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and we would be very much interested, as Senator Mansfield has said, in learning their reaction when they come back because they will see some areas of heavy industry and medium industry which, for the most part, we did not see.

I am going to talk principally on trade and China's economy, and would be glad to answer any questions on foreign policy that I am capable of answering.

Chairman PROXMIRE. Senator Scott, I feel in an uncomfortable position this morning because I told the Majority Leader he had ten minutes; we gave him a little more than ten minutes and we also, of course, will be delighted to provide any sufficient tolerance for you. Anything you would like to have put in the record, we would be delighted to do it if you would like to abbreviate your prepared statement in any way.

Senator Scott. Well, I think that is a good idea because whenever I am presiding I make the point that the Reorganization Act does not require that you read every word of your prepared statement. So I would like to submit the prepared statement for the record.

I take it that copies have already been sent up and, if not, we will see that they are during the course of the hearing.

Chairman PROXMIRE. We have not received them up here, but we would be delighted to receive them.

Senator Scott. They are on their way over now.
Chairman PROXMIRE. All right.

Senator Scott. So I will simply touch the highlights in order to try to stay within the 10 minutes.

While the area of the People's Republic of China is about the same as the United States, the Chinese population is about four times as large and its gross national product, however, is about one-tenth of the United States, and about 80 percent of the labor force is engaged in farming.

Most of our information on the economy there is derived from experiences of other businessmen and efforts of academicians and professional China watchers. Because there appears to be a matter of policy, no statistical data have been published since 1960 of a broad or detailed nature. Even today, China does not systematically gather, analyze, or publish comprehensive statistics on its economy.

In 1971, for instance, Premier Chou En-lai said China's GNP consisted of $90 billion of industrial output and $30 billion in agricultural products. This figure is fairly in close accord with the most recent Western estimates.

The centrally planned Chinese economy is directed through the medium of 5-year plans. Their central current strategy emphasizes modernizing agriculture and those manufacturing industries most directly related to processing agricultural raw materials. Otherwise, investment is directed mainly toward consolidating and strengthening its present industrial position and developing its scientific and technical

There is also a process of decentralization of industry going on, and another element that they are fond of pointing out, first, that they are moving their industry back from the coast and dividing it among many of their cities, and China has 18 cities of over a million population. The Province of Quangtung, Canton, for example, has 40 million people, or twice the population of California.

resources.

It is hard to realize the size of this country, and they emphasize, too, that their cities were formerly largely consumer cities and are now largely self-reliant as being producer cities as well.

This policy of economic self-sufficiency means that China is attempting to rely on its own resources and industrial capacity wherever possible. Nearly all items available to consumers are domestically produced, and this severely limits the selling of consumer goods there.

Their central planning is used to focus the nation's energy toward rapid economic development. This indicates a potential for exporting capital goods to China that will expand over the next decades, with an emphasis on agricultural machinery, complete plants and technology-especially for producing chemicals—machinery and equipment for the steel, mining, transport, power, construction, and potroleum industries, and industrial raw materials.

China's economy is growing at an estimated 4 percent annually, and achieving a strong economic base is the aim for the fourth 5-year plan in 1971, despite the withdrawal of Soviet economic assistance in the early sixties. An excellent harvest was achieved in 1971, and substantial increases in industrial production.

Barring political upheavals, it is expected that China can maintain its economic momentum over the next decade, their greatest worry being the feeding of a population that is expected to reach 1 billion by 1980.

They do have birth control education, they do have the pill, and they do tend, among other things, to try to limit families by limiting the housing accommodations for married couples. They are very much worried and would like to reduce the annual birth rate to about 2 percent or, optimistically, 1.5 percent in the future if they can.

Foreign trade is a state monopoly conducted through a network exclusively of nine corporations in accordance with priorities established well in advance, and the foreign trade corporations are organized according to the commodities or services for which they are responsible, with main offices in Peking and branch offices in various industrial centers, and representation in Hong Kong by China National Resources Corporation.

Development of foreign trade and economic relations is an important part of China's present policy.

It does not rely on just a few Western suppliers and, in fact, now has trading relations with some 100 countries.

A desire to finance its imports with export earnings has resulted in efforts to balance its trade with the rest of the world. They make a very strong point of the fact that they do have a balance of imports and exports. In other words, they only import that which they are able to pay for through exports, and they make the point, too, that they do not go into debt.

Foreign trade is viewed as an adjunct to domestic economic policy, useful and helpful but not a necessity. Chinese trade at times has been channeled to particular countries for strictly political reasons, and I give some figures in my prepared statement regarding its trade in 1971, which I will not read. But the free world's trade with the P.R.C. more than doubled in value during the 1960's, and there is a considerable portion of this increased trade with the Western European countries, principally the Soviet Union, whereas in 1960 approximately twothirds of their trade was with Communist countries.

As I said, China has been forced to trade largely on a cash, shortterm, or barter basis. Other important limitations to further widening of trade have been the export and import control policies of developed free world countries. China has been unable to earn more foreign exchange by offering a greater quantity and variety of goods readily marketable both in the developing countries and in the industrially advanced countries, where import demand has been strongest.

Its trade is small in volume, about 4 percent of its GNP, but its size reflects its limited export potential rather than its needs. China would certainly import more if it could export more.

The pattern of trade has been dominated by the exchange of Chinese agricultural, mineral, and textile products for industrial raw materials and machinery as well as grain and fertilizers.

The U.S.-P.R.C. trade potentially begins by pointing out that the Shanghai communique states that both sides will agree to facilitate the progress of mutually beneficial trade. Some action has been taken, with Paris as its principal contact point.

Some 30 or 40 American firms were invited to the spring Canton Fair for the first time and this is the only place in China where we actually did see Americans, one of the few places where we saw Westerners, although I may add that we saw Peruvians, Pakistanis, and Italians and a few others at scattered occasions. But most of these firms have been invited, American firms, as potential buyers of Chinese products. Some were also invited as sellers to the Chinese. They were received in a friendly manner.

We saw them engaged at small tables in groups of two to four in what appeared to be friendly and serious and business-like negotiations, and they were often given preferential treatment, we are told, in requests for meetings with Chinese officials. Some $10 million worth of goods, we believe, were purchased by American firms.

In addition, 125 subsidiaries of U.S. firms will participate at a Canadian solo exhibition in Peking this summer, and we were told, too, that the number of American firms is expected steadily to increase at the spring and autumn fairs.

Indirect trade has been taking place since April 1970, when the President authorized shipment of American-made components in nonstrategic, foreign-manufactured goods. In June 1971, the President announced the list of commodities that could be freely traded with P.R.C., roughly the same as with the U.S.S.R.

Virtually all imports are now allowed to enter the United States, and I may add that I made this point with every successive Secretary of the Treasury from President Eisenhower on that this should be done.

They are, of course, subject to the same general regulations that apply to imports from other countries such as proper labeling, food and drug regulations.

In 1971, the United States imported some $5 million worth of Chinese-origin goods, which is a mere pittance, from third country sources, chiefly hog bristles, foodstuffs, and handicraft items. Some $9.2 million of Chinese goods were imported in the first part alone of 1972, with commodity composition about the same. These goods are subject to duties generally higher than those imported from countries with whom we have a most-favored-nation agreement.

All U.S. exports are divided into two categories for export control purposes, as you know, and I will not go into the difference between the general license category and all other goods. I have that in my prepared statement.

What are the prospects for further U.S.-P.R.C. trade?

Well, in general, China has very limited ability to expand the amount and type of goods it sells and is therefore limited in its ability to purchase Western goods. An 8- to 10-percent record of growth in foreign trade is there and it is likely that this growth rate will continue.

China is an underdeveloped, predominantly agricultural country with, however, still very limited trade potential and any significant trade between the United States and P.R.C. would have to be at the expense of China's present trading partners unless different policies are enunciated by their government. This would be contrary to China's traditional policy of favoring established customers, but does remain quite possible.

Again I give you the totals in the prepared statement of China's imports from 2i leading nations of $1.4 billion in 1970. Food, and mostly wheat, made up 24 percent of the total, and then I have here the accounting of the other minerals and other materials.

Japan accounted for the largest share of the trade, 41 percent; Germany 12, Australia 9, United Kingdom 8. We have some chance to make some inroads in specific markets such as chemicals, wheat and fertilizers, and the raw materials for which domestic sources of supply are inadequate or nonexistent in the P.R.C., such as rubber or copper, will probably be imported in increasing amounts as their economy expands.

They need an increase in their fertilizer imports and wheat imports which have lately been on the decline, and sugar imports have been rising, but a bad harvest or breakthroughs in technology could quickly alter this situation.

China's purchase of machinery or equipment will probably increase as a percentage of total imports.

Finally, there will be, continue to be, some machinery and equipment that China will be unable to produce at all or could produce only at prohibitive costs, such as commercial jet aircraft and some computers.

The aircraft presently consists, as far as we can see, of Vickers, Viscounts, and various Russian planes, Ilyushin and others.

It is in this category of technology-intensive machinery and equipment that the United States may be expected to enjoy its greatest advantage.

Its exports to industrialized countries, as I have said, are mainly agricultural, mineral, and textile products, and basic manufactures, mostly textile yarns and fabrics, account for about 20 percent of this amount.

Chinese luxury products might enjoy a ready market in the United States since many of these would be unique and face little competition from domestic or foreign sources. This is an area in which I have a special interest, as you know. Typical of potential luxury items are rugs, embroideries, antiques, art objects, and curios.

Currently, a large-scale penetration of the U.S. market would be difficult as it would have to be based on exports of textiles and staple foodstuffs. In view of the impact textile imports have on the sensitive domestic market and our equity obligations to traditional trading partners who are already controlling their exports to the United States, even small quantities of textile product imports from the P.R.C. could cause us considerable difficulty. Their skills, I may add, are excellent; their cottons are in short supply because presumably they do need them for export. Cotton was the only material which I was able to learn is rationed on a coupon basis. Other items are on a licensing basis whereby you get a ticket and receive your watch or your radio or your bicycle or your sewing machine 1 to 3 months later. There would be some markets for Chinese consumer products such as teas, silks, and light manufactures.

If China were to make available greater quantities of tungsten, tin, and other metals and possibly petroleum, there might be an import market in the United States for these goods.

In the long term, it is likely that the Chinese will welcome the United States as an additional source of supply.

Projections of U.S. exports to China in 1980 range from a low of $50 million to an upper limit of $650 million. The most optimistic estimate is that of Professor Dernberger in "Prospects for Trade Between the U.S. and China." I detail here his estimates and the reasons for them. And if the United States were able to maintain its present share of the world market in the goods I have citedthat is, machinery, minerals, machinery and equipment, and chemicals-American exports to China might reach as much as $325 million in 1980.

Although China is not likely to account for a significant portion of total U.S. trade in the foreseeable future, this trade will offer important opportunities to individual firms, and businessmen should now explore the possibility of trade in this area.

I thank you, Mr. Chairman and Representative Boggs. (The prepared statement of Senator Scott follows:)

PREPARED STATEMENT OF Hon. Hugh SCOTT PROSPECTS FOR U.S. TRADE WITH THE PEOPLE'S REPUBLIC OF CHINA

CHINA'S ECONOMY

The area of People's Republic of China is only slightly larger than the United States, yet China has a population estimated to be 4 times as large. At the same time, its gross national product is approximately one tenth-that of the United States. About 80 percent of its labor force is employed in farming.

Most of our information about China's economy and foreign trade is derived from the experiences of other Western businessmen and the efforts of academicians and professional China-watchers. Apparently, as a matter of policy no statistical data have been published since 1960. Even today China does not systematically gather, analyse or publish comprehensive statistics on its economy. We depend upon scraps of information. In 1971 for instance, Premier Chou En Lai said that China's gross national product consisted of $90' billion of industrial output and $30 billion of agricultural products. This figure of $120 billion is in fairly close accord with the most reliable Western estimates.

The centrally-planned Chinese economy is directed through the medium of 5year plans. Its current strategy for industrialization emphasizes modernizing agriculture and those manufacturing industries most directly related to processing agricultural raw materials. Otherwise, investment is directed mainly toward consolidating and strengthening its present industrial position and developing its scientific and technical resources.

A policy of economic self-sufficiency means that China relies on its own resources and industrial capacity to the extent possible. Virtually every item available to consumers is domestically produced; this severely limits, if it does not entirely preclude, selling consumer goods there. Central planning is used to focus

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