"The 'rise of China' is one of the most remarkable transformations the world has ever seen," said U.S. Senator Dianne Feinstein to a transfixed after-dinner audience of California business leaders and their spouses.

For the next 20 minutes, she glided from witty anecdotes about establishing the San Francisco- Shanghai Sister City Committee in the 70s while serving as San Francisco's Mayor, and her budding friendship with then Shanghai Mayor Jiang Zemin (who later became China's President), to edifying statements about today's Yuan - Dollar exchange rate, intellectual property rights, Chinese governance issues, and China's commercial relations with the rest of Asia. She also discussed her opposition to punitive tariff legislation that is now pending in Congress against China.

Sponsors of corporate Asia Night tables were able to chat privately with Feinstein before sitting down to a colorful Asia-fusion feast that featured a Tamarind- and Orange-Glazed Filet of Wild Salmon, specially created for Asia Night.

In presenting the award, Cal-Asia President Lyz Ferguson cited Feinstein for her support of China's ascension to the World Trade Organization, diplomatic recognition of Vietnam, and other initiatives that "have created new opportunities, provided for better dispute resolution, and generally changed the way we trade and invest in Asia."

For Cal-Asia companies looking for "added value," the business networking, the Asian flavors, fashions and sounds of Asia Night, and the insightful Feinstein remarks provided plenty. Following are some highlights from her prepared remarks:

"Despite China's enormous economic strides, China remains vulnerable," Feinstein told her after-dinner Cal-Asia audience, "largely because of the unevenness of development, income inequality, insufficient educational opportunities, ethnic strife, and fluctuating capital markets.

"For many of us who watch China there is both a sense of awe at what China has accomplished, as well as a sense that it could all unravel overnight." She said a collapse would have devastating ripple effects throughout the globe.

While Sino-American relations have continued to show improvement over the past 25 years, there is a growing conflict over trade, the Senator said.

"One reason is that despite the fact that bilateral trade has grown from $5 billion in 1980 to over $230 billion today, our trade deficit with China has risen rapidly. In fact, it could well reach $200 billion by the end of this year." (She noted that U.S. exports to China grew last year by 22 percent, reaching a total of $34.7 billion, while Chinese exports to the U.S. increased by 29 percent, and have grown by nearly 100 percent since 2000.)

She said Chinese textile exports to the U.S. have, in some categories, grown by over 1,500 percent this year, and have caused the U.S. to consider implementing WTO safeguard restrictions against a number of Chinese textile products.

"One consequence of the rising trade imbalance with China has been a growing concern, rightly or wrongly, among many in the Congress that China's trade practices are responsible for the loss of millions of jobs in the US, and helping to undercut American competitiveness," Feinstein said, adding that China's fixed exchange rate has drawn the most criticism.

Currently, there are at least 5 bills in the Senate that seek to address the currency issue with China. The most prominent of these, she said, introduced by Senators Schumer and Graham, would compel China to revalue its currency or face across-the-board 27.5 percent tariffs on its exports to the United States.

Some economic analysts believe that China's currency may be undervalued anywhere between 15 - 40 percent. And if true, this has allowed China to export its goods to the U.S. at artificially low prices.

The Schumer-Graham legislation, first introduced in September 2003, has received growing support in the Senate as members have become increasingly frustrated with China's perceived lack of movement on the issue, along with the rising trade imbalance.

"I personally believe this legislation is unwise, could lead to a trade war, and actually diminish the purchasing power of American consumers," stated Feinstein. "But the large Senate vote (67-33) against tabling this legislation earlier this spring is a telling example of Congress' shifting views toward our trade relationship with China. In July, the legislation is expected to come before the Senate for final passage.

"I understand my colleagues' concern that the fixed nature of the Yuan unfairly advantages Chinese exports. But I believe the Schumer bill, if it becomes law, could aggravate the present situation.

"Let me be clear. I believe that China should move toward a market-based currency regime. Free trade means free trade of currency as well."

Feinstein said that in meetings she has had over the past two years with the Chinese leadership, she has pushed the Chinese government to take steps to implement the necessary market mechanisms to move to a market-based currency. In fact, at a dinner last August in Beijing, former Premier Zhu Rongji shared with her his belief that China will move, but only on its own time.

"Nevertheless, I believe it is important to understand the complexities surrounding this issue and the potential ramifications should China move too quickly to de-peg its currency from the U.S. dollar." She said American economists, from Federal Reserve Board Chairman Alan Greenspan to the International Institute of Economics' Nicholas Lardy, have cautioned China on the risks of moving toward a market-based currency, without first instituting preliminary reforms to its financial institutions. "So while I believe China needs to take action, it must do so in a way that minimizes harm to its economy, and consequently avoids hurting the global economy as well."

But even if China were to fully reform its currency regime, it would not be a "silver bullet," said Feinstein. She explained that most economists believe that it would have only a small impact on our trade deficit and the price of goods (5-10 percent), and American jobs would continue to move overseas to countries with cheap labor. If not China, it will be Vietnam, India, or Mexico.

"Rather than just pinning the blame on China, we need to better understand the costs that lead to outsourcing abroad and take action to remediate them," said a straight-shooting Senator Feinstein.

While Congress has focused its criticism on China's currency and unfair trade practices, the greatest bilateral trade concern, in Feinstein's view, are Intellectual Property Rights (IPR) violations.

She said it is estimated that up to 20 percent of all goods produced in China are counterfeit - that is 8 percent of China's total GDP. This cost American firms at least $2.5 billion in revenue in 2004, according to the International Intellectual Property Alliance annual report. Chinese products also accounted for about two-thirds of counterfeit and infringing goods seized by the U.S. Customs Agency at its ports of entry last year.

In particular, the U.S. motion picture industry, software industry, and recording industry have suffered substantially from pirating. For example, she said that 95 percent of films; 90 percent of computer software; and 80 percent of CDs and tapes, are copied illegally in China. "China must take the necessary actions to enforce the many IPR laws on its books, and provide its law enforcement agencies the tools to combat these crimes," said Feinstein. "China can continue to pass tough IPR laws, but without a true willingness to enforce these laws, this problem will continue to grow."

But Cal-Asia's awardee said the IPR issue "also offers many opportunities for bilateral cooperation." Just last October, she said the State Department provided $210,000 for IPR enforcement training for Chinese officials. "I believe Congress should consider establishing rule of law programs that encourage bilateral exchanges between American and Chinese legal experts on this issue."

In addition to discussing US-China bilateral commerce, the Senator discussed U.S. ramifications of China's thriving trade with its Asian neighbors.

For example, she said Taiwan's dramatically growing economic relationship with the Mainland finds the two sides virtually integrated in the production of high- tech and electronics equipment. She noted that Taiwanese firms now produce 70 percent of China's electronics, and Taiwanese engineers are at the forefront of making the Mainland the global leader in semiconductor manufacturing.

"Ultimately, I believe that this economic assimilation could eventually provide an opportunity for the Mainland and Taiwan to reconcile their differences and unify if they so wish, whether it be as a federation, state, or commonwealth."

She also discussed China's commercial relations with East Asia, with Southeast Asia (especially aimed at protecting future energy resources), and with India (when Chinese Premier Wen Jiabao traveled to India in April he called it the most important stop on his regional itinerary). She said trends suggest that within a few years, China's bilateral trade with India will surpass its trade with the U.S.

China's economic outreach into all parts of Asia has had deep ramifications for U.S. economic policy as China has established itself as the region's primary manufacturing hub, said Feinstein, and has been attracting the lion's share of foreign direct investment in the Asia Pacific.

"As a counterbalance to this growing economic dominance, the U.S. has been focusing on augmenting its security relations with China's neighbors, including Japan, India, and countries in Southeast Asia such as Singapore, who despite their vigorous trade with the Mainland, fear that a powerful and wealthy China could dominate the region militarily."

She added that the U.S. must also work to enhance its ties with organizations like ASEAN and ensure that entities such as the Asia Pacific Economic Cooperation (APEC) continue to provide a leading platform for economic cooperation throughout the region.

"How China's new leadership under President Hu Jintao and Premier Wen Jiabao handle these growing economic challenges and its trade relationship with the U.S.," said Feinstein, "will be critical to defining China's future. In my view, it is still very unclear what direction the new leadership will take."

She said many had hoped that the Hu-Wen team would build on their predecessors' reforms and bring a new openness and transparency to the government, but she has been disappointed by many recent actions including passage of the Anti-Secession Law; increased regulation over NGOs, think tanks, and the Internet; the tightening of controls over public opinion and the media on the Mainland (as well as Hong Kong).

Additionally, Feinstein pointed out, China's new leadership remains sequestered from the West and largely unknown. "Whether by design or because of insecurity, the opaqueness of the Chinese decision- making process causes concern for those of us who visit and watch China.

"When this opaqueness is accompanied by tightened controls on Hong Kong, indifference to the plight of minorities (i.e. Tibetans), and the passage of a law which makes an act of war against Taiwan legal under certain circumstances - China's rise, combined with the buildup of its military, is of growing concern to the United States."

While the U.S. must be willing to adjust and revise its policy toward the Asia Pacific as China's influence grows, Feinstein believes there is room for more cooperation between the two great powers in the region. "I strongly believe that the U.S.-China relationship is, and will be, America's most important bilateral relationship. We must not let differences, economic or otherwise, derail the progress that has already been achieved over the past three decades."

NOTES: (1) A full text of Sen. Feinstein's comments as prepared for the Asia Night dinner can be provided to Cal-Asia members upon request; (2) Past award recipients include Dr. Daniel K. H. Chao, chairman of Bechtel China, and Washington SyCip, founder of the SGV auditing and professional services firm based in Manila, known as 'the Wise Owl of Asia' for the sage advice he has given to Western firms seeking to do business in Asia; (3) Asia Night is just one annual event, but its proceeds support the entire year's business calendar. See upcoming programs at www.CalAsia.org, and contact Jeremy@CalAsia.org about how your company can become an active member; (4) Donor of the Laotian silk for Sen. Feinstein's award was www.theoldrangoon.com and the framer was The Artisans, San Francisco.

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