upon a one-year notification of our intent to allow the defense treaty with Taiwan to lapse, as provided in the treaty, we preserve the integ rity of our defense commitments. Most importantly, we maintain the welfare of Taiwan.

Thus, just as in the 1933 debate over recognition of the Soviet Union, "normalization" does not represent endorsement of a totalitarian regime. Rather, it represents an affirmation of the priority of United States national interests and the need to have realistic channels of dialogue.

CONCLUDING OBSERVATION

The important issue is not whether there is an American Embassy or a Liaison Office in Peking. Most Americans agree mutual diplomatic relations are desirable. The real issue is the China that will exist at the turn of the century. China today is not a military or economic super-power. This is why China wants and needs help from the United States. China is a potentially powerful state and only recently an adversary. The events in Cambodia sharply reveal the limits of Chinese power. It is important, however, to develop Chinese-American collaboration on matters of common interest. We in the United States must strive to consolidate Sino-American relations while seeking to achieve the constructive participation of China in the international

arena.

Our ability to exert influence in Asia and internationally in the future depends, to a degree, upon our association with Asian goals in the international arena. The era of colonialism has ended and the opportunities for great powers to dabble in domestic affairs in prenationalist Asia is over. New forms of international cooperation, regional management schemes, and wider non-governmental involvement in foreign affairs are the hallmark of our era.

China is a poor, developing country-a regional power-and at the moment nothing more. But as China grows economically and militarily stronger, its influence increasingly will be felt not only in Asia and the Western Pacific, but globally on selected issues.

If the United States hopes to play a role in East Asia, we will need a working relationship with Peking. An absence of such a relationship could well prove dangerous. In the Korean War, and in the Vietnam War, each country miscalculated the other's possible course of action. And it should go without saying that in the event-unforeseen at this moment-of some sort of détente between China and Russia, it would be essential for this country to have good relations with both. Even if some future Chinese leadership only moderated slightly the hostility toward the Soviets, the strategic balance could shift against the United States. To counter such a shift, the United States needs better relations with each communist state than they possess with one another. Normalization is therefore a crucial step in U.S. foreign policy.

CHAPTER 2

THE CHINESE ECONOMY

The Chinese economy expanded rapidly after 1949. Economist Dwight Perkins, of Harvard, has estimated that between 1952 and 1976, the GNP grew at an annual rate of 6 percent, industrial production at 10 percent, and agricultural production at 2 percent. Its social structure remains predominantly rural and urban migration is controlled. This urban-rural imbalance, despite increased state support of the agricultural sector since the 1962 recession following the collapse of the "Great Leap Forward," remains a pivotal problem. Since 1949 growth in the agricultural sector has apparently barely matched population growth-a comparative statistic that aptly illustrates the need for economic modernization since agricultural growth in successful developing countries outpaces population growth. Per capita agricultural consumption has been stagnant since the late 1950's. China has conquered recurring famines, but does not enjoy true self-sufficiency. A major difficulty with analyzing the Chinese economy is the absence of official statistics published on an annual basis (except for a brief period in the late 1950's). Today selective statistics are casually released. Poor performance is either not reported or is compared with a year that makes them look good. The year 1949 is a favorite. Statistical reliance therefore has to be placed on various estimates which are used alongside of available Chinese figures to form the basis for most judgments.

China's future policies are clearest in economics and foreign trade. Chinese leaders have decided to renew emphasis on modernization and increased production. The "Four Modernization," objectives for attaining the "comprehensive modernization of agriculture, industry, national defense, science and technology before the end of the century," first articulated by Chou En-lai in his report to the Fourth National People's Congress (January 1975), have been reinstated. A series of planning conferences in a variety of fields have been held to discuss the achievement of these objectives.

BACKGROUND

The People's Republic of China faced the difficult tasks of consolidating power, restoring order and economic functioning, and dealing with unemployment and starvation. With these tasks underway, the first five-year plan (1953-1957) was formulated. China's First FiveYear Plan emphasized the rapid buildup of heavy industry imported from the Soviet Union and installed with the aid of Soviet technicians. Agriculture, which produced the greater share of national product, received little state investment.

Since 1957 the interaction between resource scarcity and ideological politics have been responsible for erratic economic development. Mass mobilization ideological efforts have been disruptive of manpower planning and the supply of raw materials. Food shortages have exacerbated rural-urban tensions and disrupted industrial production. To avoid such difficulties in the future, a stable political leadership capable of retaining a consensus in support of economic growth must be present. Despite these periodic problems, the economy has attained substantial growth (see figure 1).

The Great Leap Forward (1958-60) experiments, which featured backyard steel plants and greater local initiative, plunged China into a depression in the early 1960s. Because of that experience and difficulties experienced in the first plan, Peking realized that a much larger share of state investment had to be allocated to agriculture. After a brief period of uninterrupted growth, the Cultural Revolution (1966-69) again began to interfere with the operation of the economy. Further, the deaths of Mao and Chou En-Lai, the earthquakes, and the arrest of the "Gang of Four-all in 1976-again disrupted economic performance. Hence, the current modernization drive is a significant turnabout in economic policies.

Nevertheless, by 1976, when the Fifth Five-Year Plan (1976-80) started, China's GNP was some 2.7 times that of 1957 (and more than six times that of 1949). But, with population growing at an average rate of over two percent a year, the annual per capita GNP growth is just over three percent from 1957. The majority of this growth has come from industry, where output has expanded at an average of about nine percent yearly. In contrast, agriculture has grown much more slowly: two percent annually, or approximately the same rate as population growth. The net result for consumers is, as any visitor

can attest, a spartan lifestyle (most items are rationed) but with appreciable gains in basic areas, such as food, health and clothing.

As China's new leadership examined economic problems, a series of national conferences by sectors were held. These meetings identified certain core problems:

-The erosion of central planning and management controls.

-Political and ideological disputes which have disrupted productivity.

-Low morale and poor manpower utilization.

-Chronic imbalances in the iron and steel industries.

-Capacity shortages in the coal, electric power, and railroad industries.

The emergence of Teng Hsiao-p'ing may reflect the need for efficient administration and economic stability. In 1975 under Teng's supervision, Peking began to take a serious look at the economic problems. As senior deputy to Chou En-lai, Teng was instrumental in the preparation of a major report entitled, "Some Problems in Accelerating Industrial Development." The report is a sober, realistic appraisal of China's economic shortcomings. Its recommendations which included greater central control, pay increase for workers, and larger imports of advancd technology-reflect Teng Hsiao-p'ing's wellknown pragmatic inclinations and are apparent in the current modernization campaign. In essence, Teng is trying to graft advanced technology and managerial practices onto a traditionally rigid, ineffective economic system. The problem is to create an expanding and dynamic economy by rewarding initiative and innovation, to lessen paralysis induced by fears of shifting political whims.

CHINA'S MODERNIZATION DRIVE

In March 1978, Chairman Hua Kuo-feng announced a new Ten Year Plan (1976-1985) designed to provide the basis for a modernization of agriculture, industry, national defense, and science and technology in a manner that would propel China into the front ranks of the industrialized nations of the world by the year 2000. The goals of the Ten Year Plan are extremely ambitious; clearly they may not be attainable in every category.

Hua has said that investment over the next eight years must equal investment laid down in the twenty-eight years since the Revolution of 1949. There is some indication that this investment would exceed $600 billion. Agricultural growth through 1985 must average 4-5 percent annually to reach production goals, or about double the rate achieved 1952-1977. Grain output is to rise to 400 million metric tons from an estimated 1978 harvest of 295 million tons. Industrial output is to grow at more than 10 percent annually with steel production reaching 60 million tons in 1985, up from about 31 million tons in 1978.

The backbone of the Plan is to be 120 key projects, including: 10 new steel plants, 9 non-ferrous metal complexes, 10 new oil and gas fields, 8 coal bases, 30 electric power stations, 5 harbors, and 6 trunk railroads. Other major projects will include truck and diesel engine plants, color television and integrated circuit plants, and a domestic satellite communications system. For many of these projects, Peking

has decided to turn for assistance to the industrialized countries, including the United States. A tentative estimate of $70-85 billion is placed on the amount of capital equipment (i.e., complete plant, equipment, and technology) that the PRC will likely import over the period 1978-85.

Procurement of the capital equipment for the Plan has already started. During 1978, the PRC reached agreements or contracts totaling about $27 billion (Japan $10 billion, France $7 billion, West Germany $4.6 billion, the U.S. well over $2 billion, and the U.K. and the Netherlands about $1 billion apiece).

PAYING FOR MODERNIZATION

Το pay this bill the Chinese are attempting to increase the output of their traditional exports and to develop new sources of earnings, especially crude oil, coal, and non-ferrous metals. Another incentive, disclosed to me by Bank of China officials, is the policy of allowing state enterprises to retain a portion of their foreign exchange earnings for export promotion. They are beginning to engage in tourism which is the reason behind the recent major hotel purchases. American firms account for $1.3 billion in hotel construction, Japan has sold 670 airconditioned buses, and the number of tourist areas has been increased from 50 to 110, including Peking, Shanghai, and Inner Mongolia. It appears, however, that hard currency earnings from expanded trade, from tourism and from overseas remittances will not cover the gap between earnings and expenditures. It seems likely that between $15 to $25 billion will need to be financed. The Chinese have dropped their ideological opposition to borrowing on the international money markets according to Bank of China officials and are currently negotiating with various lending institutions in Japan and Western Europe. The first major financial transaction appears to be a multibank, United Kingdom, $1.2 billion loan at 714 percent over 5 years. Further, in response to my question during a discussion at the Bank of China, I was told the staff had recommended that the Chinese government rejoin the International Monetary Fund, but no official decision has been made.

The concept of autarky (self-sufficiency) has been abandoned, contrary to Mao's basic dictums. Both the private Sino-Japanese trade pact and the European Community trade agreement of last year emphasize the transfer of technology. The Japanese package reportedly includes waterside integrated steel facilities near Shanghai and expanded steel works at Wuhan. Other contemplated projects include plants to manufacture color television tubes, synthetic leather, computers, a copper smelter, a petrochemical complex, concrete plants, communications equipment, an integrated circuit plant, a bulldozer factory, a container truck factory, an insecticide plant, and an aluminum plant. European projects include plastic plants, coal mining, transportation, and petrochemical facilities. The iron and steel sector is crucial. China's goal is to double annual steel production to 60 million tons by 1985. In 1977 two steel refining plants were purchased from Sweden and the Chinese are eager to acquire production knowledge relating to specialty steels. Moreover, Chinese crude oil exports will pay for some of these overseas purchases and therefore newer petroleum technology and drilling equipment is necessary.

A critical question remains regarding scientists and technicians. The country that once led the world in inventiveness (cast iron, gun