show no inclination to compromise and insists on the natural-prolongation principle, refusing to consider a median line at all, especially if such an attitude were to be accomplanied by a hard line on the Senkaku (Tiao-yü Tai) issue as one aspect of a militant stand on Taiwan. The possibility of a collision cannot be ruled out, for Peking has consistently based its claim to the islands on the contention that they are an integral part of Taiwan.

The search for bases of compromise on offshore boundary issues between Peking and its neighbors is integrally related to the outcome of the controversy in the United States over how and when to proceed with the recognition of Peking as the sole legitimate government of China and the withdrawal of recognition of Taipei. In view of the complexity of this controversy and the possibility of considerable delay in the normalization of relations with China by the United States and the other countries that continue to recognize Taiwan, these countries could take a useful interim step to reduce the danger of oil-related conflict by clearly dissociating themselves from offshore claims by Taipei that implicitly represent an assertion of all-Chinese jurisdiction. In so doing, they would also be taking a significant new step toward the de facto recognition of Pekirg as a prelude to de jure normalization. Such a move will be a necessary accompaniment to normalization, in any case, even if it is not made in the interim.

Given the American decision in 1972 to deal with Peking as the de facto government of the mainland, it would be a logical and appropriate extension of U.S. policy in 1977 to treat Peking as the only legitimate Chinese claimant to the continental shelf, since it is Peking, as a continental, coastal state that can assert the "natural prolongation" principle under international law. Taipei has asserted its claims to the shelf not on the basis of its jurisdiction over an island but rather as a regime claiming jurisdiction over the mainland. As an independent island republic, Taiwan would not have a legal rationale for claiming most of the seabed areas that it now seeks to claim; and as a province of China, autonomous or otherwise, Taipei would not be likely to have responsibility for offshore exploration beyond close-in areas immediately adjacent to its shores.

Both before and after normalization, therefore, the United States should make clear to U.S. oil companies that it does not regard Taiwan as competent to claim offshore jurisdiction on the basis of its claim to the mainland and that the extent of its offshore jurisdiction will have to be negotiated with Peking within the framework of some form of "One China" formula. For the United States to maintain its present deliberately ambiguous policy as to where drilling activities would be legitimate—treating Peking, Tokyo and Taipei as co-equal disputants— could well be interpreted by Peking and Taipei alike as indicative of a lingering attachment to a "Two China" policy or to the idea of a sovereign Taiwan co-equal with the mainland in international law. Such ambiguity adds to the danger that Taiwan might declare itself an independent republic in response to a U.S. normalization move. Conversely, a clearly defined U.S. posture would encourage Taipei to relinquish its offshore claims, promoting a climate of accommodation with the mainland in which the risks of a U.S. military withdrawal from Taiwan would be reduced.

Pending such an accommodation, it would appear likely that Taipei and its foreign partners could continue to explore in concession areas located within 50 miles, or some such distance, from the island without provoking Peking. Adoption of such a limited, close-in zone would imply acceptance of some form of provincial status within a "One China" framework. By contrast, the retention of concession zones based on an assertion of jurisdiction over the mainland constitutes a residual manifestation of a "Two China" policy.

By disassociating itself from Taipei's offshore claims, Washington would in effect be treating Peking as the sole legitimate champion of Chinese claims in the Sino-Japanese shelf controversy. This would set the stage for Sino-Japanese negotiations that are now. paralyzed. At the same time, such a U.S. move would enhance the prospects for a possible accommodation between China and an autonomous Taiwan, mentioned earlier, in which Taipei would explore for oil in partnership with Peking. The pros and cons of whether such an accommodation is a realistic possibility—that is, whether it could result in anything short of total absorption-encompass a variety of considerations that cannot be fully considered in this testimony. To the extent that a peaceful accommodation is possible, however, it would clearly require that Taipei resile from its claims to jurisdiction over the mainland; and this, in turn, underlines the sensitivity of Taiwan's oil concessions in the East China Sea.

Just as oil could touch off a conflict between Peking and Taipei, under one set of political assumptions, so oil exploration and development and oil-related areas of industrial activity could prove to be one of the most promising spheres within which a natural division of labor between Peking could develop, given more favorable political assumptions. One need only consider the long-term role of the petrochemical plants that have been built on Taiwan by Gulf, Amoco and the Taiwan government. At present, these utilize crude supplies from the Middle East, but an economic partnership with Peking would permit them to use much cheaper crude from the mainland as well. As one element in an accommodation bargain under which Taiwan would retain its economic autonomy, Peking could then obtain petrochemical products made in Taiwan at concessional prices. This would enable Peking to reduce the amount of foreign exchange expended on the import of petrochemical plants while giving expression to the "One China" principle by drawing Taiwan into a mainland-oriented economic community.

As the above indicates, insofar as petroleum is concerned, an examination of the economic implications of normalization should be addressed primarily to the impact of normalization on the economic environment in East Asia itself, especially on the prospects for offshore oil development and the triangular interplay between Peking, Taipei and Tokyo. It would be unrealistic to project large-scale Chinese crude oil exports to the United States as a quid pro quo for normalization. Many foreign observers take it for granted that a Chinese attempt to expand oil production rapidly would be motivated by a desire to earn foreign exchange through exports in order to finance the import of needed industrial technology. In this perspective it would be necessary to step up coal production as rapidly as possible to meet a major portion of domestic energy needs, while simultaneously accelerating oil production in the hope of securing export surpluses. To focus on Peking's export potential, however, is to lose sight of the emphasis on "self-reliance" that still underlies the Chinese approach to development. If one assumes, instead, that Peking intends to use most of its oil domestically, it is plausible to anticipate rising capital allocations for oil relative not only to coal but also to selected nonenergy sectors of development. In these nonenergy sectors, the short-term damage to growth resulting from reduced investment inputs would be less drastic than the damage that would result from an export-oriented energy policy and would be offset, in any case, by the economic advantages of oil as a more efficient and more versatile fuel than coal.

It would be beyond the scope of this testimony to attempt an assessment of the merits and demerits of "self-reliance" compared to other approaches to development. What should be taken into account here is simply that this approach is a fact of life in the case of China, an authentic, broad-based expression of Chinese nationalism and not, as it is often pictured, merely the ideological aberration of a narrow, factional group. In a nationalist perspective, high growth rates and rising production levels are valued primarily in relation to the larger political objective of building up China as an independent power factor in the global arena competing with the West. It is better to go more slowly and keep control of what is developed economically than to achieve a rapidly rising gross national product at the cost of foreign dependence. To be sure, there are significant differences between "radicals" and "moderates" with respect to the implementation of the "self-reliance" policy, and the downfall of the "Gang of Four" has greatly strengthened technocrats who are prepared to depart from the policy for the sake of specific technological, financial, or diplomatic purposes. In particular, the need for certain critical technological imports is acknowledged even by the most determined advocates of autonomy, which provides a rationale for exports of crude oil to help cover short-term foregin exchange needs. Crude exports could reach significant proportions in the case of Japan and modest oil exports to the United States might eventually follow American recognition of Peking.

Already, small amounts of Chineses crude have been purchased by American firms, primarily for resale to third countries in Asia, a pattern that could increase somewhat over the years. Still, even if the "self-reliance" approach is now relaxed to a much greater extent than in the past, most indications as of 1977 suggested that the basic thrust of China's development strategy would remain unchanged. To the extent that oil exports grow, this is likely to reflect political as well as economic objectives, especially Peking's ambitions as a leader of developing countries in Asia and elsewhere. Peking may liberalize its foreign trade policies to meet specific, immediate objectives, but it continues to affirm its long

term goal of maximizing the self-contained strength of the Chinese economy and thereby limiting the future need for raw material exports.

Oil development has become attractive to Chinese planners precisely because it helps to make such an inward-focused strategy workable. The coal-to-oil shift is not only a logical response to the cost factors and changing domestic development priorities discussed earlier but also helps to create the type of economy that will best serve the goals of "self-reliance." By building a petrochemical industry China can convert some of its oil into exports of synthetic textiles and other finished products, in addition to meeting a variety of domestic needs.

By using synthetics to reduce domestic cotton textile consumption, China can free some of its cotton textiles for export or, alternatively, release land hitherto devoted to cotton for grain production, thus reducing the necessity for grain imports. By using oil to manufacture fertilizer and to fuel agricultural mechanization, China can further relieve the need for food imports by stepping up food production. Increased domestic fertilizer production also means a reduced demand for fertilizer imports, and agricultural mechanization has the indirect benefit of releasing peasants for work in industry. The development of oil-based industries would clearly be more compatible with nationalist priorities than letting others use a major portion of Chinese crude to fuel their industries. Moreover, oil power strengthens China's military freedom of action and thus has a special significance in nationalist eyes. Domestic political and economic pressures reinforce each other, dictating a maximum effort to step up oil production as rapidly as possible.

While prospects for large-scale Chinese crude exports to the United States are not encouraging, there is considerable scope for increased American exports of oil equipment to China. At least $110 million worth of such equipment has already been sold to China, and Chinese interest in expanding purchases of hightechnology oil exploration and production items is rapidly escalating. In terms of the American national interest, however, there would appear to be a built-in contradiction in a policy that permits the transfer of sophisticated technology to Peking at a time when basic political issues have yet to be resolved. So long as the Taiwan issue is not settled, relations between the United States and China are likely to deteriorate, and the possibility of an adversary relationship between Washington and Peking increases. The United States should therefore give top priority to redefining its policy toward the continental shelf as part of a clear and positive movement toward normalization, liberalizing its technology transfers to China only in the context of a broad transition to more friendly relations between the two countries.

Mr. BEILENSON. Thank you very much, Mr. Harrison.
Professor Perkins.

STATEMENT OF DWIGHT H. PERKINS, PROFESSOR OF ECONOMICS, HARVARD UNIVERSITY

BIOGRAPHY

Chairman, Department of Economics and Professor of Modern China Studies and of Economics, Harvard University. He is a member of the Faculty of Arts and Sciences and is on the Faculty of the Kennedy School of Government. From 1974 to present, he has been a Faculty Fellow, Harvard Institute of International Development. He is also a member of the Executive Committee, Council of East Asian Studies. He was formerly Associate Director of the East Asian Research Center, Harvard University. He is the author and editor of many articles and books on the Chinese economy and Asian economic development, including "Agricultural Development in China, 1368-1968", "China's Modern Economy in Historical Perspective", "Rural Small-Scale Industry in the People's Republic of China", "Market Control and Planning in Communist China", and "Communist China and Arms Control". Among his academic awards and fellowships are: Woodrow Wilson Fellow (honorary), Ford Foundation Foreign Area Training Fellowships, 1958-1962, National Science Foundation Science Faculty Fellowship 1968-1969.

Mr. PERKINS. Mr. Chairman, I shall read you an edited version of the statement I handed you which I hope will stay within the 10minute limit.

There is an important economic component in our efforts to achieve normalization of relations with the People's Republic of China just as there is such an element in our desire to continue relations on some basis with Taiwan.

There is a fundamental difference, however, in the role that economic considerations play in the two cases. In the case of the People's Republic of China, economic growth and industrialization are turning that nation into a major world power faster than most people realize, but growth is not turning China into a great trading nation. Taiwan, on the other hand, will never become a major world power as a separate entity, but it is becoming an important trading partner of the United States.

It is not commonly known but China already has one of the world's larger gross domestic products. Despite severe political disruption during the "Great Leap Forward," the Cultural Revolution, and during the struggle with the "Gang of Four," China's GDP over the last two decades has grown from 5.5 to 6 percent per year.

If the present leadership in China can consolidate its power, the prospects are for China's rate of economic growth to accelerate perhaps to 7 percent a year. The current government is the most economic growth-oriented that China has had in two decades. Where, in the past, highest priority has been given to pursuing what the Chinese refer to as the "class struggle," today the No. 1 priority is to make China a major industrial power by the year 2000, and the prospects for success are promising.

At 7 percent a year, GDP doubles every 10 years so that by the year 2000, China could have a gross domestic product of well over U.S.$1,000 billion.

China's foreign trade historically has grown along with the nation's GDP. Chinese leaders at times have talked about reducing China's dependence on trade but the ratio of trade to GDP has stayed the same, rising a bit during major investment drives, falling back during periods of consolidation or recession.

The prospects for the future are for more of the same.

TAIWAN'S ECONOMY

Where China has had a very respectable economic performance over the past two decades, Taiwan has been one of the world's star performers both in terms of economic growth in general and the growth of exports and imports in particular. From 1955 to 1975, Taiwan's GDP grew at an average rate of 8 percent per year. Economic assistance from the United States contributed to the growth of Taiwan's economy between 1950 and 1965 but in the most recent decade, when aid was no longer being received and when OPEC price increases were both a direct and an indirect blow to Taiwan's economy, Taiwan's average growth rate was actually higher than in the previous decade. Over the same two-decade period, Taiwan's exports in money terms have grown at 26 percent per annum or 15 percent per annum if the

impact of inflation is removed. Throughout the latter half of this period, the United States has been the major destination of these exports. What is less commonly realized is that the United States has also sold large amounts of goods to Taiwan and the U.S. share of Taiwan's imports has been rising in recent years as the island has cut back on the share of its purchases made in Japan.

Although Taiwan's GDP may continue to grow for some time into the future at rates comparable to those achieved during the past decade, it is unlikely that Taiwan's foreign trade will continue expanding at 15 percent a year in real terms even if Taiwan's current diplomatic position were not altered in the slightest. Rising protectionist sentiment in Western Europe and the United States combined with the fact that Taiwan's trade is now too large to be easily ignored will probably slow Taiwan's export growth a bit. Trade in general and with the United States in particular, however, will continue to grow probably at a rate somewhat faster than GDP.

Ten and twenty years from now, other things being equal, Taiwan will be an even more important trading partner of the United States than it is today.

Other things being equal, Taiwan will also continue to be a recipient of private foreign investment from the United States, Japan, and elsewhere. The importance of this private foreign investment, however, has frequently been exaggerated. Taiwan has borrowed fairly heavily at times from such international and governmental agencies as the World Bank and the Export-Import Bank although the island's external indebtedness is easily within its capacity to repay. Private direct foreign investment, on the other hand, has only averaged a little over U.S.$150 million in recent years, a not very large sum when one considers that total investment-gross capital formation-on Taiwan has averaged about U.S.$3,000 million a year.

The central question with which we are concerned today, of course, is whether the economic situation in the People's Republic of China and on Taiwan will continue pretty much as in the past or whether normalization will bring about profound economic changes.

The answer depends in the first instance on how the security issue is resolved. If events transpire that lead China to attempt to reincorporate Taiwan by use of force, there will obviously be major adverse effects on Taiwan's economy and on the island's economic relations with the United States. In the discussion that follows, however, I assume that normalization will be achieved in a way that will not undermine the security of Taiwan either in the immediate future or over the next decade or two. On the other hand, I also assume that U.S. guarantees of Taiwan's security will be more informal than the present mutual security treaty and this lack of a formal guarantee will be a source of nervousness or uncertainty at least for a time for both the people of Taiwan and for prospective foreign investors in the island's economy.

Will increased uncertainty of this kind fundamentally undermine Taiwan's economic development? I believe that the answer to this question is a clear no. The people most likely to pull back from involvement in the island are the foreign investors. But as suggested above, foreign direct investment has not played a central role in