(1) A primary PRC objective has been adequate physical security. Current and future requirements are primarily to be prepared to meet substantial ground incursions from the Soviet Union and to avoid Vietnam-type destruction of their industrial and transportation systems.

(2) A secondary strategic policy objective is that of reasserting territorial integrity over areas presumed to be integral parts of China such as the Paracel Islands, Taiwan, and other border areas. Controlled communication by military action on territorial issues characterized Chinese behavior in both Korea in 1950-53 and on the Indian border in 1962.

(3) A tertiary policy is that of extending Chinese power and influence. Currently the PRC views its neighbors not perceived as threats more as cushions or buffers than targets. In the long run the PRC would probably like to sit at the bargaining table as equals with the United States and the Soviet Union, but they appear to be patient and realistic about attaining this Asian and global power status (Fraser, pp. 438-439.)

15. What is the current buildup of Chinese military forces? Is their defense burden onerous? What are the economic impacts of defense expenditures?

Even though the Soviet Union continues to refer to the Chinese economy as militarized since the break with the Soviet Union, Western analysts see a different picture with "guns" tending to lose out in recent years to "butter" or factories and farms.

China's military policy has called for large conventional forces and small but growing nuclear deterrent forces. The three-million-man ground forces-the world's largest-have been equipped and trained mainly for the military environment of the 1940's and 1950's, although an increasing proportion is being armed with more modern weapons. The air force consists largely of obsolescent shortrange fighters, while naval forces have been configured primarily for coastal defense. In short, China has deployed the type of conventional forces one would expect from a developing country with a large population and a largely agricultural economy. The conventional forces stress manpower and easily manufactured weaponry in lieu of more sophisticated armaments.

China has also developed nuclear weapons for delivery by bombers and by medium- and intermediate-range ballistic missiles capable of reaching most parts of Asia. Longer range land-based missiles as well as a submarine-launched ballistic missile are probably under development, while work continues on what is apparently China's first nuclear-powered attack submarine (probably armed with conventional torpedos). The development and manufacture of these weapons, while limited in number, testifies to the mastery by the People's Republic of much of the technology of a modern industrial nation. * * *

Over the past ten years, Chinese procurement of weapons has been characterized by a generally upward trend, with two periods of rapid growth-each followed by a decline.

The first growth period occurred through the mid-1960's, as China recovered from the effects of the Great Leap Forward (1958-60) and the withdrawal of the Soviet military assistance (mid-1960). Arms production had practically stopped in the early 1960s, but by the middle of the decade the output of all types of weapons had reached new peaks.

In 1966, just when armament production seemed to have recovered completely from the Leap Forward, Mao launched his Great Proletarian Cultural Revolution (1966-69). The new upheaval affected military programs in a variety of ways, even though it was not the basically economic in nature as the Leap had been.

The central authorities sought to insulate the defense industry from the disruptions of the Cultural Revolution. Nevertheless, political activity and factional conflict in the factories caused frequent disorders, occasionally of a prolonged and serious nature. Disruptions of the transportation and communication system led to delays in the delivery of raw materials, parts, and subassemblies.

A large number of leading Party and government officials were removed from office, with a resultant decline in policy initiatives. The curtailment in military production during the Cultural Revolution was not so severe or lengthy as during the Leap Forward. By the second half of 1968 the worst effects of the Cultural

Revolution on the weapons industries were over, and another period of growth in defense production had commenced. Procurement appears to have risen rapidly in the following years, with output in 1971 being more than double output in 1967.

Since 1971, military procurement has fallen substantially. This drop has extended through 1974 and apparently is continuing in the first quarter of 1975. Production and procurement of military hardware in 1972-74 has been about 25 percent lower than during the peak period of 1970-71. Much of the decline reflects a sharp curtailment of acquisitions of aircraft, but other weapons production programs have also slowed down. The broad scope and long duration of the decline suggests that it is not simply the consequence of a coincidental cutback in several weapons programs; rather, it is the result of some general cause

or causes.

While the picture is not yet clear, several interrelated factors apparently are behind the decline in the production of weapons.

Because trends in weapons procurement correspond to the rise and fall of Lin Piao, political events surrounding Lin's abortive "coup" in the fall of 1971 possibly were a major factor in the decisions made in Peking. Official accounts of the coup state that military units were to have spearheaded the takeover, and it would not be surprising that the military establishment should suffer in the wake of Lin's aborted conspiracy.

China's political leadership has exhibited distrust of the military forces ever since the Lin incident. Shakeups in the military command structure have diluted the provincial civil authority of senior military leaders and may have reduced their influence on budget allocations as well. The background of this civilianmilitary tension lay in the Cultural Revolution when the military leaders moved or were drawn-into the vacuum left by the fall from power of so many Party and government officials. Speeches and appointments at the Fourth National People's Congress of January 1975 may indicate that the process of restoring the more normal subordination of the military to the Party is nearly completed.

Disputes over economic priorities and budgetary allocations may in themselves have played a part in bringing the Lin crisis to a head, although direct evidence for this is thin. China's leaders may have decided that military programs were preempting an ex-orbitant amount of resources without significantly improving the country's military posture. Many of the weapons that China has been producing—such as the MIG-19 fighter-are fast becoming obsolete; additional numbers would not appreciably improve China's overall defense capability. Moreover, the Chinese policymaker must realize that the United States and the U.S.S.R. have an overwhelming superiority in both strategic and tactical arms and that even an all-out production effort by the Chinese would not redress the military balance of power for many years to come.

At the same time, Peking probably feels that it now has sufficient nuclear and conventional forces both to deter the Soviet Union from attacking with nuclear weapons and to discourage the Soviet Union or any nation from attacking with conventional forces. Furthermore, in the minds of the Chinese leaders, the threat posed by the United States has decreased as well. Thus, Peking may reason that production of some kinds of military hardware should be cut back and the resources put to other uses-certainly until later models are ready for large-scale production. Such a reallocation would not mean a reduction in Chinese forces, but rather a slower rate of military modernization.

The leadership thus may believe that in the long run a strong economy would do more to strengthen China than would a bigger military buildup at this time. * * * (Jammes, pp. 459, 462-464.)

Given the constraints presented by China's resource endowments, and present level of development, however, China's military potential and capabilities still derive from China's manpower resources. Thus, in terms of manpower alone, China's armed forces are on a par with those of the two major superpowers (the United States and the Soviet Union) and are slightly larger in size than the total armed forces in NATO. In terms of modern armaments and supporting services, such as air and naval power, however, China ranks far behind the major superpowers with annual defense expenditures less than one-fifth those in the United States and the Soviet Union and less than one-half those in the NATO countries combined. In terms of annual defense expenditures per man in the armed forces, therefore, the comparison shows an even greater gap between China and the other superpowers.

This atypical mix of manpower as against modern, sophisticated, weaponry and air and naval power explains why China has been able to provide the third

largest military force in the world, even though China is an underdeveloped country. In absolute and aggregate terms, China's economy is the seventh largest in the world, but its per capita income is still less than 200 U.S. dollars. The emphasis on a manpower intensive military in a labor abundant country such as China, therefore, has only served to keep with manageable limits the economic burden of China's recognized military capabilities. Given China's desire to equip its armed forces with some modern weapons and to provide a creditable military threat by means of carefully selected modern weapon systems, however, means that the economic burden of China's defense expenditures still claims a significant share of China's production-about one-tenth of China's total GNP. To put it in the popular terminology, China's emphases on manpower in its military strategy has allowed the Chinese to obtain the biggest bang for their buck, but to obtain that bang they will have found it necessary to spend a significant share of the bucks they have available.

*** On the margin, additional defense expenditures-especially those on military hardware require the use of high priority inputs from other sectors where scarcities and imbalances already exist. For example, an increase in the level of defense expenditures or change in their composition in favor of more military hardware reduces the potential supply of producer's goods for civilian use, the demand for which is increasing rapidly; reduces the supply of exports and increases the demand for imports, although the Chinese balance of trade has required China to use its scarce holding of foreign exchange in recent years; and would reduce the potential standard of living of the civilian labor force which is already relatively low and the source of potential public discontent and opposition.

Thus, as China's leaders consider the various defense expenditure choice available, they obviously will be heavily influenced by the economic consequences of these choices. * (Dernberger, pp. 468-469.)

16. What system of Sino-American commercial relations has been set up since the signing of the Shanghai communique? What problems and obstacles impede further development?

In quantiative terms the People's Republic of China (PRC), despite its large size, is not a major trading nation. Chinese exports never exceed 2 percent of world exports. The ratio of total trade to China's gross national product is about 5 to 6 percent. In terms of trade per head of population, the value for China is some $14, one of the lowest in the world for any major nation. In spite of the smallness of its value, foreign trade is an important policy instrument used by the PRC for the pursuit of her overall political and economic goals. Being a state monopoly within the Chinese command economy, foreign trade has become a significant ingredient in China's development program to transform itself into a modern industrial state. Specifically, foreign trade in China has played the following roles.

Foreign trade has constituted for China an important means of facilitating and accelerating modernization. China does not have all the facilities to produce the wide variety of machinery and equipment needed for modernization. Some industrial materials were either not available in China, or available only in insufficient quantities. Foreign trade helps provide the necessary capital goods. Imports of these goods, moreover, have given China an important channel of access to modern technological know-how. The importation of specialized machineries and complete plans, some of them installed by foreign technicians, accelerate the process of technological diffusion. (Chen, pp. 617-618.)

Trade, which had been nonexistent in 1970, rose to $805.1 and $933.8 million by 1973 and 1974, respectively, with wheat sales, jet transport exports, and a number of other major contracts highlighting this unexpectedly rapid development. On the strength of Chinese purchases of American agricultural commodities, the U.S. has risen to the position of China's number two trading partner in the last two years. A degree of normalization has been returned to the SinoAmerican commercial relationship.

While trade has risen quickly to significant levels, while more and more American businessmen are traveling to Peking and to the Canton Trade Fair, and while Liaison Offices with commercial staffs have been opened in the respective capitals, certain unresolved issues clearly stand in the path of substantial further improvement in trading relations.

Settlement of the issues of Chinese blocked assets and U.S. private claims would clear the way for further normalizaiton of commercial relations. Un

resolved, these issues prevent direct shipping and direct airline connections owing to the risk of attachment of flag carriers in satisfaction of claims. Direct banking is precluded and the exchange of trade exhibitions forestalled. Another major commercial issue concerns the extension by the U.S. of most-favored nation (MFN) nondiscriminatory tariff treatment to the PRC. PRC officials have raised the MFN issue with U.S. business men and others. Presumably, Peking not only wants MFN, but feels entitled to it as part of the Shanghai commitment to conduct trade on the basis of "equality and mutual benefit." The Trade Act of 1974 provides a mechanism by which the U.S. could confer MFN status on China, but it is an Act burdened with difficult requirements where the nonmarket economies of the socialist states are concerned.

The outlook for Chinese exports of the U.S. over the next several years is one of continued growth. The rate of this growth will depend on the state of the U.S. economy, on Chinese perception of this market and willingness to adapt to its demands, and on the availability in China of commodities in the requiste quantity and quality sought by Americans. Fish and shellfish showed good growth in 1974 as did tea, spices, vegetables and other food preparations. These should continue at sustained levels. Tin, tungsten, and antimony among the metals will continue to register imports of significance. Gum rosin and essential oils grew rapidly in 1974 and should continue. Textiles, clothing, bristles, feathers, and down will maintain a strong showing. Americans continue to enjoy Chinese artworks and antiques, but fireworks, a perennial leader, have declined, in part owing to problems meeting new U.S. safety standards. Petroleum exports to the U.S. do not appear to be a factor although U.S. owned oil companies may buy Chinese oil for distribution in East Asia. American importers will continue to attend the Fairs in Canton in substantial numbers.

The Chinese trade deficit with the U.S. will be sharply reduced in 1975, running perhaps $50 million. The deficit is likely to continue, its future magnitude being governed primarily by the size of Chinese agricultural purchases in the United States. (Clarke and Avery, pp. 501, 502, 530, 531.)

The prospects of a trade agreement between the United States and the People's Republic of China has. since the Shanghai Communique, offered the possibility of marked forward motion in the relations between the two countries. It assumes substantial importance for both sides in light of the passage of the Trade Act of 1974 in the closing days of the 93rd Congress. Under the Act. Public Law 93-618, signed by the President on January 3, 1975, the authority to lower tariffs on imports from China has shifted from Congress to the Executive. There are limitations on the authority of the President to grant most-favored-nation tariff treatment to China, to be sure, but the negotiating authority now is there, and there is no good reason not to proceed with all deliberate speed to trade negotiations with Peking.

The threshold question, of course, is whether or not the United States should contemplate a trade agreement with a country to which it has not accorded diplomatic recognition Precedent for such an agreement under international law, if such were needed. lies in a trade agreement entered into between Great Britain and the Soviet Union in 1921, a step which preceded formal diplomatic relations. The same question may be raised in Peking, although the Chinese have previously concluded trade agreements in the absence of diplomatic ties. While the two sides will have to examine whether on pragmatic grounds, a trade agreement should precede or follow the establishment of full diplomatic relations, trade negotiations toward such an agreement can certainly begin prior to fully normalized political relations. * * *

*To sustain and build toward the modern industralized state, to which the Chinese pledged themselves at the Fourth National People's Congress, does require acquisition of foreign goods and technologies. Purchases of needed imports in turn requires more than a little contact with the West. Not all such contact is likely to be palatable to a political leadership which is bound to fear that revolutionary values may wane in the process. The post-Mao, post-Chou period cannot be far away, and succeeding leadership is certain to be preoccupied with political consolidation, preserving revolutionary fervor and maintaining the monumental accomplishments of the old leadership. This process can obviously sharply influence China's trade and development policies. But Peking's 1975 pledge to achieve "comprehensive modernization *** before the end of the century" should be signal enough that China's foreign trade ought to hold interest for American firms. (Theroux, pp. 582, 583, 595, 596.)

17. How flexible has the PRC been in external transactions in adapting to international practices?

China's practices in financing trade with non-Communist countries are in substantial contrast to those of the other Centrally Planned Economies (CPEs). Despite the fact that the PRC has a greater share of its trade with the west than other CPES, the PRC has been more reluctant to adopt as many western banking practices as the other CPEs. Many of the practices that have been adopted have been modified with the general result that the PRC maintains somewhat more control over its international finance with the west than other CPEs do. Examples of this range from requiring negotiation of letters of credit in China both for exports and imports to using the Renminbi to denominate trade contracts.

Most importantly, the PRC has, as yet, been unwilling to follow other CPES in adopting western banking techniques such as setting up European branches to engage in archetypical banking activities such as general trade financing and active participation on the Euro-currency market.

On the other hand, PRC international financial practices have changed significantly in the last few years generally in the direction of adopting more traditional practices. The Chinese foreign trade corporations (FTCs) have been more flexible on various letter of credit provisions and they have become more willing to denominate trade contracts in western currencies. Most important of all, of course, the PRC has begun to accept credit, albeit in moderation and often indirectly. (Denny, p. 676.)

18. Is Japan likely to continue to develop a special commercial relationship with PRC?

Japan has become the People's Republic of China's leading trade partner, accounting for about 20 percent of the PRC's foreign trade turnover in recent years. A unique set of economic and political factors has facilitated a rapid expansion of Sino-Japanese trade in the 1960's and 1970's. First, there is a substantial degree of complementarity between the two economies. Japan is heavily dependent on imports of raw materials to fuel its modern industrial economy, and Japanese industrial leaders consider the PRC a logical supplier of some of their needs. At the same time, foreign trade planners in the PRC have placed a high priority on imports of the kinds of machinery and equipment and industrial manufactures which Japan has the capacity to export. The short, relatively cheap water transport between Japan and China makes the trading relationship especially attractive for exchange of goods in which 'transport costs represent a large share of the final price. Long water and rail transport to alternative markets in Western Europe and North America involve substantially higher transport costs. Their economic complementarity and their geographic proximity create an opportunity for a substantial trade turnover benefiting both countries. The foreign trade potential of certain key industrial sectors which are examined in this paper will be a key determinant of the volume of future Sino-Japanese trade.

Another key determinant of the level of Sino-Japanese trade is the political relationship between the two governments. To a much greater degree than other countries, the PRC's foreign trade has been shaped by its general foreign policy objectives. Consequently, Sino-Japanese commercial relations have been linked to the diplomatic interactions of the four great powers in Asia-the PRC, Japan, the Soviet Union, and the United States. (Kim, p. 600.)

19. How have the Chinese perceived their need for foreign technology? How effectively do the Chinese diffuse technology transferred from the West?

The People's Republic of China has exhibited wide swings in its receptivity to foreign technology in the course of its 25-year history, oscillating between enthusiastic acceptance and determined rejection. In the 1950's-the era of close Sino-Soviet Cooperation-China eagerly accepted what was undoubtedly the most comprehensive technology transfer in modern history. During that decade the Chinese obtained from the Soviet Union the foundation of a modern industrial system. In the process, however, the Chinese became heavily dependent on Soviet tutelage and were induced to adopt a Soviet model of forced industrialization inappropriate to China's resource endowment. In the late 1950's, the