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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 petroleum industries, and industrial raw materials.

During the past twenty years China's economy has grown at an estimated 4 percent annually, thus doubling the level of GNP and achieving a strong economic base for launching its fourth Five-Year Plan in 1971, despite the withdrawal of Soviet economic assistance in the early 1960's.

Substantial increases in industrial production and an excellent harvest were achieved in 1971, the first year of the fourth Five-Year Plan. Barring a major political upheaval, there is a good prospect that China will maintain its economic momentum over the next decade-even while feeding a population that is expected to reach one billion by 1980. China is already ahead of other large developing countries in basic economic strength and the gap will probably widen.

Foreign trade is a state monopoly, controlled by the Ministry of Foreign Trade, and is conducted exclusively through a network of 9 corporations in accordance with priorities established considerably in advance by the country's economic plan. The foreign trade corporations are organized according to the commodities or services for which they are responsible. All ve main offices in Peking with branch offices in various industrial centers and are represented in Hong Kong by China National Resources Corporation.

Development of foreign trade and economic relations with most nations of the world 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 an effort to balance its trade with the rest of the world. China attempts, but does not insist on, balancing its trade with individual countries. It seeks to avoid allowing any supply or export market to become of critical or decisive importance to its economy. Foreign trade is viewed as an adjunct to domestic economic policy-useful, helpful, but never a necessity. Furthermore, Chinese trade has at times been channelled to particular countries for strictly political reasons.

Eighty percent of China's $4.6 billion trade in 1971 (imports, $2.2 billion; exports, $2.4 billion) was with free-world countries, with whom it has maintained an estimated annual balance-of-trade surplus of $100-$250 million for the past 20 years. These surpluses stem principally from its trade with Hong Kong and Singapore. Details of China's import plans are not available; however, a study of China's imports from free world countries can reveal trends and patterns.

The free-world's trade with the People's Republic more than doubled in value during the 1960's. A considerable portion of this increased trade with the West resulted from a shift in Chinese trade away from the East European countries, principally the Soviet Union. In 1960, approximately two-thirds of Chinese trade was with Communist countries.

In the absence of long-term credit from the free world in recent years, China has been forced to trade largely on a cash, short-term, 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.

The volume of China's trade is small—about 4 percent of its gross national product, but its size reflects its limited export potential rather than its needsChina would surely import more if it could export more.

The pattern of trade with the industrialized West has been dominated by an exchange of Chinese agricultural, mineral and textile products for industrial raw materials and machinery, as well as grain and fertilizers, to supplement domestic production.

U.S./PRC TRADE POTENTIAL The Shanghai communique, issued at the end of the President's trip stated that both sides would agree to facilitate the progress of mutually beneficial trade. Several actions have been taken in this connection.

Paris has been established as the principal contact point for exchanging information and exploring the potential for expanding trade with the Chinese.

The Chinese invited 30–40 American firms to the Spring Canton Fair, for the first time. Most of these firms have been invited as potential buyers of Chinese products but some were also invited as sellers to the Chinese. Early reports indicate that the United States firms were received in a friendly manner and were often given preferential treatment in requests for meetings with Chinese officials. We estimate that some $10 million worth of goods were purchased by American firms.

In addition, 125 subsidiaries of U.S. firms will participate at a Canadian Solo Exhibition in Peking this summer-another indication that the Chinese want to do business with us.

Indirect trade has been taking place since April 1970 when the President authorized shipment of American-made components in non-strategic, foreignmanufactured goods. In June 1971 the President announced the list of commodities that could be freely traded with the People's Republic of China.

Virtually all imports are now allowed to enter the United States. They are, of course, subject to the same general regulations that apply to imports from other countries, such as proper labeling and Food and Drug regulations. During 1971, the United States imported some $5 million worth of Chinese-origin goods, from third countries, chiefly hog bristles, food stuffs and handicraft items. Some $9.2 million of Chinese goods were imported into the United States during the first quarter of 1972 with the commodity composition about the same as last year. Goods imported from the People's Republic are subject to duties generally higher than those imported from countries with whom the United States has a most-favored-nation tariff agreement. Comparable figures are not available on indirect exports of U.S. goods to the People's Republic.

All U.S. exports are divided into two categories for export control purposes. Those which may be exported without prior approval of the Department of Commerce are in the general license category; all other goods require the explicit approval of the Commerce Department before they may be exported. In February of this year, this General License List was expanded so that those goods which are exportable under general license to the Soviet Union may now be exported to China under general license.

WHAT THEN ARE THE PROSPECTS FOR U.s./PRC TRADE? In general, China has a very limited ability to expand the amount and type of goods it sells and is therefore limited in its ability to purchase Western goods. Recently history shows 8-10% rate of growth in foreign trade, and it is likely that this growth rate will continue. Despite the allure of a market with 800 million people, China is an underdeveloped, predominantly agricultural, country with a very limited trade potential, and any significant trade between the United States and the People's Republic would have to be at the expense of China's present trading partners. This would be contrary to China's traditional policy of favoring established customers, but remains possible.

POTENTIAL U.S. EXPORT COMMODITIES

“China's imports from 21 leading industrial nations totaled $1.4 billion in 1970.” Food, mostly wheat, made up 24% of this total, chemicals and fertilizer, 19%; iron and steel 25%, nonferrous metals, 10%; and machines and transportation equipment, 18%. Japan accounted for the largest share of this trade with 41%. Germany had 12%, Australia, 9% and the United Kingdom, 8%. As political and economic barriers dissolve, chances are good for the United States to make inroads in specific markets, such as chemicals, wheat and fertilizers.

Given the present direction of economic development and China's likely future priorities, the pattern of imports will probably remain fairly stable. Key raw materials for which domestic sources of supply are inadequate or nonexistent, such as rubber and copper, will probably be imported in increasing amounts as the Chinese economy expands. Chemical fertilizer imports-4.3 million tons in 1971– will also probably continue at substantial levels for a decade or more. Wheat imports-3.2 million tons in 1971-are on the ine and sugar imports have been rising, but a bad harvest or breakthroughs in agricultural technology could quickly alter this situation.

As trade expands, China's purchase of machinery and equipment will probably increase as a percentage of total imports. The kinds of machinery and equipment ordered will probably change rapidly over time as plants producing new products, or old products in a new way, will be bought until the Chinese have learned how to construct such plants on their own. Temporary shortages of key items excused by mistakes in planning will also create a demand for foreign products. Finally there will continue to be some machinery and equipment that China will be unable to produce at all or could produce only at prohibitive cost, such as commercial jet aircraft and some computers. It is in this category of technology-intensive machinery and equipment that the United States may be expected to enjoy its greatest advantage.

China's exports to industrialized Western countries comprise mainly agricultural, mineral and textile products. In 1970, for example, crude materials, such as seeds, nuts and textile fibers accounted for 43% of China's exports to the industralized West. Basic manufactures, mostly textile yarns and fabrics, accounted for another 20% and food products for 18%.

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. 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 PRC could cause us considerable difficulty. While staple foodstuffs would not enjoy a large market in the United States, China would probably sell substantial quantities of specialty foods to American consumers. There would be some market for Chinese exports of consumer products such as tea, silks and light manufactures. Also, 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.

CONCLUSION

Any attempt to quantify the potential for U.S.-P.R.C. trade is highly conjectural. Given the politicized nature of U.S.-P.R.C. trade relations and the severely limiting economic constraints, experts are generally agreed that U.S.China trade will evolve slowly, even after a trade infrastructure is reestablished. In the long term it is likely that the Chinese will welcome the United States as an additional source of supply. At the same time China will be concerned about balancing its trade with the United States, and its ability to export to this country may be expected to have a significant influence on the volume of their purchases from us.

Projections of U.S. exports to China in 1980 range from a low of $50 to an upper limit of $650 million. This latter figure is the "most optimistic” estimate of Professor Dernberger in Prospects for Trade Between China and the United States. He estimates Chinese imports in 1980 will total $5 billion; then makes a statistical extrapolation of the U.S. share of world exports of minerals and metals, and machinery and equipment applied to projected Chinese imports and assumes these items will be 50% of our total exports to China comprising some 30% minerals and metals, 25% machinery and equipment and 15% chemicals. If the United States were able to maintain its present share of the world market in these goods, 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 with this area.

Chairman PROXMIRE. Thank you, Senator Scott. I want to especially thank you for your very heavy emphasis before this committee, which is most appropriate, on trade.

In our previous hearings, this seemed to be the key to many, many things with respect to our relationship with China.

There is a kind of division here of thought. One is that we have everything to gain by increasing trade with China and much more than they have to gain in terms of our foreign policy influence. We would enormously increase trade with China and it wouldn't be anything that this country would have to depend on economically.

On the other hand, because China's economy is not as big as ours, their dependence on us would increase greatly. You have talked about a 10-to-1 relationship and we can almost say that. In other

words, if we have $100 million worth of trade it would be 10 times as important to them as it would be to us and, therefore, we might in that sense have 10 times the influence.

On the other hand, we have that old saying of Lenin, you know, that when the Communists get ready to hang the capitalists the capitalists will sell them the rope—this notion that we would build up the Chinese economy by this kind of trade.

Now, in view of all this, do you think it would be wise for us to consider most-favored-nation status for China so we could really get this moving, or should we be quite cautious in moving in that direction?

Senator Scott. I think we are premature in considering mostfavored-nation status at this early stage in our relations, after so long a hiatus, because we have not yet extended that to other nations for which there are many more and better reasons perhaps. It is something which could be held out but, as Senator Mansfield has made clear, there can be no true normalization of relations until the war in Vietnam ends. There can, however, be some kind of normalization notwithstanding the failure to solve in the foreseeable future the Taiwan problem, so I think we could hold out various benefits, but we are limited in the amount we can sell to China by the amount which they can buy from us because they have a very strong aversion to going into debt.

Chairman PROXMIRE. That was a very helpful contribution you made to us. In other words, if they are going to buy from us, we have to buy from them?

Senator Scott. Yes.

Chairman PROXMIRE. And they have limited amounts that they could sell to us. You say they have some minerals they might not want to sell; is that right?

Senator Scott. Tungsten, tin; we do not yet know whether they want to sell it.

Chairman PROXMIRE. At any rate, you see this as a fairly low level operation in terms of our economy?

Senator Scott. I think it is.

Chairman PROXMIRE. But very significant in terms of a reapproachment? I can't see any other approach to China.

We are not going to have an aid program to China.
Senator Scott. I hope not. (Laughter.]

The two leaders are agreed on that. I think that aside from aid to our own businessmen, aside from keeping open all the conduits and all the faucets in the world having to do with trade, the big reason is to continue a closer communication because the more interweaving we have the more the webbing grows of contacts between China and the United States, the better possibility of understanding, the less likelihood for trouble between us. Moreover, China is far behind Russia in this rise in consumer aspiration. The Russians have had their appetite whetted to a degree that I myself think that the Moscow pacts are apparently a result of Russia's need to send a signal to its people that times are going to be better on the domestic front. The Chinese are not in a position to send that signal. They, on the contrary, have trained their people to endure and even to enjoy a low standard of living on the theory that everyone will progress surely and gradually and slowly to a better level and meanwhile the Chinese do not have the clothing shortages, with the exception of rationing cotton. There are plenty of synthetic fibers, a substitute for that, and they do not have food problems of any great magnitude so they maintain a consumer aspiration at an agreed low level which, so far as we could see, everybody goes along with the act.

Chairman PROXMIRE. Do you see any improvement in that reaction? We are all familiar with the situation in Russia where they had great emphasis on production and held down consumer consumption for many, many years in a harsh and cruel way. You say in China they have succeeded in persuading the populace to somewhat accept this but have there been somewhat more opportunities for consumers to get some things--for example, bicycles or some of the other very simple things?

Senator Scott. There is. They limit the number of things which consumers would get and they also limit by thought control the number of things which consumers would want. So there are only these items I mentioned and a very few more for which you are—in which you are hoping to acquire.

The difference, I think, between the Russian psychology and the Chinese is that the Russians grumble about what they have not got. The Chinese brag about what they have got, even though in some ways it is less than what the Russians have, because the Chinese are content to work this out on a mutual, collective, and self-reliant basis. So they are not grumbling; they are justifying under this thought control, which seems to be working. The concept of the supreme teacher—they are Confucianists although they deny it.

Chairman ProXMIRE. Before I yield to Majority Leader Boggs and Senator Pearson, let me just ask one other question, because it is something that still haunts us from the hearings we had a few years ago.

We were told by experts that there seems to be something endemic in China that slowed them down very greatly. There was a conflict between a pragmatism, a desire to move ahead and adopt capitalistic methods here and there, to modify their ideology, and then, on the other hand, Mao insistence on self-sufficiency, the Mao insistence on absolute egalitarianism where you have people in charge of huge factories who make nothing more than somebody who works on the assembly line, and this was one of the reasons for the big disruptions they had in the decade of the 1960's that slowed them down.

Do you get any feeling about this kind of thing-remember the Red Guard conflict with the students and so forth, and with some of the economists and others who wanted to move in a more practical way?

Senator Scott. Well, I have a feeling that they are on top of it for a number of years; no one knows how long-5 or 10 years. I think they are on top of it by having the workers, the peasants, and the People's Liberation Army and the cadre, all on top of things as they happen and everybody watches everybody else, and they are all treated about the same. They don't have dachas, for example, in China; they don't have a privileged class as far as you can see.

I think, however, the Chinese talent for getting ahead, the Chinese being the best businessmen in the world, in time the Chinese will evolve means by which some people will be more equal than others, and whether this will mean another Red Guard or another form of adaptation for socialism, I don't know; but in my opinion it will not exist as it now exists for more than 5 or 10 years, but they will work it out. They have a genius for working it out whereby talent will be recognized.

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