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Federal News Service


September 20, 2005 Tuesday




LENGTH: 18348 words














SEN. COLEMAN: This hearing of the Senate Foreign Relations Subcommittee on Western Hemisphere, Peace Corps and Narcotics Affairs will come to order.


This is very busy times, I will note to the panelists. First I want to thank them for their attendance and participation today. This is a very important discussion. When I left, our conference was having an all-conference briefing from FEMA, the Coast Guard, on Hurricane Katrina. So that will, I think, account for some of my colleagues not being here. But I did want to go forward with the hearing as scheduled. This is part of what will be an ongoing conversation, and I think a very, very important conversation.


Minnesota native and Pulitzer Prize-winning journalist Tom Friedman has recently published a new book called "The World Is Flat." The book is a major data dump of facts about how the world has changed, particularly with regard to China and India. On some editions, the cover depicts a boat sailing over the edge of the earth, and the jacket cover says the painting is called, "I Told You So." That's kind of a grim joke, but it's a serious warning. We have to understand the new dynamics at play in this interconnected world. In the end we will either ride the waves of opportunity or we will be swept out to sea.


There can be no question that China is playing an increasing role in Latin America, as it is elsewhere around the world. Between 1999 and 2004, China's imports from Latin America increased six-fold and its exports more than tripled. In 2003, Latin America was the destination of fully one-third of Chinese foreign direct investment.


A number of high-profile visits further illustrate China's growing interest in Latin America. Since President Jiang Zemin's 31- day tour of Latin America in April 2001, President Hu Jintao has visited Latin America twice, including Mexico earlier this month. And China's vice president visited the region in March of this year.


The overall pattern seems to be the following. A Chinese official visits a Latin American country. China makes an attractive offer to that country, market access for agricultural and other goods, a substantial commitment of investment and/or the country's designation as an official tourist destination for Chinese visitors.


In exchange, China gets certain benefits, the country's designation of China as a, quote, "market economy," closed quote, which decreases the country's ability to apply anti-dumping measures against Chinese imports, and/or the country switching its diplomatic recognition from Taiwan to China.


China's outreach in Latin America includes military cooperation. China is establishing and strengthening military exchange programs in the hemisphere, even as the U.S. is restricting our military-to- military relations because of differences over the international criminal court.


In 2004, 20 senior Chinese defense officials visited Latin America. In addition, China sent 125 peacekeepers to Haiti, the first military operation in the Western Hemisphere with Chinese troops.


China is also becoming increasingly active in the hemisphere multilateral institutions. China gained observer status at the Organization of American States last year and would like to join the Inter-American Development Bank.


Chinese criminal elements are having an impact in the Western Hemisphere as well. It is estimated that two-thirds of Brazil's pirated goods originate in China and a considerable amount of its traffic through the tri-border region. China is a major source country for ephedra, a principal component in the manufacture of methamphetamine, which is a plague that is growing larger and larger in the United States.


China's influence is not the same throughout the region, however. Countries like Brazil, Chile, Argentina and Venezuela view China positively as an important and growing market for their oil, copper and soybeans. Places like Mexico, the Dominican Republic and Central America, on the other hand, may be more concerned about the fact that many of their low-wage jobs have been displaced to China.


Overall, China's influence in the region appears unlikely to supersede the United States any time soon. U.S.-Latin America trade is 10 times greater than China-Latin America trade, and American investment in Latin America dwarfs China's by even greater margins. Our history, values and geography also bind the United States to Latin America in a way that China cannot match.


However, China's staggering economic growth and its insatiable need for natural resources, particularly energy, is a global phenomenon that will have an effect in the United States and one that certainly merits our attention.


At minimum, we must find ways to ensure that American influence in the Western Hemisphere is not diminished by an increasing act of China. Economically, we should be looking for ways to work cooperatively as a region to increase our global competitiveness in the face of a growing China, a rapidly developing India, and a united Europe.


The United States must also be aggressive in our diplomacy so as to dissuade any notion of a vacuum that China is filling in the hemisphere.


I'd also challenge our witnesses to look for the opportunities presented by a major world power showing interest in this hemisphere. Are there ways to engage China in Latin America? Where there is instability in this hemisphere, can China play a constructive role? Are there opportunities for the U.S., China and Latin America to work together in ways that benefit all?


We'll begin today's hearing with the view from the Departments of State and Defense about how U.S. policy in Latin America takes into account China's growing presence.


Ambassador Charles Shapiro is currently the principal deputy assistant secretary of State for Western Hemisphere Affairs. A career member of the Foreign Service, Ambassador Shapiro was most recently posted as ambassador to Venezuela. He has previously served as director of the Office of Cuban Affairs, as deputy chief of mission in Santiago, Chile, as deputy chief of mission in Trinidad, and as a political officer in San Salvador.


He has held numerous posts in Washington DC, including executive assistants in the Bureau of Western Hemisphere Affairs, international relations officer in the Office of Latin American Programs with the Bureau of International Narcotics & Law Enforcement Affairs, and deputy director of the Office of Andean Affairs.


Ambassador Shapiro will be supported by Mr. Robert Forden, deputy director for China and Mongolian Affairs at the Department of State. Mr. Forden is a career Foreign Service officer with experience in Beijing, Taiwan and Hanoi.


Mr. Roger Pardo-Maurer is deputy assistant secretary of Defense for Western Hemisphere Affairs. Before joining the Department of Defense, Mr. Pardo-Maurer was president of Emerging Market Access, a Washington DC consulting firm. He's also managing partner of Access NAFTA Project Management, a trade and investment advisory firm, and president of Trotwell Information Group.


Mr. Pardo-Maurer has worked as a Latin American specialist at the American Enterprise Institute, at the Center for Strategic & International Studies. He's also served as chief of staff for the representative of the Nicaraguan resistance. Mr. Pardo-Maurer is an enlisted reservist in the United States Army's 20th Special Forces Group.


We will begin with Ambassador Shapiro.


MR. SHAPIRO: Thank you very much, Mr. Chairman. I'm pleased to appear before you this afternoon to discuss the diplomatic, political and economic implications --


SEN. COLEMAN: Mr. Ambassador, if I can, since you just started, what I would like, since you just started, I would love to give my colleague from Florida, Senator Nelson, an opportunity to make a statement before you begin your testimony.


Senator Nelson, can you kind of catch your breath and gather your thoughts?


SEN. BILL NELSON (D-FL): Mr. Chairman, this, of course, is an enormously important subject to us, not only in the Western Hemisphere but in the entire world, because of the kind of relationship that we have had with, for example, Venezuela, that is now being strained, and whether or not that would be strained by an additional building relationship between Venezuela and China over the allocation of the oil resources out of Venezuela.


The enormous importance to us of the extension of terrorism out of the Middle East and into Africa and into Latin America and how increasingly the Chinese can be our partners in helping us with regard -- because they have as much at stake in helping against terrorism as we do -- we're dealing on Latin America today, but it's a role that the United States and China increasingly are coming together, for example, in dealing with North Korea and realizing it's not in China's interest, and certainly not in America or the rest of the world's interest, that North Korea have a nuclear bomb. So I'm really looking forward to the discussion of this panel here.


REP. COLEMAN: Thank you, Senator Nelson. With that, Ambassador Shapiro.


MR. SHAPIRO: Thank you very much, Mr. Chairman, Senator Nelson. It's with great pleasure that I appear before you this afternoon to discuss the diplomatic, political and economic implications of China's engagement in Latin America and the Caribbean and the challenge and opportunity that this presents the United States and our allies and friends during the next quarter of a century.


I provided the subcommittee with written testimony, but there are several key areas that I would like to highlight now, with your permission.


China's growth and development have naturally brought growing relationships with traditional U.S. allies in the region. This does not diminish U.S. influence or capabilities. U.S. policy towards Latin America is anchored in our strong and enduring alliances, which continue to provide unprecedented stability and prosperity in the region.


Our allies throughout Latin America believe good U.S.-China relations are important to global peace, prosperity and stability. Our efforts to work with China should enhance, not impair, our regional alliances.


U.S. policy in Latin America is built upon a positive and constructive vision designed to advance freedom and prosperity. We promote democracy and the rule of law so that every citizen can decide what is best for him or herself and is guaranteed the right to claim his fair share of political freedom and economic opportunity.


We promote free enterprise as a perpetual engine of growth. We are committed to working together with our neighbors to make things better for the poorest among us so that things can be better for all of us.


We are working constantly to achieve our goals. We're working multilaterally with the United Nations, particularly in Haiti, and with the OAS throughout the hemisphere. With the strong support of President Bush at the Fort Lauderdale general assembly of the Organization of American States in June, we joined with our neighbors in issuing the Declaration of Florida, which advances an agenda of democracy and transparent and accountable governments.


We've also contributed significant resources to support the exercise of democracy in the more than a dozen countries that will be holding presidential elections through the end of 2006. That includes, among others, Haiti, Nicaragua and Bolivia.


Our economic engagement in the region is extensive and broad- based. U.S. trade with Latin America and the Caribbean exceeded $445 billion in 2004 and is growing this year at the rate of 10 percent.


U.S. investment in Latin America, direct investment, exceeds $300 billion. We have free trade agreements with Mexico and Chile. Similar benefits will soon be extended to the CAFTA-DR countries. Negotiators are meeting this week in Cartagena, Colombia with negotiators from Colombia, Peru and Ecuador. And we also hope to soon conclude a free-trade agreement with Panama.


The Millennium Challenge Account offers great promise to assist countries in making reforms necessary for long-term growth. Both Honduras and Nicaragua have completed MCA compacts.


An estimated 30 percent of the direct investment flows into the region come from the United States. The United States accounts for more than 50 percent of multinational firms doing business in Latin America and the Caribbean.


We wouldn't be so bold as to claim that all of our goals have been met. There's still much to be done. But there has been progress in many areas. Today every country in the hemisphere, save one, has a democratic constitutional government. We've improved the basis for security cooperation in the hemisphere through a broad range of military-to-military engagement and security assistance programs.


And the percentage of the hemisphere's population, about 15 percent, living in extreme poverty is decreasing. Reducing poverty and increasing regional prosperity are key objectives and will be a focus of the Summit of the Americas which will take place in November in Mar del Plata, Argentina.


For its part, China has many reasons to be engaged in Latin America and the Caribbean. We see two major trends in Chinese engagement; first and foremost, growing trade and investment to fuel China's own rapid domestic development. Second, China wants to match its growing economic strength with political influence. China is the world's seventh-largest economy, the world's third-largest trading nation, and a major destination for foreign direct investment from around the world.


To sustain economic growth, China has become more engaged with the rest of the world, including Latin America. Chinese trade with Latin America is growing at around 25 percent a year. China may become an important new investor in the region. Its total investment at the end of 2004 was only $8.3 billion. However, new pledged investments in infrastructure and natural resources could be a significant boost to the region if realized.


Let me go back. Our investment in the region is $300 billion. China's is about $8.3 (billion). To give you a comparison, Spain's direct investment in the region is somewhere around $55 billion.


China is also interested in matching its economic power with political influence. China's integration into the global economic and political community is now largely complete. We encourage China to act as a stakeholder in the international system, of which it is a major beneficiary. We support China's engagement in the region in ways that create prosperity and promote transparency, good governance and respect for human rights. We also want to ensure vital renewable resources, such as fisheries and forests, are used in a sustainable way.


Given the subcommittee's interest in narcotics, let me touch for a minute on China's role in narcotics control in the region. China has a large and developed chemical industry, and, like the United States, it is one of the world's largest producers of precursor chemicals, chemicals which have legitimate uses but are also used in the production of cocaine and synthetic drugs.


China notifies the DEA of shipments of precursor chemicals to the U.S. and Mexico so that tracking may be done to prevent diversion of those chemicals for illicit purposes. Nevertheless, some precursor chemicals are, in fact, diverted from legal use to manufacture of methamphetamine destined for U.S. markets.


We are following closely what appears to be expanding military- to-military contacts between China and countries in the region, and my colleague on the panel will address that more. As China considers arms sales to the region, we will apply our general policy of seeking transparency and accountability in these sales and are concerned about the risk of diversion of weapons to illegal armed groups.


We do not have reliable figures for China's military assistance to the Western Hemisphere. However, we note that U.S. assistance is preconditioned on adherence to basic principles of good governance and transparency, and we encourage China to adopt similar principles. I would also note that in comparison, U.S. military assistance dwarfs Chinese security assistance to the region.


There's much that's complementary with China in our approach to the region and much on which we look forward to cooperating with them. As the president said on May 31st, our relationship with China is complex, but in recent years we've been able to communicate often to address common challenges.


Of course, we have differences with China on a variety of important issues, including human rights, non-proliferation, Taiwan, and some aspects of trade and finance, among others. We intend for our relationship with China to be based both on a realistic appraisal of our common interests and, equally important, a frank exploration of differences through dialogue.


Let me conclude with a couple of observations. First, our relationships with our neighbors in the Western Hemisphere are strong and stable, based on shared values, economic ties and defense relationships. A strong, secure United States and a strong, secure, prosperous and stable Western Hemisphere remains our goal and a continuing reality.


Second, we must continue to work with China and with our partners around the world to ensure that China's development takes place within strong regional and global security, economic and political arrangements. That's the policy articulated by President Bush, by Secretary Rice, and is a key objective of the U.S.-China senior dialogue led by Deputy Secretary Zoellick.


I assure you that in pursuing this goal, our guiding principle remains to advance the interests and values of the United States of America.


Thank you for this opportunity to testify. I'd be pleased to take your questions.


SEN. COLEMAN: Thank you, Ambassador Shapiro, for that optimistic presentation. Mr. Pardo-Maurer.


MR. PARDO-MAURER: Thank you, Mr. Chairman. And I'm delighted to see Senator Nelson here, whose state has such an important relationship with Latin America. And, in fact, Senator Nelson's appearance tempts me to take the risk of straying from my prepared remarks and perhaps beg a question from the senator based on a reflection that the last year was a big year for the People's Republic of China, where the last year or so they can rightly take pride in having placed second in gold medals at the Olympics.


They placed troops in the Western Hemisphere, participating in the U.N. force in Haiti. And they put a man in space, or two men, I think it was. And there's no question but that transforms the view of the world, not only of those people who are so fortunate as to have been able to look at our planet from that perspective, but of the entire nation.


So no question their views of the world and of their place in it are evolving, and it's only natural that our inquiry here should take that into account and see how we can influence those views. And I take this hearing as an opportunity to do so. So I'm delighted to see you here. Thank you, sir.


China was only yesterday a marginal presence in our neighborhood, but now it is a growing feature of this new geostrategic map. And at the 2004 APEC summit in Chile, President Hu of China thrilled the region by raising expectations that China would invest $20 billion, at least, and by some media reports up to $100 billion, over the next decade.


This was widely heralded in Latin America as signaling the arrival of a new age. And certainly as perceived by the Latin Americans, President Hu's tour through the Americas was all the more remarkable for having attracted scant comment in the United States.


We can expect Beijing's influence in the Western Hemisphere to grow considerably over the next decade.


China offers Latin America and the Caribbean what some may see as alternatives or counterweights to the democratically accountable free markets, which are the cornerstone of the inter-American system as we know it today.


Our objective, as Ambassador Shapiro has pointed out, should be to ensure that China's rise as a commercial power in the Americas opens economic opportunity for all and raises the standard of living of all our peoples while strengthening mutual trust and security and helping to consolidate the rule of law and democratic institutions in what Michael Novak, scholar of the Americas, has called this hemisphere of liberty.


To the extent that China's rising political, economic and strategic competitiveness is not properly addressed or understood, it harbors the potential to sew discord between the United States and the People's Republic of China and the region.


China is still in the early stages of its quest for global influence. I might add there were a few people who even a few years ago realized that China was pursuing a global strategy.


The rules of the game are evolving. To be helpful, the rules should help us distinguish clearly the things that are threats from the things that are not threats. They should help sort out diplomatic and commercial pursuits from strategic pursuits. They should inject predictability into the system, create efficiencies and economies and avoid misunderstandings.


Ultimately, good rules should help identify those areas in which we can and should cooperate with China and our regional partners. The evidence suggests that in this hemisphere, China is not unresponsive to U.S. sensitivities, but only when those sensitivities are made evident.


So this process is unfolding as we speak, and it is not surprising, therefore, that our understanding of China's role in the Western Hemisphere is evolving. That is why this hearing is so important and why I commend you on the spirit in which it is held.


To start with the things that we do not know, there appears to be no consensus among the experts as to whether China's policy towards the Western Hemisphere is informed by an authoritative, long-term strategy, by short-term tactics, or some pragmatic mixture of both. And I would suggest that our understanding would benefit further if this inquiry were to explore the broader context of China's activities in the Americas. And if your colleagues were to pose the same questions being asked here today to our specialists for other important regions -- Africa, the Middle East, Central Asia, South Asia and East Asia.


With few exceptions, the United States is the security partner of choice for the nations of the Americas. We should not take this for granted. It was not accomplished overnight or by shirking from difficult and, at times, thankless tasks. The friendly defense relations between the United States and the nations of the Americas are the product of hard work by generations of civilian officials of the United States government and by the men and women of our armed forces. Our goal should be to maintain these privileged and long- standing relationships.


The importance of the Latin American democratic revolution of the 1980s and '90s to sustaining our friendly defense relations in the Americas cannot be overstated. The virtual disappearance in this hemisphere of interstate military rivalry, so recently the bane of the continent, is one of the most cherished accomplishments of the democratic revolution. By virtually any indicator, Latin America and the Caribbean today comprise the least militarized region of the world.


This means that the United States is able to approach Latin America and the Caribbean as a, quote, "economy of force," unquote, theater. We want to keep it that way.


The strength of our economic and cultural ties with our neighbors permit us to maintain a strategic posture that requires a relatively and, indeed, historically small investment of military forces and security assistance. This positive situation should be seen as one of the core strategic assets of the United States.


Should another actor attempt to become a serious competitor for military influence and cooperation in the region, an effective response by the United States could become much more costly.


Our relationship with each country is different and is conducted on unique terms. Nevertheless, throughout the region, our friendship is reflected in the entire range of military cooperation -- in operations, exercises, training, equipment, education, doctrines, even uniforms and for lack of a better term, elan.


We do not see China as directly competitive in this area. There is no evidence of Chinese interest in establishing a continuous military presence in the region, nor is there evidence that Chinese military activities in the Western Hemisphere, including arms sales, at this time pose a direct conventional threat to the United States or its friends and allies.


That is not to say, however, that there are no concerns. And in particular, we need to be alert to rapidly advancing Chinese capabilities, particularly in the fields of intelligence, communications and cyber warfare and their possible application in the region. We continue to be concerned about China's capabilities or activities in these areas.


As I noted in my recent testimony to the House International Relations Committee, we encourage other nations in the hemisphere to take a close look at how such activities could possibly be used against them or the United States.


I hope this testimony will stimulate a discussion and better understanding of China's changing role in the world and its long-term implications for the United States and that it will stimulate a discussion of how closely the national security of the United States remains linked to the security of the Western Hemisphere.


Global, hemispheric and homeland security are a continuum, not discrete spheres. And our security is ultimately tied to the advancement of economic opportunity and democracy in this hemisphere. Indeed, these interconnections are what inform U.S. policy towards the hemisphere.


We must recognize that China and the U.S. will compete for trade opportunities and that competition can, itself, benefit the nations of this hemisphere. But we must remain mindful that China also has its own set of political, economic and military interests, requiring us to carefully distinguish between legitimate commercial initiatives and the possibility of political or diplomatic efforts to weaken the democratic alliances we have forged.


So above all, I hope this hearing will challenge any complacent belief that our enduring vision of the New World as a land of freedom and opportunity for all can somehow be conceived in isolation from our long-term strategic interests.


Thank you.


SEN. COLEMAN: Thank you.


First, an observation. I have a very strong belief that as we look into the next decade and decades to come and that as we see a Europe that is eliminating trade barriers and political divisions and kind of developing a -- trying to develop a unified economic strength, as we see the emergence of a growing China, a growing India, that ultimately our ability to, as a Western Hemisphere, to work together to take advantages of the resource opportunities that we have, of the labor opportunities -- in the end, that ability for us to build upon -- what I get from both of you gentlemen, which is an optimistic assessment based on the long-standing ties between the United States and Latin America and Central America, that that really is part of our future.


One of my concerns, though, is -- and I think, Ambassador Shapiro, you talked about China's growing economic strength with political influence. My question, then, is about that political influence.


The nature of democracy in Central America and Latin America is still fragile -- concerns, obviously, that many of us have about the direction that Venezuela has taken; the political instability in Peru; the rise of the cocaleros; and the -- what's happening in Bolivia with an election coming soon; Nicaragua -- the Bolanos administration being squeezed by Ortega on the left and Aleman on the right.


And so my question, then, becomes with that concern about the fragility of what you've both really reflected upon. The -- I think the democratic revolution, Mr. Pardo-Maurer, is what you talked about, for a country that doesn't have a deep and abiding commitment to democratic principles.


Can we talk a little bit about your perspective of Chinese foreign policy objectives when it comes to Latin America? Do we see any involvement in some of the political divisions that were being played out in some of the countries that I've talked about? Does China -- how would you describe their goal or their vision when it comes to some of the challenges that democracy is facing in Central America and Latin America?


MR. PARDO-MAURER: Mr. Chairman, I'm going to defer to my colleague here who's an expert on China, whom I brought along, Mr. Forden, from the East Asia Pacific Affairs Bureau of Department of State.


SEN. COLEMAN: Mr. Forden.


MR. FORDEN: Thank you, Mr. Chairman.


Well, I'm not an expert on the political dynamics of Latin American countries, so I would defer to Ambassador Shapiro on the effects of China's foreign policy -- or potential effects -- in the domestic political scene.


But in terms of China's foreign policy on Latin America in general, we don't see any evidence that China has a concerted policy or interest in intervening in the domestic political dynamics in these countries that you mentioned.


I think primarily what -- from our point of view -- China's looking at is growing economic ties to these countries -- opportunities to secure access to resources that they need to fuel their domestic economic development, opportunities to seek access and expanded access to markets for their exports of their goods and a foreign policy in this hemisphere, which is mostly designed to secure and maintain good relationships with those countries in Latin America with the primary purpose of maintaining and securing their economic ties.


MR. SHAPIRO: If I may add to that, Mr. Chairman.


These markets in Latin America are important to us and they are of increasing importance to China, both as a market for Chinese exports and as a place where they purchase the things that they need.


To the extent that that trade is taking place in an open manner with a level playing field, to the extent that Latin American countries are wealthier from selling their exports to China, those countries are going to be more stable and they're going to, in turn, be better trade partners for the United States as well.


There is no reason why China shouldn't be involved in Latin America the way that other economic powers, we hope, will not only trade with Latin America, but Latin America will trade among itself.


SEN. COLEMAN: Mr. Pardo-Maurer?


MR. PARDO-MAURER: Mr. Chairman, I concur with the remarks of both of my colleagues. And I would add the following.


We do need to be alert to the possibility of a sort of Gresham's Law working here where the bad money drives out the good.


As Ambassador Shapiro said, what's important is that there be a level playing field. The fact is that American -- U.S. commercial -- relations with Latin America are embedded within a much larger context than merely economic considerations. We have a human rights component to our diplomacy. We have cultural aspects to our diplomacy. There's all kinds of other things that go on within the context of our economic relations.


And what's more, I would argue that our relationship -- the relationship of U.S. businessmen with Latin American businessmen -- is one that also takes place within a larger social context.


So from that point of view, there is something very real out there, which we call the inter-American system, that is undergirded not only by binding institutions between governments, but by ethics and mores and a common vision of the world.


China is not part of that system at all. It's not a democracy. It's not a place where you can speak freely. It's a place, as my colleague indicated, whose interests in Latin America are economic. So from that point of view, we need to be sure that we're able to work within the inter-American system so that China is competing on a level playing field.


What is the equivalent of the Corrupt Foreign Practices Act that should restrict businesses from not bribing businesses or governments in other countries for contracts and so forth?


What is the equivalent of Rotary Club or Kiwanis or any of these many other organisms of civil societies that act as watch dogs and that shape the behavior of the business community?


These exist in Latin America. And the degree of development of civil society in each country is different. And therefore, a one- size-fits-all approach will not necessarily work. But I think by working together within the inter-American system, we can help bring China in as a constructive partner that builds up institutions and ultimately is a more constructive player on the world stage.


So I think we need to keep that in mind.


SEN. COLEMAN: Thank you. Senator Nelson?


SEN. NELSON: Mr. -- Ambassador Shapiro, since we import 13 percent of our daily consumption of oil from Venezuela, what's going on between China and Venezuela, and how is that going to affect us?


MR. SHAPIRO: Thank you for the question, Senator. I have to note that we talked about this in Caracas and as we were jogging through the neighborhoods around my house.


SEN. NELSON: And that was two years ago.


MR. SHAPIRO: That was two years ago. What Venezuela supplies China is primarily orimulsion, which is a hybrid fuel developed in Venezuela -- a mixture of bitumen and water that's used in power plants. I think at the peak, our estimate is that they were selling 100,000 barrels a day of orimulsion. Right now, it looks like it's at about 40,000 barrels a day of orimulsion.


The China National Petroleum Company has a joint venture with PDVSA, the Venezuelan oil company to produce this ore emulsion. PDVSA has opened an office in Beijing. And China is active in Venezuela.


But the one thing I'd like to note is the Chinese ambassador to Venezuela in a press interview with the Venezuelan press noted China's interest in furthering its energy relationship with Venezuela, but went on to note that China doesn't seek to replace the U.S. market, adding that North and South America are Venezuela's natural markets.


SEN. NELSON: When was that statement made?


MR. SHAPIRO: It was made earlier this year, Mr. Senator. Our ports in the Gulf are four days away from Venezuela. China's ports are I think three weeks away from Venezuela.


SEN. NELSON: How do you square that statement with the statements of the president of Venezuela threatening to cut off oil to the United States?


MR. SHAPIRO: Venezuela sells the United States somewhere around 1.4 million barrels a day of oil. Sells it primarily to its own subsidiary, CITGO. The United States doesn't buy oil from countries; we buy oil from companies. Companies import that oil. That's a market-driven decision that is in the interests of both the seller and, like any market-driven decision, it's in the interest of the buyer. Our refineries on the Gulf Coast are designed to refine Venezuelan crude oil, which is very heavy and has a high sulfur content. At this point, Chinese refineries cannot process that oil.


SEN. NELSON: How long would it take them to develop those refineries?


MR. SHAPIRO: They could do that. It would require an investment of billions of dollars and would take -- I can't give you an exact date because it would depend on how much money they're willing to put into it -- not just in refineries but also in tanker capacity to transport that oil from Venezuela to China. It's four days' sailing time to the United States and 20 days' sailing time to China. Obviously you need five times as many tankers to carry it.


SEN. NELSON: So your conclusion and advice to this committee, then, is the bombastic statements by Hugo Chavez, president of the Bolivarian Republic of Venezuela -- is that it would be impractical for him to suddenly cut off his oil to the United States and look elsewhere on the world market, particularly to China?


MR. SHAPIRO: He could do it. The world markets would adjust. It would be very expensive for Venezuela. It would be very expensive for the United States.


SEN. NELSON: Mr. Chairman, thank you. I've got to go on to another hearing. We have Max Mayfield up there, and we've got a hurricane ravaging across Key West as we speak. I think -- you know, I ask these with a certain edge on my words, but I'm one of the ones that wanted to have a good relationship with the leader of Venezuela. And the ambassador and I have talked long and hard, and yet I've been very, very upfront and critical of the administration. And whenever I think that something's going to get better, then it gets worse because of the rhetoric that comes out of Venezuela. So your comments have been most enlightening in light of the rhetoric that we have heard.


SEN. COLEMAN: I appreciate your concerns, Senator Nelson. I had a chance to visit with President Chavez, and he had made the comment to me that I could cut oil off from CITGO just like that. And my comment was you could cut off your left arm, too, and would you feel better? I think it would hurt. I think it would hurt. And certainly what I'm hearing today is kind of the realities of space, distance, market, production, a range of other things -- that's something, at least for today, that we're not going to lose a lot of sleep over. But again, these are things worth keeping an eye on. So I appreciate your concerns. Thank you, Senator.


Let me continue talking about the military-foreign affairs perspective, and then I'm going to move on to some other issues.


But I believe, Ambassador Shapiro, in your written testimony I recall a concern being raised about -- as China considers arms sales to the region, we will apply a general policy of seeking transparency and accountability in these sales and are concerned about the risk of diversion of weapons to illegal armed groups, which threaten the peace and security of the hemisphere.


(Inaudible) -- ambassador, Mr. Pardo-Maurer. Be interested if, one, if you can -- what groups are we talking about, and how serious is that concern?


MR. SHAPIRO: Mr. Senator, it is a general concern about all arms sales anywhere in the world, but my concern is this area of the world. At this point in time, I believe that China's sales to the Western Hemisphere are somewhere around 2 percent of total purchases by Latin America and Caribbean countries. So it's quite small. That said, we're constantly -- we're in touch with the Chinese. We're working with the Chinese. We want to ensure that those sales are transparent, that they go to the intended users and don't get diverted to illegal armed groups anywhere.


SEN. COLEMAN: Mr. Pardo-Maurer, anything to add to that?


MR. PARDO-MAURER: As Ambassador Shapiro said, that is a general concern. There are other countries that are selling weapons to specific countries in Latin America. I could cite Russia with Venezuela that we have repeatedly -- repeatedly -- at the highest levels expressed our concerns to and our desire that they work within the established procedures for transparency and competence and security-building measures of the inter-American system.


As a general principal, I'd say the smaller the item sold, the greater our concern. It's much harder to keep track of a single round than it is to keep track of an aircraft carrier. And to the degree that China is pursuing military relationships with the region, we have to think in terms of where are we going to be five, 10 and 15 years from now? That's the way they think. They have -- we are told that they have a 50-year plan. We don't know if that's true. We don't know if that's what it is. But suppose they do have a 50-year plan. In that sort of a scenario, everything we've been talking about -- their energy relationships, their diplomatic relationships, even their cultural and demographic relationships take on a different light.


SEN. COLEMAN: I'm going to spend a little more time with the second panel talking about Article 98 -- (inaudible) -- that we have and the impact that's having on our IMET training of military personnel in Latin America.


When I was in Brazil, Uruguay, Chile just a couple weeks ago, those issues came up consistently. We're losing the ability to strengthen the military-to-military contacts because of some of the concerns about Article 98 and the inability then to continue on with IMET training.


Do you see China as filling -- is there a void being created by that, and is anyone rushing to fill the void? In particular, is China looking to fill the void?


MR. SHAPIRO: We are supportive of concluding Article 98 agreements in those countries where we don't have them. We think that it's important.


We don't perceive a void -- I sort of want to avoid that word. We're continuing to work, to the extent that we can, the number of Latin American students who go to China to study each year is minimal. I saw an estimate that was under 50 total, region-wide. I think 2,500 Latin American students were in -- military students were in the United States last year at various military schools. The same thing with our -- military assistance personnel in embassies and that the sales -- I mean, it's -- void is not a word that I would use, sir.


SEN. COLEMAN: Mr. Pardo-Maurer, do you want to -- is void too harsh a word, too strong a word?


MR. PARDO-MAURER: What I would say is that we have different types of relationships with different countries. And in some countries we have very, very active, important relationships where we're working on solving serious problems that affect us both. Colombia and the United States would be a good example. And we have an agreement with Colombia. We aim to have good relations with all the counties in the region, and the Article 98 agreement is a way to ensure that our service members will not be subject to kangaroo courts and governments that change depending on the weather. And this has happened before in Latin America. So I think the concerns we're seeking to address by Article 98 are very, very, very important concerns.


When we lose our ability to provide materiel -- or perhaps even more importantly in the case of Latin America, where relationships are such an essential part of the -- of our military engagement, then yes, we have to counterbalance that. I mean, it was never an easy decision. It was never an easy decision. Where we have probably seen the most difficult situation is with regard to IMET, the money that we use for training. And there's no question but that this has made it much more difficult to bring qualified Latin American officers and enlisted men to the United States to train. That's an extremely important part of our relationship.


And I would not say that I've seen other countries rushing to fill a void or whatever you want to call it. But it has led other counties to look elsewhere. And there's no question that China is ramping up its cooperation. They have established what is the largest Latin American Studies program in the world. That's new. Who knows what may happen one or two or three years from now with military relationships. It's not just China. Venezuela and Cuba are offering alternatives for training. Not in the military field, but Cuba just recently graduated 12,500 Latin American students in -- they call them doctors; we would call them paramedics. But nonetheless, they're training professionals to deal with health issues that are not being addressed in the countries where these students came from.


So our ability to develop relationships has been hampered; there is no question.


SEN. COLEMAN: I would say -- first of all, I fully understand the concerns that are reflected in the Article 98 agreements and the -- what we're looking to -- the protection that we're looking to afford to American servicemen and women, which they rightly deserve.


I do think, Ambassador, that we are creating a void when it comes -- with IMET -- that those relationships are very, very important, and to the extent that we are losing amongst our -- these are our friends -- the ability to strengthen those relationships, then a void is created. It may be in this specific area, and it certainly doesn't void, using that term, all our other relationships, but I think something is lacking there.


But what I'm hearing is that we're not seeing anybody rushing into that at this point in time, but clearly other countries, and China in particular, are looking to strengthen those relationships. And relationships are important.


MR SHAPIRO: They are important. And they are the relationships that are made by young officers as they go through their career that are important and that we want to have with them so that we know them, they know us, they know our culture, our military culture, and so that we can work with them. And that's why we're working so hard to conclude these ASPA agreements.


SEN. COLEMAN: And I mentioned particularly in regard to China because it gets back to my earlier question, that we have a culture, a military culture -- still be built on foundations of democracy and foundations of rule of law. And that is not the Chinese experience, democracy. So we're getting folks who are -- we're losing the ability to train young military officers with a fundamental respect and appreciation for what democracy has to offer. And if that is then being filled in any way by countries that don't have that same tradition -- we're not talking about economics now. We're not talking about GDP; we're talking about fundamental respect for human rights; we're talking about fundamental respect for democracy, rule of law, and the impact that has on the military. You want officers who understand that, and if we're -- if somehow what we're offering is being replaced, it raises concern.


Mr. Pardo-Maurer, did you -


MR. PARDO-MAURER: Yes, I'd just like to throw a poignant example into the discussion here. I was just in Peru with Secretary Rumsfeld where we visited with President Toledo. And President Toledo was from a very humble family, an indigenous family from the highlands of Peru -- I believe one of 16 children, seven of whom died in infancy. And someone somewhere saw this young man back in the '60s and said, "He can play soccer." And he went on a soccer scholarship to the University of San Francisco, and from then went on to get a Ph.D. in economics from Stanford on scholarships and eventually became president of his country.


And I can tell you, we have a good friend in President Toledo. President Uribe of Colombia has said few, if anyone, has been as supportive of his efforts as President Toledo.


So that's the kind of difference that a single scholarship can make.


SEN. COLEMAN: And I share that perspective. President Toledo said he was president by accident, and where he grew up people didn't get that -- an education. He did. And he's president of his country. I'm tempted to have my kid learn to play soccer better if that's the payoff. (Laughter.)


Let me ask one other foreign relations question. I wanted to turn to some economic matters.


President Lulu has spoken of developing a strategic partnership with China. Can anyone give me a sense of what does that mean? Will he achieve this? What are the implications for the United States regarding that relationship?


Mr. Forden, Ambassador?


MR. FORDEN: Well, look, when President Hu went to China (sic), they signed a number of agreements that promised great investment. It will be interesting to see how many of those are actually realized, how much money actually is invested.


SEN. COLEMAN: You said President Hu -- you mean when President Hu went to Brazil. You said to China.


MR. FORDEN: I'm sorry, apologize -- got it backwards there.


There is -- it is -- both our regional powers -- both Brazil and China. It is normal that they should trade with each other and that they should seek to improve their relations with each other.


And we don't see that as a threat to the United States. We see it as a normal part of both of those countries, as their economies are growing, and as they have more power to -- economic power and political power beyond their borders to deal with each other.


Let me go back to the point we've been making throughout is that it's the rules that are important. What we want to see are rules of the game. We want to see -- we think it's important for China to have an interest in -- because it's got investments in Latin America, it will have an interest in stability in Latin America.


We want to ensure that Chinese investors and Chinese exporters compete on a level playing field with U.S. investors and U.S. exporters.


SEN. COLEMAN: Mr. Pardo-Maurer.


MR. PARDO-MAURER: We at the Defense Department have a very particular interest in what is happening in terms of the scientific and technical cooperation between Brazil and China.


We take -- we at the Defense Department take the science capabilities of the southern cone countries very, very seriously. By many measures, this is -- if I may put it in an advertisement -- this is a good subject for further inquiry by the Western Hemisphere subcommittee -- by many measures the southern cone is one of the fastest-growing regions of the world for quality scientific research and articles. And that's according to the National Science Foundation -- I can get this report to you.


We recognize this. In 2002 we established an Office of Naval Research office in Santiago. We established a counterpart for the Army in Buenos Aires. And we've made a lot of progress towards established an Air Force office for Brazil.


They are doing tremendous research, and we are benefiting from that. Dr. Sega, a former astronaut colleague of Senator Nelson, who is the director of defense research engineering, came to Brazil with Secretary Rumsfeld and -- to further our cooperation in this area.


And when we see Brazil developing very, very fruitful relationships in aerospace and satellite technology, even launching satellites with China, what we see is a country that we want to be working with too. And everything that we can do to strengthen that scientific relationship is important.


What is important is that countries like China and Brazil and everyone else see that this can be mutually beneficial. This is not a zero-sum world at all when it comes to that kind of research. We can cooperate.


And our aim in establishing these offices in the southern cone is to promote just that kind of interchange and cooperation.


SEN. COLEMAN: Though we talk about interchange and cooperation, we have sent a very strong message to the Europeans -- very strong message -- of concern about selling military technology -- scientific capability that can be converted to military use -- to the Chinese.


Have we communicated that same message to Brazil or to other countries in the southern cone that have access to technology that would be of concern were it to be sold to the Chinese?


MR. PARDO-MAURER: It is not a policy vis-a-vis Europe. It is a global policy of the United States, our concerns concerning certain exports to China.


SEN. COLEMAN: So I take it then that the answer is that it's adaptable to the southern cone.


MR. : (Inaudible) -- the applied policy, yes.


SEN. COLEMAN: Let me just, if I can, two other questions -- one regarding human trafficking to the ambassador. And any concerns the State Department may have regarding Chinese human traffickers operating in Latin America and the Caribbean? How are we working to address this?


MR. SHAPIRO: It is a concern. We estimate that between 20 (thousand) and 30,000 Chinese migrants enter the United States illegally each year. Now they're not just going through Latin America; they are going through Asia, Europe, Canada, and Latin America to get to the United States.


We are working with the Chinese. We are working with the governments of Latin America to try to stop that -- interdict that traffic. We've stopped several ships recently in the Pacific that -- and it's not just a Chinese phenomenon. Other Latin Americans are coming via ship up the west coast of Latin America to the United States.


And so we're working to stop that. The Coast Guard is working very hard on it, and we're working with governments on that, and our trafficking in persons office at the State Department has paid particular interest to the whole trade in people, which is a very lucrative and illicit trade.


SEN. COLEMAN: And how would you, then, describe the level of Chinese cooperation as we're working with them to stop this?


MR. FORDEN: Well, as Ambassador Shapiro mentioned, Mr. Chairman, this is an issue that has drawn a lot of attention from our office as ambassador for trafficking in persons. Geared towards our annual review of trafficking-in-persons problem around the world -- our annual report -- we have an ongoing dialogue with China. We share our concerns with them.


The government of China has been cooperative -- has officially agreed and cooperated with us that this is a problem that they would like to work with us to attack and to try and stop.


We have worked together with -- our law enforcement people have worked with their law enforcement people on individual cases. But given the enormity of China's population and the push pressures from population pressure there and the pull of opportunities in the United States and other places outside of China, it's a problem that is not likely to go away very quickly, but one that we are working with China to resolve.


SEN. COLEMAN: Thank you, Mr. Forden.


Mr. Pardo-Maurer, does the Pentagon have any concerns relative to China and the Panama Canal?


MR. PARDO-MAURER: There is a common concern out there that somehow because a company -- this emerged a few years back -- that because a company controlled by Chinese investors had gained control of the terminal facilities of the canal, that somehow this was going to be a threat, and it is not, that we can tell.


The redevelopment of the Panama Canal is going to be one of the biggest infrastructure projects in history. It's probably a 16 (billion dollar), 20 (billion dollar), $25 billion project. Panama has reached the final stages of the decision to go ahead with this, and they are going to be looking for investors.


They're going to be looking for governments and companies and individuals who are going to be stakeholders in this project. And it is something that we have looked at.


And I think it is very much in the interests of the United States to ensure that this project goes ahead in ways that strengthen the countries that use it responsibly and that are members of the responsible global trading community.


Now China is one of the largest users of the canal and fast growing. I think it is the third largest user. So from what we can tell, it's in their interests to have a canal that works and is dependable and is reliable.


So to me the canal is actually a classic example of how bringing China in -- or helping China become a responsible trading partner -- a responsible member of the world trading community -- is in our interest. It makes the Panama Canal, which is truly -- it's Panama's, of course, but it's a global asset. It makes the canal something that they have an interest in cherishing and defending.


So there's two aspects to this. One is, who controls the canal, from here to the future. And that is Panama's prerogative. The canal belongs to Panama.


The other is securing international cooperation so that the canal is safe. We do know that al Qaeda has sent people to scope out the canal and that it was on their list of targets. So to the degree that China can be a partner in protecting that asset, whether because of what it knows in its part of the world or other ways, that's an important thing.


I'm not sure I answered your question by saying that, but the short answer is that the most common concerns that I've seen out there, that because a certain company that has Chinese investors control the terminal facilities of the canal, therefore we need to be concerned, that, I think, is not a concern.


SEN. COLEMAN: And you have answered the question. The question stems from those kind of conversations -- concerns -- that have been raised. But I do appreciate the entire panel, you're going beyond that because, as I said, after listening to the testimony and before the questioning, I felt this was rather optimistic, which is nice. I'm an optimist. But rather optimistic perspective on what's happening with China-Latin America, that in fact we in the United States have a history of relationships, have strong economic ties with the hemisphere that far exceed other ties, that China certainly has its -- is looking to expand its place, the need for resources, opportunity for markets.


And the sense I'm getting is that that it does not have to be a threat, that we can work with it, and in the end if we can add to the economic opportunity, add to the economic security and work with -- continue to work with China in this community of democratic nations, it's not a bad thing.


So this has been very, very helpful. I want to thank you gentlemen for your testimony, and this panel is excused.


Our second panel is composed of Mr. Stephen Johnson, senior policy analyst for Latin America for the Kathryn and Shelby Collum Davis Institute for International Studies at the Heritage Foundation.


Mr. Johnson is a former State Department officer; has worked at the bureau of central American affairs and public affairs, as a writer and researcher; as director of the Central America working group; and as a chief of the editorial division in the Bureau of Public Affairs.


A former Air Force officer, he served as an assistant Air Force attache in Honduras, later as a member of the Air Force Reserve; he was a public affairs officer, and a strategic planner in the Office of the Public Affairs for the secretary of Air Force; and was also a public affairs officer for the United States Southern Command.


Dr. David Lampton is a dean of faculty, George and Sadie Hymen Professor and director of China studies at the Johns Hopkins School of Advanced International Studies, as well as founding director of China studies at the Nixon Center.


Before assuming these posts he was president of the national committee on United States-China relations in New York City from 1988 through 1997. Prior to 1988 Dr. Lampton was founder and director of the China policy program at the American Enterprise Institute and associate professor for political science at the Ohio State University.


Dr. Lampton is the author of numerous books and articles on the Chinese domestic and foreign affairs.


Dr. Gal Luft is co-director of the Institute for the Analysis of Global Security. He has published numerous studies and articles on security and energy issues in various newspapers and publications; appears frequently in the media and consults for various think tanks and news organizations around the world.


We will begin with Mr. Johnson and go to Dr. Lampton and end with Dr. Luft.


With that, gentlemen, thank you for being here today and look forward to your testimony.


MR. JOHNSON: Thank you, Chairman Coleman.


Members of the committee, it is an honor and a privilege to appear before you today to discuss the influence of the People's Republic of China and Latin America. I would commend you, as the previous panel did, for holding a hearing as China carves a role for itself in this hemisphere and undoubtedly will become a factor in affecting relations between the United States and its neighbors.


The United States has become the greatest power in the world based on its tradition of free choice. Choice goes hand in hand with competitions to keep markets vibrant and government accountable. Human talent from all over the world has come here to prosper by these values.


Starting in the 1960s there was ideological competition from abroad. The Soviet Union was able to intrude, supporting a dictatorship, the first in Cuba and later in insurgencies in Central America.


In the end, liberal reforms won out. Encouraged by the United States, they have generally helped Latin American states become more politically, economically and commercially viable.


Once again, emissaries are coming from the other side of the world, this time to compete in commerce, diplomacy and military-to- military relations. And we're not sure that we like it.


The People's Republic of China is a communist state that is embracing market concepts, but it is still a non-market economy where a disciplined, totalitarian party, through the central government, retains full authority over non-state investment and trade.


Latin America is rich in natural resources and developing markets which China needs. There is no question that it has its foot in the door and seeks access to advance its own interests, as any nation would.


We can shrink from this intrusion, or we can attempt to contain it. But maybe it's best to look after our hemispheric interests and mitigate China's presence by relying on an old friend -- competition.


Specifically we can do this by consolidating trade relations with Latin America and dropping our own protectionist barriers; developing comprehensive relationships as opposed to narrow-interest diplomacy, such as counter-narcotics; minimizing unproductive restrictions on assistance to our neighbors; and by pressing harder for democratic and economic reforms; prioritizing support for these purposes and re- energizing our public diplomacy


China is not only a nation, but also the world's oldest continuous civilization, with more than three -- 3,500 years of written history. And relatively recently it suffered hard times. Communism did little to help.


But in 1978, Communist Party leader Deng Xiaoping introduce economic reforms that have steadily transformed the PRC into a socialist market economy.


Twenty-five years into this experiment we witnessed that China has one of the world's largest economies, the third biggest defense budget, the highest population of any nation at 1.3 billion persons.


According to the World Bank its gross domestic product of $1.6 trillion is growing about 9 percent per year, and at 230 billion (dollars) in trade, it is our second largest partner in commerce, something that we should think about as we look at how we might want to contain their relations in Latin America.


Resources must feed that economy, and China does not have sufficient oil, natural gas, aluminum, copper, iron to satisfy those needs. Furthermore, China needs trade partners to buy its electronics, apparel, toys and footwear.


Asian neighbors are competing for many of the same markets, as are Europe and the United States. But Latin America has promising characteristics. It's relatively un-industrialized and has lots of raw materials.


Moreover, signing purchase agreements with perhaps corrupt officials who lead some of the governments -- and I say some of the governments, not all of them -- is much easier than dealing with a panoply of private corporations because it's basically one-stop shopping.


China's main rival for global preeminence is the United States. It sees the United States preventing Taiwan's reunification with the mainland and thwarting Beijing's rise as a power. And while it has become our second largest trade partner after Canada, China challenges our influence wherever it can. It may soon possess more attack submarines than we do.


Science, sports and military exchanges characterize Sino-Latin American relations in the 1980s. Economic ties did not develop significantly until after 1990, when President Yang Shangkun visited Latin America with an upbeat message -- a new international political and economic order, he called it.


Soon after that the pace picked up. In April, 2001 Chinese President Jiang Zemin made a 12-day visit to cement trade ties and attack Washington's unipolar scheme.


Last November President Hu Jintao flew to Argentina, Brazil, Chile and Cuba, where he signed 39 bilateral agreements and announced $100 billion in investments over the next 10 years.


Because China's demand for oil has been growing to satisfy industrial needs, as we talked about earlier, and demands for consumers, it has pursued agreements with such producers as Venezuela, Ecuador, Colombia, Argentina, Brazil and even Mexico.


Obviously the best fit is Venezuela, whose authoritarian leader Hugo Chavez directly controls the state oil industry. President Chavez even invited the Chinese national petroleum corporation to help explore the rich Orinoco belt. And last year President Chavez advanced an agreement with Colombia to build a pipeline to the Pacific port of Tribugal to enable China to access Venezuelan oil from the Pacific coast.


China also has a bid on concessions to Ecuador's major oil fields and also has interests in an Argentine firm that has concessions on fields in northern Argentina as well as Peru.


On the military front, China has expanded ties through exchanges. It's reportedly has direct military-to-military relations with Venezuela, as well as Argentina, Chile, Peru and Uruguay.


The PRC began collaborating with Brazil on spy satellite technology in 1999, providing needed rocket launch expertise in exchange for digital optical technology. Access to Brazil's space traffic facilities could give it the ability to attack U.S. satellites.


Access to Brazil's space tracking facilities could give it the ability to attack U.S. satellites.


But perhaps the most fruitful collaboration of all has been with dictator Fidel Castro in Cuba. In 1999 China was reportedly intercepting satellite signals from facilities in eastern Cuba. In 2000 it obtained access to a base outside of Havana to intercept U.S. telephony along the east coast. In 2001 Russia announced it would abandon its extensive electronic espionage center at Lourdes, and the PRC now reportedly occupies it.


At first blush, expanding ties with China may seem like a good fit. China makes deals on the spot without a lot of strings. Its transactions are based on simple exchanges. And China's markets are, indeed, expanding. However, such dealings pose problems. It shames American-style bottleneck diplomacy. Latins find that obtaining any kind of assistance from us requires compliance on a battery of restrictions from protecting the environment to signing promises not to send U.S. military personnel to the International Criminal Court. Some say, why bother?


Latin American leaders have noticed that China's exports are much cheaper than our own -- or than their own, and our own as well, leading to big trade deficits. Chinese goods are made by laborers who toil for about a third of the wages of Latin American counterparts and tolerate worse working conditions. For every dollar's worth of goods Mexico sells to China, we're told, the PRC reportedly makes $31 from exports to Mexico.


Now, some analysts believe that China is encouraging a commodities-based trade model that will supplant the progress that the region has made toward industrialization. While countries like Chile and Brazil have gotten behind -- or, beyond raw materials exports, powerful presidents and comfortable oligarchies may be tempted to fall back on plantation economics. Income gaps between the rich and the poor may widen. Greater inequality and political instability could depress U.S. exports to the region and worsen migration problems.


In conclusion, the United States and China have some competing interests in Latin America. The best way to address them is to rely on America's strength, which is competition. U.S. policy-makers should make true competition paramount. And in doing this, they should accelerate free trade agreements by dropping agricultural and steel subsidies that dissuade potential partners and cost taxpayers money. U.S. trade relations with Andean neighbors and, eventually, the southern cone countries can open market access for both U.S. and Latin American enterprises and provide a solid outlet for non-state industrial growth.


Adopt more comprehensive relationships as opposed to single-issue diplomacy such as counter-narcotics, as we had initially with Colombia. Plan Colombia is working because the United States is helping its South American partner expand public safety zones, reactivate the economy, and strengthen public institutions. Cut strings on assistance to the greatest extent possible. Certifications and restrictions are blunt instruments that don't necessarily cover every situation, and even harm some U.S. security interests. Press harder for reforms. U.S. support for democracy and economic reforms has actually declined over the past 15 years. U.S. public diplomacy, which is reactive toward Latin America, needs strengthening, and needs to be more supportive of our development agenda.


Mr. Chairman, thank you for this opportunity to address the committee.


I could easily go on. It's a big subject. But I would restrain myself and wait for your questions. Thank you very much.


SEN. COLEMAN: Thank you, Mr. Johnson. And I do appreciate the very specific recommendations that you've set forth in both your written and oral testimony.


Dr. Lampton?


MR. LAMPTON: Well, thank you, Mr. Chairman, for inviting me to be here today. I would ask that the full statement -- I'm going to be brief, and the full statement be entered into the record.


SEN. COLEMAN: Without objection.


MR. LAMPTON: I certainly first want to associate myself with the end remarks you made at the previous panel. I found myself entirely in agreement with that, and I think it reflects my perspective.


I have three overriding messages in this testimony. To start, I do not believe it's accurate to conceive of the PRC as an eight-food giant striding across Latin America. And I think most of the testimony we've heard has been very moderate and certainly consistent with that. Indeed, if China overpromises, such as this $100 billion that we've heard about, when its economy is humming today, it runs the risk of disappointing Latin America when Chinese growth slows, as it will.


Moreover, China has substantial problems in projecting its power, certainly military power. There are conflicts of interest between China and Latin America that will reduce Beijing's ability to cooperate in the region. And Latin America's interests in the United States will remain enormous for the foreseeable future. We must restore balance to our views of China, a balance that does not exaggerate Chinese power while respecting it.


Second, although Chinese activity in the region can complicate U.S. diplomatic life -- for example, with respect to Cuba and the Chavez regime that we've been talking about in Venezuela -- overall, Chinese economic activity in the region, carried out under relatively free trade conditions, will boost the economic well-being in Latin America, though some economic sectors in the region will be hurt. In fact, I talked to some Mexican scholars earlier -- well, last week, and they were very alarmed at what's happening on some of the (maquiladora ?) facilities to Mexican employment. So there are going to be resource-extracting companies, I think, that do rather well; there are going to be labor-intensive industrial sectors that are going to be hurt quite a bit. But nonetheless, a healthier, more diversified Latin America, I believe, is in the interest of the United States.


And finally, though the focus of this hearing is Chinese activity in Latin America, Latin America is not the principal foreign policy concern of Beijing. I've been asked briefly to address the issue of China's global strategy and the role Latin America plays in that strategy. The PRC's national strategy, I believe, can be described succinctly: China seeks sustained, rapid economic growth to provide the long-term foundation for comprehensive national power.


China has less than global per capita average of almost every single natural resource, including water, petroleum, other precious metals, not to mention arable land. Beijing, therefore, counts on its foreign policy to provide needed markets, natural resources, capital and technological input, and to create an international environment so that China does not have to spend excessively on defense.


Latin America fits into this strategy because of its resources and markets, and part of it's economically driven foreign policy. It is not principally to compete with the United States geopolitically.


Secondarily, China is in Latin America -- and I've been surprised nobody's mentioned the following -- China's in Latin America to reduce the degree to which states in the region recognize Taiwan. Currently, 12 of the 24 nations that recognize Taipei globally are in Latin America and the Caribbean.


And indeed, I understand President Chen Shui-bian is on his way down to Latin America. I'm sure he has multiple objectives, but one I'm sure is to staunch the loss of Latin American countries that recognize the Republic of China.


With respect to policy recommendations, I have three.


To start, notwithstanding our many disagreements with the PRC in the trade, human rights, proliferation, Taiwan and other areas, America has a symbiotic relationship with the PRC. We need each other. Beijing needs the jobs, the technology, the markets, and relatively secure external environment that the U.S. can provide. The United States needs cooperation such -- cooperation on issues such as the global war on terror, as we've seen recently North Korea, and a host of other national -- transnational issues. Huge numbers of American families benefit from the low interest rates that Beijing helps make possible through its purchase of U.S. debt. As we think about China's interaction with Latin America, our policy should be devised against this larger background of common as well as competitive interests.


Second, China's growing involvement in Latin America is not a crisis for U.S. foreign policy. To the degree that it is a subject of concern, that focus should be on positively increasing U.S. influence in the region rather than being overly defensive. And I very much agree with Mr. Johnson; the whole area of public diplomacy, students, all of that, and just the obstacles that now exist to getting businesspeople and students into the United States, that's where we really ought to, I think, focus our -- and not worry so much about what Beijing's doing.


And finally, if Washington takes a broad, future-oriented perspective, we may be surprised at some of the common interests we share. That list of shared or broadly compatible interests, in my view, includes the following.


One, if China invests in oil and energy resources in Latin America when others are not prepared to do so, the PRC is contributing to a larger global pool of available energy.


Latin American oil brought to the surface by Chinese companies or firms or interests probably is going to end up in the United States, as we just heard in the previous panel, the same way that Asian oil brought to the surface by American companies and interests probably is going to end up in China and Japan.


Second, the United States is China's most important market for exports. And getting to the entire Eastern half of the United States market depends considerably on the Panama Canal. As China builds resource and food relations with the big Eastern seaboard nations of Brazil and Argentina, the canal and free passage through it assumes ever more importance to Beijing. The idea that the PRC would somehow choose to impair passage through the canal strikes me as very unrealistic. And that was the conclusion I drew from the earlier discussion on the first panel.


And finally, the 2005 annual report of the Pentagon on "The Military Power of the People's Republic of China," makes it clear that China still possesses very limited long-distance conventional power- projection capacity, and this going to remain true for a very long time, though improvements are occurring. It was only in July 2002 that a Chinese naval vessel first circumnavigated the world. There is no Sino-American military competition in Latin America now, and there won't be for the foreseeable future.


In short, a zero-sum view in this globalized world is no longer appropriate, and Chinese-U.S.-Latin American interaction I believe is a good example of that new reality.


Thank you, Mr. Chairman.


SEN. COLEMAN: Thank you very much, Dr. Lampton.


Dr. Luft?


MR. LUFT: Thank you, Mr. Chairman. Since we are facing a major challenge with regards to energy, I will limit my remarks to the field of energy security and how China's activities in Latin America affects America's energy security.


There is no doubt that China's robust economic growth has already been felt on the global energy scene and contributed substantially to this year's spike in oil prices. But no less important is the impact of China's energy activities on its relations with the United States and the international community at large.


Energy today is perhaps the main driver of China's recent international behavior. Many of China's foreign policies in the Middle East, East China Sea, Central Asia and Africa are shaped by its energy expediencies, often at the detriment of the United States. China's recent effort to drive the United States out of Central Asia, and its support of terrorist-sponsored regimes like Iran and Sudan just because it needs their oil, are the latest testimony of this trend.


With global reserves of cheaply recoverable oil and gas being depleted, China is already competing with the United States over the same oil reserves in some of the world's most unstable areas. When it comes to Latin America, China's demand for oil has resulted in a series of deals with a number of countries, primarily Peru, Cuba, Ecuador, Bolivia, Argentina, Brazil, Mexico and Venezuela, which is America's fourth-largest oil supplier.


Though this hearing is focused on Latin America, I want to mention here that there is also a lot of activity going on in Canada, our top petroleum supplier.


I will not go into the full roster of activity that's all in the written testimony, but the main point I want to make here is that the single most important thing to remember about China's energy acquisitions in the Western Hemisphere is that they will eventually make the United States more dependant on the Middle East and other volatile areas, and I would like to explain why.


The Western Hemisphere is estimated to hold 13.5 percent of the world's proven conventional oil reserves. This amounts to about 160 billion barrels of oil, of which 101 billion barrels are concentrated in Central and South America, particularly in Venezuela, Brazil, Colombia, Ecuador, Argentina and Peru. These countries accounted for 8 percent of total world output in 2004. Of the region's largest producers, only Brazil and Ecuador still experience production growth. Conventional oil production in the rest -- namely, Peru, Colombia, Argentina and Venezuela -- has been declining. Same goes for Mexico.


According to a study by PFC Energy, non-OPEC Latin America -- that's excluding Venezuela, of course -- will peak around 2007 and decline steeply thereafter. Considering the projection that in the next 20 years the region's own need for oil will nearly double, it seems that Latin America's long-term ability to satisfy the needs of the growing U.S. market will be increasingly compromised.


China's pursuit of Latin American oil will only make matters worse. With half of its oil imports coming from the Western Hemisphere and with oil imports in the United States projected to surge 60 percent during the next two decades, the United States cannot afford to lose chunks of Western Hemispheric crude. Every barrel of oil China buys in the Americas means one less barrel of Western Hemispheric oil available to the U.S. market. This means that China will have to -- rather, the United States will have to look for this oil elsewhere, and that will be particularly in the Middle East, which is contrary to President Bush's pledge to make the United States less dependant on, quote, "countries that don't particularly like us." So when it comes to oil, Mr. Chairman, this is a zero-sum game.


I must add that I'm talking about conventional crude. There are a lot of reserves of non-conventional crude. I can address that, too, and that's part of the reason that China is very interested in Venezuela, which holds a vast endowment of extra-heavy crude.


As consumer of a quarter of the world's oil supply and holder of merely 3 percent of global reserves, the United States cannot afford to ignore the implications of 1.3 billion people who will gradually relinquish their bicycles in exchange for passenger cars. In addition, with its current consumption habits, the United States lacks the moral authority to preach to the Chinese about the need to address their oil problems, nor can it ask them to deny their people the high standard of living that Americans have been enjoying for decades.


The United States should look inward and begin to seriously address its growing addiction to oil, and more broadly, assign a large role for energy policy in its global strategy. This can only be done through multinational cooperation on energy, and a joint commitment by the United States, China and other consuming countries to work toward reducing oil dependence through efficiency and development of alternative energy sources.


China's interests in Latin America are not restricted to petroleum, but also to the continent alternative fuel market. In response to its growing need for fuel, China has decided to dive into the alcohol market, and its main purpose is sugar-based ethanol coming from Brazil and the Caribbean. China is now in the process of developing fleet of flexible-fuel vehicles that can run on any combination of gasoline and alcohols, and it's showing strong interest in emerging sugar markets in Central and Latin America. I must add that Latin America is for sugar what the Middle East is for oil.


Should oil prices continue to stay high, the United States will have no other option but to do the same. Ramping up ethanol supply requires incentive for domestic producers -- as you have done as part of the energy bill, Mr. Chairman -- but more importantly, it entails opening the biofuels market to imports from our neighbors in the Western Hemisphere. Today such imports are prevented due to protectionist policies enacted by Congress, which imposes stiff tariffs on ethanol imports. Oddly, Mr. Chairman, we're willing to important petroleum from Saudi Arabia, but not ethanol from Brazil. Blocking ethanol imports to the United States not only undermines U.S. energy security, but also has geopolitical consequences that this committee should be aware of.


While the United States could encourage sugar growth in Latin America and Central America to increase their output and become fuel suppliers, creating economic interdependence with its neighbors, it is China that is doing exactly that. This is likely to make our neighbors in the Western Hemisphere increasingly dependent on China with regards to the agricultural sector, hence strengthening China's foothold in America's backyard. Needless to say that such development would undermine U.S. energy security in the Western Hemisphere.


So I urge this committee to take a serious look at how we can shift our energy inputs and imports from regions that are increasingly hostile to the United States to those that have the strongest likelihood of being our true allies.


Thank you.


REP. COLEMAN: Thank you. Thank you, Dr. Luft.


I'm going to just touch a little bit on the renewables. Representing the largest sugar-growing region in the country, I just want to raise that issue, but then I want to get to a range of others.


When I was in Brazil recently, 60 percent of the new cars in Brazil are now flex-fuel engines, which means they can run on pure ethanol or pure alcohol. I think there are sensors in the gas lines that allow them to measure the oxygen content, which then changes the compression ratio in the engine so you can run either way. And I understand that Brazil is not going to be importing any foreign oil at the end of 2005.


We have yet to -- we've doubled the production of ethanol in this country in the last -- and as you both, you made reference -- I think from 3.87 billion gallons to 7.5. But that's still just a drop in the bucket. And we haven't yet gone to -- that's sugar into the energy business, which I think the future is there.


Is -- Brazil is using its ethanol domestically. Is it your -- and I have not done an in-depth study of Brazil. But is Brazil in a situation to import ethanol to China and also, then, to be a competitor in the United States?


MR. LUFT: First of all, let me say that there is no reason, Mr. Chairman, why every new car sold in the United States should not be a flexible fuel car. This is a very, very cheap feature; it costs about $150 a car. There's 4 million cars like this already on the road, including Ford Taurus, Mercedes C-320, Chevrolet Silverado, Dodge Caravan. People don't even know that they have flex fuel cars.


Since it is a very cheap feature and it's very easily produced by auto manufacturers, we ought to have a situation that all our new cars are capable of running on alternative fuels. That includes ethanol and also methanol, that can be made also from agricultural products through gasification. So that is exactly what the Brazilians are doing, and their fleet will be almost -- all of it will be running on -- or, capable of running on ethanol in the next several years. Today they already run on 25 percent ethanol in the blend, which is great, and that really puts them in a situation that they are very, very well insulated against: oil shocks.


Brazil and other Caribbean countries are capable of ramping up production significantly. Only 20 percent of Brazil's arable land is cultivated. They have said that they can -- are in a position to produce, and I quote the minister of Agriculture, "rivers of ethanol". The Chinese have set their sights on this. They are already building the largest ethanol plants in the world. They are building, as I mentioned before, a large fleet of flex fuel cars. And if we will not do -- if we will not preempt them and be in these markets, they will be there, and most of ethanol would be diverted to Asia. And by the way, Japan is doing the same thing.


So I think what -- we are missing the boat here. And that will be very unfortunate, because every gallon of ethanol can replace a gallon of fuel that were imported from the Middle East.


SEN. COLEMAN: But one of the things that Brazil did is they began this transformation 30 years ago. So they developed an infrastructure, the delivery of ethanol. I mean, I represent a state in which I go to my neighborhood gas station. I have a standard lease 2005 Ford Explorer that's a flex fuel engine. That -- I got an even -- they didn't advertise.


I just looked through the book, and there it was. And I can buy that at a neighborhood gas station on the corner of Grand Avenue and Milton in St. Paul, Minnesota. But that's pretty unusual.


Does China have the infrastructure for the delivery of ethanol into its auto market?


MR. LUFT: Well, they have -- they are building now and -- as we're talking, there are a number of representatives now from the Republic of China here addressing this. And they are building refueling stations that are capable of handling alcohol fuels. They have developed a large fleet of buses that run on methanol that can be made, by the way, also from coal as well as biomass. So they are investing in domestic production as well as exploring opportunities to import alcohols into their country, because we need to remember that China itself is the Saudi Arabia of biomass. They have a tremendous endowment of agricultural waste that can be converted into fuel.


SEN. COLEMAN: Let me shift -- Dr. Lampton?


MR. LAMPTON: I just wanted to say this suggests an area for cooperation with China. It would seem to be in our mutual interests, and that is energy cooperation, alternative fuels. I looked at what you were saying about ethanol and China's interest in that to be a very positive thing. If we're competing about oil, the more energy sources we can get, the better.


I'd just point out that China just raised its fuel efficiency standards for its cars quite substantially. Now, it's growing so fast that it's still generating a huge demand for crude and refined products. But China's moving in that way, and I think this is another area of cooperation. We want, rather than fighting over a finite pie, we ought to all be trying to make this pie bigger.


SEN. COLEMAN: I think it was Dr. Lampton, I think in your testimony -- shift gears a little bit -- you indicated you didn't see any Sino-American military competition in Latin America. Does everyone else on the panel agree with that?


Mr. Johnson?


MR. JOHNSON: Well, I'm not sure that I don't see any competition. I think that certainly there is some; that there's an effort to establish some ties with Latin American countries, and it's what any rising power would want to do around the world because certainly military-to-military relations are a component of normal diplomatic ties. They also imply some arms sales and the possibility for sales of heavy equipment, such as transport aircraft and jet fighters.


Now, whether or not China's particularly competitive in that regime is another question altogether. Up until Airbus came on the scene, the United States was the preeminent nation on earth in terms of developing and marketing military aircraft and commercial aircraft, and in many ways, it still is. I think China's behind the times, but there may be some areas in which Chinese equipment may be appealing to countries that don't have particularly big budgets.


SEN. COLEMAN: Dr. Lampton?


MR. LAMPTON: If I could just add a little. I don't particularly disagree with what was just said. I guess what I meant is that I think China's trying to use, as it can, particularly in Southeast Asia, South Asia and in Latin America -- (off mike) -- military -- (off mike) -- in the sense of the military instrument than a diplomatic instrument, and I think it's trying to use it to reassure -- not only is China increasing its military exchanges with Latin American countries, it's just had joint exchanges with Britain and France. So I think this is more to be looked at almost as diplomacy, and that gets me back -- and it gets to the repetitive question you've raised about IMET. I think that's where we ought to be competing.


SEN. COLEMAN: That was my next question to you, actually. I wanted to get back to the IMET question -- and again, I fully understand the intent of the American Service Members Protection Act.


My concern is that it's had a disproportionate effect in Latin America. Would anyone on the panel want to respond to whether they believe the U.S. should exempt Latin American countries from -- (word inaudible) -- sanctions? Is the negative impact of losing relations exceeding whatever the benefits have been?


Dr. Lampton?


MR. LAMPTON: I'm certainly not an expert on that, but it seems that we have 30-some countries in Latin America and the Caribbean, and there might be something that --


SEN. COLEMAN: -- something other than just the -- a blanket. I'm prepared to believe there are some governments we would want to do that and others we might not wish to, so -- but my general predisposition is in the direction of doing so.


Mr. Johnson?


MR. JOHNSON: Mr. Chairman, I'd just like to relate the conversation that I had with the, I believe, the chief of intelligence for the Costa Rican Civil Guard who told me that, because Costa Rica's not a signatory of the Article 98 letter, that, unfortunately, they couldn't receive IMET training nor could they receive any particularly specialized equipment from the United States that would help them scan containers coming into their ports. And ironically, a lot of arms, drugs and even people are being found in these containers -- some of the ones that are being opened. And ironically enough, a lot of the people coming out of them are Chinese. So this is one of the areas in which it would be in our best interests to have a scalpel instead of a bludgeon.


SEN. COLEMAN: Let me turn to Venezuela, which we'd -- my colleague, Senator Nelson, raised some concerns there, and I'll address it to everybody on the panel.


First, if I can, a technical question to you, Dr. Luft. You talked about that Venezuela has heavy crude. It's my understanding though that the technical capacity to turn that heavy crude into lighter crude is now a lot better than it ever was. Is that -- can you explain the implications of your comments about heavy crude? Is that a limitation on Venezuelans actually strengthening their relationship with China?


MR. LUFT: In the Western Hemisphere, there are two large reservoirs of heavy crude. One is in Canada, in Alberta, in the form of tar sands. The other one is in Venezuela in the form of extra- heavy crude. The results though were quite a large endowment of oil shale in the United States. Now, all of these non-conventional sources of crude will amount, by the end of the decade, to about 4 percent of the world's oil output, so this is not a lot, and most of it will actually come from Canada. The reason being that these are very, very expensive and energy-intensive processes.


If we stay with oil, Mr. Chairman, if the world remains with oil as a primary energy currency, we will have to tap into these reserves and invest a lot of money, a lot of money in infrastructure, in conversion processes, in refining.


The refining process is completely different. We have no choice because we are running out of conventional crude.


China is aware of this. They are looking into this market. They want to be there as it happens. They want to make sure that they are on top of this because they realize that -- and by the way, their projections for the future of the oil industry are pretty dire. Unlike our oil companies, that tend to project oil to be back at the $27 a barrel, they are talking about much higher figures, and that affects their long-term planning. And that's why they are willing to invest in places and areas that we are not willing to invest. Maybe they're right, maybe they're wrong; we don't know. But if they are right and we are wrong, then we're going to pay a very heavy price.


SEN. COLEMAN: Let me ask you about -- continuing on the Venezuelan discussion. Do you think that China's interests -- I got a feeling as I listened to the earlier panel that -- and some of the testimony that has been presented here -- that Venezuela doesn't have the capacity to simply cut off, you know, its flow to Citgo. Economically, it would suffer great consequences. And I'm wondering if discussions of Venezuela diverting oil to China is simply a way of needling the United States; is one of those things that's going to take advantage of competing influences in the region.


Is there a sense that China's interest in the region can be exploited by those who wish to confront the United States? Is there a -- I'm trying to understand the nature of the danger. Is it just -- you know, is it a verbal thing, or is there a real threat here that those who wish to hurt U.S. interests in Latin America, that they'll use China's interest as a way to kind of further their own objectives?


Go ahead. Dr. Lampton, Mr. Johnson, Dr. Luft. Yeah.


MR. LAMPTON: Not so much on the technical side, but I said that Latin America --


SEN. COLEMAN: Is his microphone on?


MR. LAMPTON: I said that this isn't so much a comment on the technical side as the political side. And I said in my testimony that I did not think Latin America was the most important foreign policy focus for China. And if I had been asked what is the most important foreign policy focus for China, it's the United States and then its region. And quite frankly, I think the Chinese are probably somewhat embarrassed by some of the anti-American bombasts from Mr. Chavez. They're trying to make relations with us smoother. And I think in an earlier panel the secretary pointed out that, indeed, the Chinese had said their purpose was not to divert oil from Venezuela to China, and I think that's just one reflection of this effort.


So I think my reading of it would be that we're listening to rhetoric designed for a domestic political audience, not designed for action. And the people that they're proposing to act with don't want to act with them.


SEN. COLEMAN: Mr. Johnson?


MR. JOHNSON: My sense of it is kind of along those lines. And I would agree that I think the United States is China's priority. But in looking at the patterns of Chinese commerce with Latin America, I'd have to say that the Chinese seem to be equal-opportunity consumers; they'll buy from whomever they can get their product from, and it doesn't matter if it's somebody who may be disagreeable or somebody who may not be necessarily a friend of the United States. And we have two countries in Latin America, Cuba and Venezuela, that are openly hostile, that are openly adversaries of the United States.


That doesn't stop China from dealing with them and, obviously, trying to have relations that work to their advantage. They see things a little bit differently.


Another thing I would keep my eye on is whether or not there may ever be a Chinese role in Venezuela -- not in Venezuela, but in Bolivia in the future. Right now the interest there seem to be more Brazilian and Spanish and European. And, of course, the United States is interested to what happens to the gas fields in Tarija.


But at the same time, if you look at the declining interest that socialist leaders in Latin America have in terms of commerce with Western nations, China might be the only acceptable foreign buyer for Bolivian gas to a -- say, a future President Evo Morales. Those are things that are difficult to say. But, obviously, there's an ideological component there that it may not be present necessarily with China, but it's certainly there with adversaries that we have in our own backyard.




MR. LUFT: I just want to focus on -- not on the statement by Hugo Chavez, but on the work plan of Venezuela's oil industry, minister of energy, et cetera. They are talking about sending 300,000 barrels to China by 2012. But more importantly, they are talking very, very openly, and they have said so in numerous occasions, that they would like to see by the end of the day, Venezuela being the source of 20 percent of China's imported oil.


Now, let's look what it means. If we look at the trajectory of China's demand for oil, we see that by 2025, they will need 15 million barrels a day, out of which about 11 million barrels a day will be imported. Twenty percent, Mr. Chairman, of 11 million barrels a day, that's 2.2 million barrels -- 2.2 million barrels a day that Venezuela is telling us that they would like to see them sending to China.


Now, question number one. Can our economy afford to -- considering our growth rate, considering our growing demand for it, can we afford to lose 2.2 million barrels a day? I don't think so.


The other question is, can those extra-heavy processes, all these things, can meet the rising demand; can they fill in the gap? That's the issue here; that's the question. And I'm not so sure we can do it on time.


SEN. COLEMAN: Dr. Lampton, why don't you respond?


MR. LAMPTON: I was just going to say -- because several times you've side that oil's zero sum. And if Venezuelan oil was the only oil in the world, I would agree. But in fact, there are many suppliers, and they're going to have to move that Venezuelan oil at a pretty heavy transportation cost, and that was explained in terms of days of transport. And that's going to either cost the Chinese more, and they can buy oil out of Burma, which presents its own problems to our foreign policy; can buy from Indonesia; they're going to liquefied natural gas.


So I just don't see it as zero sum. I mean, in the end we want to keep the prices as low as possible, and certainly we don't want it higher cost, but the United States has plenty of choices about where to buy oil, and everybody else does. So I don't see it as zero sum. I think that's a misconception.


MR. LUFT: Our policy is that we want to reduce our dependence on countries that don't like us. If that's the purpose, then we have a problem here. If we don't care who we buy our oil from, then it's a different debate. But I believe that this administration's policy is to reduce our dependence on the Middle East.


SEN. COLEMAN: I'd be remiss if we concluded this hearing and didn't talk about IPR. China is ground zero when it comes to the piracy of intellectual property. I believe two-thirds of Brazil's counterfeit goods apparently come from China. There's a lot of concern that a lot of that's transited over the more or less lawless tri-border region between Brazil and Paraguay and Argentina. When I was in Brazil not too long ago, I attended a conference on IPR, and after years of looking the other way, it seems that Brazil is making an effort to turn the corner with regard to IPR protections.


So my question is, how does the growing Chinese relationship and influence, particularly in Brazil, but in Latin America, how does that impact the IPR issue? Do we have any leverage in dealing with China regarding IPR issues in our neighborhood?


And to open it up, Dr. Lampton.


MR. LAMPTON: I think this is really one of the core issues, but this is a global issue with China. We've got a problem with IPR violation as it pertains to the sale of products in China, but what's even -- if you can say -- more distressing is the production of counterfeit items in China and then the contamination in third markets that we would otherwise have. So I think this is really a key.


The United States, as I would understand the State Department's policy and the special trade representative and so on, have placed this very high, and I think this is really one of the major issues and we ought to not only, you know, target China itself, but those criminal syndicates and governments that are cooperating or turning a blind eye to this.


So this strikes me -- because the key to the U.S. moving up the value-added chain is our intellectual property. That's what's going to make us competitive. We're not going to compete with the Chinese on low labor costs. I sure hope we're not. And so it's this intellectual property. And I mean, I think that ought to be, you know, right up there in the number-one category of our concerns both with China directly and its operation in third countries.


SEN. COLEMAN: What kind of -- well, I'd like to hear from everyone, then I'll do a follow-up question.


Dr. -- Mr. Johnson?


MR. JOHNSON: On top of that, I would just like to commend the Senate and the House of Representatives and the administration for the work it's done in its relations with Paraguay in solidifying a number of things that make our relationship with that country more comprehensive, because that's helped in some measure to try and close down some of the contraband activities in the tri-border area.


And if we didn't have that kind of a comprehensive relationship with them, a lot of that would not have happened.


SEN. COLEMAN: Do we have -- let me just get back to one more -- kind of -- just -- kind of approach to this question as I'm -- I'm still trying to -- and maybe it's simply -- it's not a Latin America problem, it's simply a problem. I mean, it's a problem all over. But in regard to Latin America, is there anything that we can do, you know, vis-a-vis piracy in Brazil that's being fed by Chinese product? I mean, any steps America can take to deal with that issue?


MR. LAMPTON (?): Well, I think it probably calls for a level of expertise I don't have. But I know what we're doing with respect to China itself, and maybe this has applicability.


Many of the customs services around the world lack -- and immigration and border control and so on, lack a lot of tools -- training, legal advice and so forth. So, once again, we ended up in the realm of exchange. But our government has very active exchanges in intellectual property with many countries around the world, and I would look for those particular offenders in South America and Latin America that are particular problems where we can cooperate with their law enforcement and border control and so forth. So to the degree that knowledge is the problem, as opposed to something else, I'd like to see us cooperate more there.


SEN. COLEMAN: Thank you.


Mr. Johnson, let me just -- and I'll end on this note. One, I appreciate your comment about the more comprehensive relationship with Paraguay. They -- the government there is trying to make a difference. And you keep coming back to -- you've mentioned this phrase "comprehensive" -- maybe that's a good note to end on, that, you know, our relationships with Latin America is (sic) about comprehensive relationships. Colombia: it is about drugs, but it's not just about drugs. We have a direct interest in the economic vitality of Colombia and business coming back. Obviously that's dependent upon security. And so, you know, what we've done with Plan Colombia, now Plan Colombia 2, we have to keep in mind this comprehensive approach. And I would suspect that with our other neighbors in Latin America it's the same concept, that it's -- to us, Latin America is not just a market for resources. I wonder with the Chinese whether that resource market is kind of at the core. But for a whole range of other reasons, where the first panel talked about the long-standing relationships, the shared culture, the heritage, that we have some tremendous opportunities and advantages if we -- if we work on them, and we develop them, and we don't worry about China as our, quote, "competitor", we keep an eye on what's going on, but we realize that there are aspects of the relationship that we need to develop. Is that kind of a fair summation of what you -- what you mentioned when you talked about comprehensive relationships?


MR. JOHNSON: Yes, that's -- that's exactly it. And we went through a period in the 1990s where we shrank back. And rightfully so, because, you know, looking at the other priorities that we had in the world, we had the collapse of the Soviet Union, we had things at the end of the 1990s that were beginning to happen in the Middle East. And so it's kind of hard to say that one region should be more important than the other. But one of the things that happened in Central and South America was that we pulled a lot of our programs that were of a comprehensive nature when it was very important to try and go beyond the inactivity that we had traditionally for decades and try to encourage democracy and open markets and better relations with these countries.


And so, we -- in doing so, in turning a -- in reducing the relationships that we had, we tended to concentrate on counter- narcotics. And those were big issues. They were sellable at home. American constituents understood them a lot better than such concepts as why rule of law is -- is something that's in our interest -- in Ecuador, for instance. But now I think that the model that we've seen in Colombia, perhaps we can't do it on that scale in other countries. But -- you know, investing that amount of money. But certainly we can try to replicate the extent to which we contact different areas of society and government and institutions and be a kind of a helping hand, because to the extent that we do that, then the rising tide lifts more boats.


SEN. COLEMAN: And in many ways the concern about China in the hemisphere is actually fostering that more comprehensive discussion. If you look at the debate about CAFTA, I think are were some people who will say that if we don't pass CAFTA, that that benefits China, that we're giving away market opportunities. As we look to the possibility of an Andean trade agreement and an agreement with Panama, I think the same discussion gets -- comes into play: do we want to just give away market opportunities, or do we want to develop them? And yet, to develop them, we, in addition, have to see things like commitment to rule of law, we have to see respect for intellectual property rights, we have to see issues dealing with labor agreements and other things that need to be part of our treaty arrangements. So, in many ways, the Chinese relationship is actually spurring a -- perhaps a greater unity.


This has been a very, very informative hearing, very helpful to me. And I'll share this with other members of the committee. I still -- I -- the testimony has been much more optimistic than I perhaps would have anticipated. I had always -- prior to coming into this, the sense I had is that those involved in the business community see China and its -- and its development and the role it's playing in Latin America and places as well as presenting opportunity. For those focused on foreign policy and defense issues, I think there is some question of fear and concern. And my take on this hearing is that the opportunity's there, it's always good to be concerned, but on the other hand that, hopefully, if done right, that the opportunity can trump the fear.


So with that, this hearing is -- what I will do is I will leave the record open for seven days. So if there's any additional questions my colleagues have, gentlemen, I'll make sure they contact you. But if not, this hearing is now adjourned. (Gavels.)


MR. : Thank you.


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