press harder for a normalization of relations, and may decide to raise the terms for a settlement of the Taiwan issue.

4. "The United States can pursue détente with the Soviet Union and China simultaneously." This assumption seemed plausible until Secretary Kissinger's recent visit to China. Now, however, the Chinese seem to be arguing that the United States must begin to make choices between detente with Peking and detente with Moscow. It remains to be seen whether the Chinese will try to prevent further Soviet-American trade and arms limitation agreements, as they have successfully prevented Soviet-Japanese economic cooperation in developing the Tyumen oil fields in Siberia. It also remains to be seen whether Peking will attempt to link bilateral Sino-American issues to Soviet-American relations-making, for example, the level of Sino-American trade dependent on Peking's assessment of Soviet-American détente. Despite these uncertainties, it appears that Washington will have to take the interests and concerns of Peking into account in its dealings with Moscow, just as it has borne Russian concerns in mind when dealing with the Chinese.

Given the flaws in these four assumptions, it is necessary for the United States now to reassess its own policy toward China, and examine carefully the lack of progress in normalizing our relations with Peking. In such an analysis, we must estimate and weigh the bencfits of extending recognition to the People's Republic of China, the costs of recognition, and the risks in continuing to delay the full normalization of relations with Peking.

The benefits of establishing diplomatic relations with Peking should not be exaggerated. The upgrading of our liaison office in Peking to an embassy will make little difference for the conduct of our relations. But diplomatic relations would pave the way for more meaningful, sustained, and mutually beneficial exchanges in the cultural, educational, and journalistic spheres. They should also facilitate trade with China, although the market for American goods in China will be limited by China's ability to import, its present reluctance to accept longterm credits, and its desire to avoid dependence on any one supplier.

The principal costs of recognition would be its effects on Taiwan and its impact on the credibility of American commitments generally. American recognition of Peking would further weaken the Republic of China's international diplomatic position. The abrogation of our defense treaty with the Republic of China would weaken Taiwan's security posture, and might lead as well to reductions in the flow of international investment to Taiwan. These effects might increase the pressure on Taipei to reach an accommodation with Peking—which, of course, is one reason why China seeks full American recognition.

Moreover, the United States presently has both legal and moral commitments to the government of the Republic of China and to the people of Taiwan. To renounce those commitments completey would both be morally wrong, politically unacceptable at home, and bring into question abroad the reliability of the American government.

These costs, however, are controllable and declining. Taiwan seems to be weathering its own succession crisis well, has developed an impressive military capability, and, most importantly, is finding ways of maintaining its economic and political contacts with other nations in the absence of formal diplomatic ties. Japan's continuing ties with Taiwan demonstrate that recognition of Peking need not mean the renunciation of all relations with Taipei.

Moreover, the United States has the ability greatly to control the impact on Taiwan of its recognition of the People's Republic of China. Establishing diplomatic relations with Peking would require breaking relations with Taipei, and the renunciation of the Mutual Security Treaty with the Republic of China. But we should still insist upon the right to maintain economic and political contacts with Taiwan, and should reiterate, our longstanding view that the Taiwan question must be settled by the Chinese themselves without resort to force. In so doing, we could complete the normalization of relations with the People's Republic of China, while still fulfilling our commitments to the people of Taiwan. Against these possible costs must be weighed the risks of further delay:

The risk that Sino-American détente will not survive forthcoming changes in Chinese leadership;

The risk that China will become increasingly impatient with the lack of progress toward full normalization of relations;

The risk that Sino-Soviet rapprochement will reduce China's need to take a relatively conciliatory stand toward the United States:

Or, conversely, the risk that an anti-Soviet China will seek to punish the United States for its détente with the Soviet Union.

What is at stake, in short, is the future of our new relationship with China. It is important that the progress achieved over the last six years not be undone, and that the United States not return to a situation in which there is a possibility of military conflict with China in those parts of Asia where our interests conflict. In my view, the advantages and disadvantages of immediate recognition of the People's Republic of China are very evenly balanced. Accordingly, I see no need for President Ford to extend recognition to China on this trip. But the costs of recognition are controllable, while the risks of delay will continue to rise. Provided that we can reach a fair and just resolution of Sino-American differences over Taiwan, I would propose that we commit ourselves to complete the normalization of relations with the People's Republic of China within the next two years.

Mr. HAMILTON. Professor Harding, we appreciate your statement. The bells have rung, calling us to a vote. We will recess the subcommittee while we go vote. When we return, Professor Eckstein, we will hear from you

The subcommittee stands in recess.

[A recess was taken.]

Mr. HAMILTON. The subcommittee will resume.

Professor Eckstein, you may proceed.

Mr. ECKSTEIN. Thank you very much, Mr. Chairman.

Mr. Chairman, I have slightly revised the statement that you have received in advance. There were some ambiguities in it. I submitted a revised statement to the reporter or gentleman on my left.

Mr. HAMILTON. The revised statement will be entered in full in the record, Professor Eckstein.

STATEMENT OF ALEXANDER ECKSTEIN, PROFESSOR OF

ECONOMICS, THE UNIVERSITY OF MICHIGAN

Mr. ECKSTEIN. Mr. Chairman, I appreciate being invited to testify at these important hearings on the state of United States-China relations. I will address myself primarily to the trade and economic aspects of this relationship.

THE IMPORTANCE OF CHINESE FOREIGN TRADE

Foreign trade is a relatively small sector of the economy for any large country. Thus imports and exports combined constitute perhaps no more than 6 percent of the gross national product in China, roughly the same for the Soviet Union, as compared to 10 or more percent for the United States, but 22 percent for Japan and as much as 70 or 80 percent for a small foreign-trade-oriented country in western Europe or in Africa. A small share, however, does not mean that foreign trade is unimportant for China's economic development.

On the contrary, imports serve as the major highway for the transfer of advanced technology and modern production techniques. The imports of machinery, equipment, and other capital goods as components and as complete plants played a most crucial role in China's industrial development, particularly in the 1950's and 1970's. Similarly, imports of foodstuffs, particularly grain. made a marginal but quite important contribution to China's urban food supply since 1961, thereby easing the burden imposed on the internal transport and distribution network. At the same time, these food purchases relieved the pressure on the peasantry to increase grain deliveries to the state. Food imports

in the Chinese context can therefore be considered as an investment in the maintenance of stability in the urban areas and the improvement of incentives and rising living standards in the rural ones.

CHINESE IMPORTS AND GROWTH

The primary interest of Chinese planners is in imports. Exports are fostered as a way of earning foreign exchange with which to purchase capital goods, foodstuffs, and other materials to accelerate China's economic growth. In the 1950's, China hoped to accomplish these objectives through a preponderantly Soviet trade orientation. At that time, in trade as in politics, the Chinese followed a "lean to one side" policy evidenced by the fact that 60 to 80 percent of the country's trade was with the Soviet Union and other Communist countries. In fact, within the context of this orientation, China's foreign trade expanded very rapidly, indeed more rapidly than GNP.

THE IMPACT OF THE SINO-SOVIET SPLIT

These policies were drastically reversed in the 1960's when, as a result of the Sino-Soviet break, the Russians withdrew thousands of technicians and advisers from China very suddenly and thus brought to a virtual halt an extensive program of turnkey projects in which they were involved. Having thus suffered the penalties of overdependence on one dominant trading partner, the Chinese embarked on a selfreliance policy in the 1960's. Therefore, under the impact of slower economic growth and deliberate policy combined, Chinese foreign trade fluctuated in the 1960's around an essentially stable level. Thus if one adjusts for inflationary price rises, the volume of China's total trade turnover did not exceed 1959 levels until 1972.

CHINESE ECONOMIC EXPANSION

In effect, following a depression in the early 1960's and a mild recession engendered by the disruptive impact of the "Cultural Revolution," the Chinese economy has been in the throes of a new wave of expansion since around 1970. Chinese leaders have placed a renewed emphasis on the importance of economic development as illustrated by the fact that they apparently cut back military expenditures between 1971 and 1972, perhaps by as much as 25 percent. They have maintained it at this reduced level since. In this way, they released resources for investment in the civilian sectors of the economy. This cutback in military expenditures almost certainly reflected a reduced sense of an immediate Soviet threat to China. This ties in with some of the remarks of Professor Harding a few moments ago. It also was part and parcel of a broader process of reassessment of all of China's policies, domestic and foreign, economic and political. These policy reassessments were closely intertwined with a far-reaching internal power struggle which led to the fall of Lin Piao.

THE IMPORTANCE OF UNITED STATES-CHINESE RELATIONS

It would seem that beginning around 1968 or 1970, Chairman Mao and Premier Chou decided to reformulate the Chinese strategy of coping with the Soviet threat. In the short run, the Chinese would seek

reassurances against the Soviets by opening relations with the United States. In the longer run, they would seek to build a "powerful, modern, socialist state." According to Chou En-lai's "Report on the Work of the Government," in January 1975, this task was to be accomplished by the end of this century. In the same speech, Chou spoke of the need to "accomplish the comprehensive modernization of agriculture, industry, national defense, and science and technology, so that our national economy will be advancing in the front ranks of the world.”

CHINESE TRADE EXPANSION GOALS

Actually the short-term and long-term strategies of coping with the Soviet threat can be considered as mutually interrelated and reinforcing. In the process of their policy reassessment, the Chinese leaders clearly recognized that rapid economic development and modernization over the next quarter century will require accelerated technological progress and a much more open trade orientation on the part of China. This view was reiterated again most recently by the Vice Minister of Foreign Trade in a discussion with a high-level American delegation. He reemphasized that China would, in the next 5 to 10 years, import on a significantly larger scale advanced technology and equipment in order to speed up its domestic development. He underlined that China trade volume with the world will continue to expand at a rapid rate in the years ahead.

THE NEED FOR FOREIGN EXCHANGE

In reality, the Chinese have reinterpreted the concept of self-reliance. In the 1960's, it meant import minimization. Now it represents a much more active and open foreign trade orientation with the limits defined by China's ability to earn foreign exchange. That is, while in the 1960's, China policy was based on minimizing trade dependence on the rest of the world, it now means minimizing financial dependence. Therefore, the new policy and the desire to accelerate industrial development provide a strong incentive to broaden China's trade relations with Japan, Western Europe, and the United States. At the same time, Dr. Kissinger's secret trip in mid-1971 provided an opportunity for opening relations, including trade relations, with the United States.

CHINESE GRAIN IMPORT REQUIREMENTS

These new policy considerations happened to coincide with a mediocre Chinese harvest in 1972 which suddenly increased China's grain import requirements. Since the 1950's, China had been an exporter of rice. Up to 1961, the Chinese did not import grains or other foodstuffs in significant quantities. However, under the impact of an acute agricultural crisis in the early 1960's, they began to import about 6 million tons of grain per year. As the agricultural situation improved in the late 1960's, these imports were reduced, fluctuating between 3 and 5 million tons. However under the impact of the inferior 1972 harvest, they were suddenly increased to 7 or more million tons in 1973 and 1974. The United States became the principal supplier of this additional grain to China. While we sold them no grain before 1971, we

supplied almost 1 million tons in 1972, 4 million tons in 1973, and almost 3 million tons in 1974. In addition, the Chinese purchased from us sizable quantities of soybeans and raw cotton in 1973 and 1974.

THE COLLAPSE OF SINO-AMERICAN TRADE

These sharply fluctuating trends in our grain sales to China have dominated the whole course of United States-China trade since its opening in 1971 as illustrated by the data which I present- which I won't attempt to summarize. It might just be kept in mind that there was a peaking in 1974 and a sudden collapse in the current year, with probably much less than half of last year's trade.

Why this sudden rise and sharp collapse? China's traditional grain supplies were Canada and Australia, but they were not in a position to suddenly, from one year to the next, increase their grain exports by 2 to 4 million tons. Therefore the Chinese had to look to the United States. Almost certainly, however, economic and trade considerations were reinforced by political factors. In 1972 and 1973, China was clearly interested in rapidly normalizing its relations with the United States. A rapid increase in United States-China trade stood as a symbol of improved relations and was also probably intended by the Chinese as a token of their earnestness in pursuing normalization. As a result, the United States was suddenly propelled into second place as China's leading trading partner.

INFERIOR U.S. GRAIN

The collapse, too, was brought about by interacting economic and political considerations. There is no question that the Chinese found the quality of the grain shipped from the United States greatly inferior to the supplies they were accustomed to receiving from Canada and Australia. U.S. wheat contained many impurities while corn was so high in moisture content that it arrived in China sprouting. Repeated complaints by the Chinese led to some corrective action by both the grain traders and the U.S. Government but these were belated and only partially effective.

There are ample indications that, in addition to these problems, the Chinese became more and more disappointed at the pace of normalization in the course of 1974 and 1975, as Professor Harding indicated. It is therefore not surprising that when the Chinese harvest improved to the point that total purchases were reduced from a 7- to 8-millionton level back to a 3- to 5-million-ton level, U.S. imports were eliminated altogether.

CHINESE DOUBTS

China's doubts about the United States have been reinforced by Watergate and the collapse in Vietnam. These events are interpreted by them as signs of growing weakness in the United States, both domestically and internationally. Their concern is greatly aggravated by the intensifying rivalry and competition between Russia and China for influence and dominance in Indochina, following the collapse in Vietnam. In the face of this rivalry, they feel they can no longer fully rely on the United States as an effective counterbalance to the U.S.S.R.