<html><body>China Hands: Nine Decades of Adventure, Espionage, and Diplomacy in Asia May 4, 2004 Unedited transcript prepared from a tape recording <TABLE width="100%" border=0> <TBODY> <TR> <TD vAlign=top align=left width="25%"> 3:45 p.m.</TD> <TD vAlign=top align=left width="75%" colSpan=2> Registration</TD></TR> <TR> <TD vAlign=top align=left width="25%"> 4:00</TD> <TD vAlign=top align=left width="25%"> Presenters:</TD> <TD vAlign=top align=left width="50%"> James R. Lilley, AEI</TD></TR> <TR> <TD vAlign=top align=left width="25%">  </TD> <TD vAlign=top align=left width="25%">  </TD> <TD vAlign=top align=left width="50%"> Jeffrey Lilley</TD></TR> <TR> <TD vAlign=top align=left width="25%">  </TD> <TD vAlign=top align=left width="25%"> Moderator:</TD> <TD vAlign=top align=left width="50%"> William Webster, former CIA director</TD></TR> <TR> <TD vAlign=top align=left width="25%"> 6:00</TD> <TD vAlign=top align=left width="75%" colSpan=2> Adjournment</TD></TR></TBODY></TABLE> Proceedings: PRESIDENT DeMUTH:  Ladies and gentlemen, can we come to order, please?  My name is Chris DeMuth, I'm President of The American Enterprise Institute.  Having just spent 12 days in the Peoples Republic of China, traveling throughout that vast land with Ambassador James Lilley, I can say with authority that he is much too young and energetic a man to have written his memoirs.  But young as he is he still has an important and engrossing story to tell.  And with his son, Jeffrey, he has done so in "China Hands, Nine Decades of Adventure, Espionage, and Diplomacy in Asia,"  which has just been published in its English-language version by PublicAffairs in New York City.  Copies are available, it is being widely and favorably--deservedly so reviewed around the country and we are here, today, to listen to Jim talk about the book and have a discussion with him. He and his son, will be introduced and the session moderated by William Webster, who is a very hard man to introduce; one of the best-known public servants of the recent decades in the United States.  Judge Webster served in the U.S. Navy in World War II and, again, in the Korean War.  He practiced law for many years in his home state of Missouri; was a federal district and then court of appeals judge from 1970 to 1978.  In 1978, he became the Director of the Federal Bureau of Investigation.  And in 1987, he was appointed head of the CIA and Director of Central Intelligence. Since 1991, he has been in private practice with the firm of Novak, Tweed, and he is now, of course, the Vice Chairman of the Homeland Security Advisory Council. I will now turn the proceedings over to Judge Webster, Bill. JUDGE WEBSTER:  Thank you very much.  It's a pleasure for me to participate in this program.  I see a great many people with books in their laps.  And I can tell those of you who haven't had a chance to dig in that you're in for a very real treat.  Jim Lilley has had a remarkable life career and so has his son, Jeff, who collaborated in this book. There's a line in his book about meeting an American who had been in China for a few days.  And the gentleman pointed out that he had already formed several opinions about China.  And I thought to myself, I've just returned, like Chris, from two and a half weeks in the Pacific Rim and you realize that, over the passage of time, how much you still have to learn and how much there is to see in terms of relationships and our respective places in the world. Jim looks at it from the perspective of nine decades.  He was born in Shandong, his father worked for Sauconi in China for 30 years.  And Jim gravitated back East to school, Exeter and Yale.  And then found himself following a lot of Yale types into the CIA, where he had a very distinguished career. But, unlike most officers in the agency, he found, also, that he was in demand for public service as a diplomat.  And he had a unique exposure to a very important part of the world--our world.  And the more that he writes about it in his book, the more I realize how much I've learned that I thought I knew, just before I took a took spin through the book.  I thought I'd scan through and see, but I read every page and I want to go back and review it again. Jim, as I mentioned, was educated in the United States, but he grew up in china, where he also went to school.  And then, with his work in CIA, his natural background in China, found his way into various positions of responsibility. But, just to mention a few and not to encroach on his time, he was the first declared intelligence official to be assigned officially in China.  With the knowledge of the Chinese government and officials there.  He went on to other important responsibilities, both there and in the United States; came back, among other things, served as our first representative to the, never can say that name IAI--what--the pseudonym for our embassy to Taiwan after relationships and treaties changed that relationship. He became our ambassador officially, after George Bush and others had been there, following Winston Lord.  He served with great distinction there and during the very troubled Tiananmen Square time.  And, I think was a great credit to the United States in the way that he performed his duties there.  And later became ambassador to Korea, which pretty much is about everything there is to do in the China Rim an the Pacific Rim. I'm going to let him tell you about that.  But keep in mind that this family grew up in a world in which leaders like Mao, Chou en-Lai, and Deng Xiaoping were in charge and has watched the progression and evolution of China since that time. Not many of us can say that.  I think it would be fair to say that there is no one who has learned more and experienced more about China alive in the United States than James Lilley.  And I can tell by the quality of the writing that his journalist son Jeffrey has contributed immensely to the book.  He, too, lived many years in China, was educated in the United States. And, so, with that I would ask that I turn the microphones over to Jim to see a perspective that I think all of us are privileged to hear.  Jim. [APPLAUSE.] MR. LILLEY:  Thank you, Jim, that was very generous.   You aren't here just by chance on the 4th of May, we selected this date.  And I'm sure Chinese friends here all know about ou say ung dung [ph], it's the fourth-of-may movement that was born out of the province where I was born, Shandong and the Versailles Treaty of 1919 and the first demonstration for democracy and science in China at Tienanmen Square.  And some 70 years later, I arrived in Beijing and I was there on May 4, 1989.  And there the students were all walking around Peking with signs for freedom and democracy. And I suppose the most exhilarating thing for me is to see them, as my car went by with the American flag going like this.  I don't think you see that today.  But it was a great experience and so we didn't pick May 4 casually. Chris, Judge Webster, this is a personal engagement from 1916 to 2004.  My father, my brother Frank and me and I am what Marshall Green used to say, why I'm an extinguished diplomat, with a long career in the second oldest profession--perhaps, it's the first. That is the way it starts.  And we went from my father's era, gun-boats, Bibles, oil cans, the 4th Marines in Shanghai, the 15th Infantry in Kin sin [ph], "Oil for the Lamps of China," and the Boxer Rebellion, in which a number of Christians were slain.  And it was an era of privilege of councilor courts, concessions, and foreign schools. That was the first period--the period when China was supine, torn by inner conflict, but we lived inured  from a great deal of this. Then we went to the second period of chaos, starting in 1937, when the Japanese invaded China and we went into a series of disasters, including the civil war; including terrible inflation; the breakdown; floods; the whole thing happened. And entering upon the scene was my oldest brother, Frank.  And I thought I would ask Jeff to say one or two words about Frank's impression, because I think he was very perceptive about what was happening and what would happen in the future.  Jeff. JEFF LILLEY:  Part of the interest in doing this book for me was for me to find out about my Uncle Frank, who I never knew.  And this book gave us a chance to look at letters and diaries that had been collected and passed down through the generations.  Frank was a famous letter writer and a diary taker for all these years of being in China from the time he went to go to school in what is now North Korea in 1934 until he came back to the States to go to university, where he preceded my father at Exeter and Yale.  He was eight years older than my dad. But Frank gave insight into the events that were shaking China in the late '30s in these letters and dairies.  He noticed Japanese troop trains going up through the Korean Peninsula to deliver their cargo in Northern China--this was in 1936 before the war broke out in 1937.  And he remarked on this and he was a very astute young man for being all of 16 years old at this time. But, Frank, we followed the story of Frank and we followed the story of a young man in the beginning of the book, Frank, I mean, who was the older brother, hero to my father.  And in many ways shaped the way my father thought by the way Frank lived his life and the high moral standard that he kept. But Frank was also a victim, in a way.  Victim, I don't know if that's the right word, but he became--he became a victim of this turbulent time and we try to fathom that in the book, what happened with Frank. The important thing is that we're able to tell Frank's story in his own words and what I'll try to do is just give you a sense of what Frank's words were that became the platform for my father's career and my father's life. So, let me just start out with September 10, 1939, an excerpt that Frank writes from a letter to his family.  Frank is now in Monroe, New York, on the family far where my father's parents had taken the family to Americanize their China-born children.  Frank was on his way off to Yale and he felt very indebted to my grandfather for saving money in China to send him to Exeter and Yale. Open quote, "The rest of the family, having piled off to bed, I decided to sit down and write you a letter.  A letter which I have owed you for quite some time.  The clock just struck 10:00 and the only noise breaking the stillness of the farm is the steady rattle of my typewriter.  that is one of the things I enjoy most about living here on the farm--the silence of the night." Frank was a romantic; he was an idealist; he was a sentimental person.  And these traits somehow got tied up in a very turbulent period of history. From Yale, 1940--June 1940, he writes to his parents, "I have found thus far in my experience in living with myself that I tend to be an idealist and philosopher in everything I do.  For me, what is important is not what I do, but the way I do it.  The motivating force behind my actions must be in accordance with my ideals or I am not happy at all." This idealism led to a pacifist nature and internal turmoil in Frank.  Again, from Yale, on September 19, 1940, as the thunder of war is approaching.  "You will say the natural run of events as progress moves on will make men see that war is futile.  I don't think so.  I believe that some men must be martyrs to the cause--must first rise up against the beliefs of their fellow men, must, like Christ, be willing to die for their beliefs. "I don't have the guts to do it, though, I value my own life and future, the respect of my friends too much.  Together with this, any efforts on my part would be futile in advancing the cause of pacifism.  The country definitely is not in a pacifist mood today.  So I will succumb to the great forces moving in the country to drag us nearer to the brink of war." Well, in the interest of condensing, I'll just say that Frank did enlist in the Army in 1943 and he saw himself as a real misfit.  He was a romantic and learning how to fire Howitzers somehow was very hard for him. He did make it back to China in 1945 and this is Frank on the cover in the highlands of Yunnan Province outside Kunming where he was teaching the Chinese how to fire Howitzers towards the end of the war. Frank, then, made it back to the states and got married and had a quick, short relationship before heading off to Japan.  And that's ultimately where Frank end came. MR. LILLEY:  Picking it up from there, Frank was during this period of chaos, the civil war and the invasion and he witnessed the absolute devastation of Hiroshima.  He was posted ten miles away from there. We then went into a period of hostility with China, starting in '49 and that's where I come in.  The period of hostility lasting roughly from '49 to '71.  And we were out in China working against China as the enemy.  And we were using covert means--paramilitary means, everything to render Chinese docile and more susceptible to our views. And this period went on, roughly to the Nixon/Kissinger breakthroughs.  And it goes on today.  We went into a period of rapprochement, but today we have a new set of problems that we didn't have in the '50s and '60s. We have the problems of trade deficits, intellectual property rights, missile deployments--a whole new set of problems, but we've gone through a period where I think we've tested each other and found the limits of what we can achieve and have selected other means for carrying out our cooperation or our confrontations. Lots of these methods are tested, but they're still in play and that is my point.  We went through these experiences.  We made errors and there was a maturing process evolving through these turbulent times. The paramilitary efforts against China failed.  People died and were jailed--my classmate, Jack Downey, was jailed for 21 years.  There was a period of fabrications of intelligence.  There was other experiments in paramilitary activity.  I was in Laos for three years carrying out paramilitary activity on the Chinese border. We eventually lost--not because we were incapable of doing effective paramilitary when we had the right forces in Laos, but we were unable to take on the Chinese in the East on their borders.  And we lost support from the United States government. The economic--the big breakthrough obviously came in 1977.  It could not have happened earlier.  China had to go through the extremes of the Soviet period with its central planning; it's heavy emphasis on heavy industry.  They had to go through the great leap forward and they had to go through the great proletarian cultural revolution. Out of these wild social engineering impulses, China worked it somewhat out of its system and at least denigrated these periods of its past excessive.  It was in this period that our strategic cooperation emerged and this is, as Judge Webster knows, a critical part of our association with China and both he and I were involved in this.  The strategic cooperation emerged, originally, from Bud MacFarland's,--later a national security adviser--early briefing of the Chinese on Soviet power.  Using sophisticated means to give them the kind of information they never had.  And this reached full volition, I would say, in 1975, when we, for the first time, proposed that we work with the Chinese actively in operations from the Northwest China aimed at [inaudible] palintinsk [ph] area where the Soviets had their long-range missiles and underground nuclear tests. Now Andy Nathan says I stopped the story there.  I stopped it there, because I was asked to stop it there.  Clearly, it didn't stop there.  Anybody who could read the newspapers can see that.  It went on and it was part of our cooperation with China--a very strong link and it led to our cooperation on F8 avionics, torpedoes, all sorts of other areas where we cooperated with the Chinese.  The Peace Pro Program. But it was at this point, I suppose, where I switched roles and went into the diplomatic role.  And, as my friend Nick Ever [ph] said, I'm the ambassador that proves you don't have to be diplomatic to be an ambassador. We saw early openings between Taiwan and China in the period when I was there between '82 and '84.  Dave Greese [ph], came over then, I remember introducing him to a lot of up-and-coming Taiwanese and the conversation was freewheeling and we talked to the Chinese there--this was '82, way before they opened up.  But certain things happened which led, inevitably to the opening between China and Taiwan. And the first of these, I think, was Jiang Lo's four points.  He said we are going to democratize, we're going to Taiwanize, we're going to be prosperous and we're going to open to China, four visionary points. We tried to carry through on this.  We had conversations with Taiwanese businessmen and one of the pitches they made was, with you don't you turn Kimoy into Disneyland East?  Why don't you take your five divisions off of there and turn it into a free-trade area?  Why not?  I made that proposal in The Wall Street Journal two weeks ago. But we had to begin to formulate how we were going to bring this about.  And I think the important thing that I try to point out in the book is that after the August communique of 1982, which was negotiated with the Chinese--and a lot of Americans were very, very unhappy with the limitations we put on ourselves, in terms of quality and quantity of sales to China, the Reagan codicil came in and Reagan penned this himself.  And he said there's two things that you have to understand in healing with the Chinese in arms sales to Taiwan:  Number one, it is only done if China continues as a peaceful means to carry out its unification or association with Taiwan--peaceful; number two, you must maintain some degree of a balance of power. And this led to our evolving policy with people like Paul Wolfowitz, Bill Brown, John Monjou [ph], Rich Armitage.  Out of this group came a policy and the policy was that a strong and prosperous Taiwan would be a better partner for China.  And the argument was, as long as you sell arms to Taiwan--China's argument was, this then, makes Taiwan become more independent, more hostile to us.  It had the opposite effect.  And that was our case. It led to two big things happening in the '80s.  It led to, first of all the opening of Taiwan to China in '87 when Jiang Lo's lifts marshall law; throws the gates open, Taiwanese pour into China; the trading relationship; the cultural, athletic relationship just takes off.  It goes through the roof.  A million Taiwanese are going over there.  The trade today is $100 billion.  I mean--I'm sorry, the investment. But the other thing that happened at that time, as Taiwan got its confidence, we made that giving them confidence contingent upon making moves to open to China.  They didn't have to surrender to China; they didn't have to compromise, unilateral concession.  They had to declare an opening.  And the classic case, I think, was the Asian Development Bank, where Taiwan was in that bank under the name of the Republic of China.  China wanted to enter, they said, kick Taiwan out as you did in the World Bank, we said, no, Taiwan stays, you come in and the Chinese said change their name. So we worked this out eventually over two and a half years.  They both got into this official organization.  They're both in it and what we did is we then speeded up the avionics for their F8 aircraft.  And this was the pattern, that was set. Two other things I think were interesting which I raised in this book.  And the first is that Lee dong Whey, then, who became President, after Jiang Lo died in 1988, said to me--before I went to Peking--he said, I want you to tell the Chinese that I am not going to declare independence.  And I think Judge Webster has an anecdote he can add on to that. I did, I passed it right directly to the President of China, Jiang Zemin.  I said I can't elaborate on this, but I'm telling you what this man told me and used me as a messenger. Second, I always felt, I think Jay Taylor has this in his book that Deng and Jiang Jing Wo were classmates in Moscow in the early '20s and they became close friends and took long walks together and they understood each other.  So there was always sort of a feeling of a Chinese relationship that would not catapult these two sides of the straits into war. The other think I stress in the book is the extraordinary chemistry that I think developed between two men.  When they met, they were both out of it.  George Bush, was the head of a two-bit operation Peking called the U.S. Liaison Office, with 26 people in it and Deng had just come out from about seven years in the cow pen and was a vice premiere. But when these two men looked at each other some chemistry happened.  Maybe I'm reading something into it, but if I track the events of how these two men interacted, I think it really changed the course of history. And I would cite, first of all, that when Bush went there, in 1977, took a delegation over with Hewlett, he was on it, Lowell Thomas, Jimmy Baker, myself, Dean Birch.  And we went over there for about 16 days.  And Bush had this very critical conversation with Dung.  And he knew the problems that China was having in offshore oil.  He knew their jacked-up rigs were turning over; he knew they couldn't manage their semi-submersible; and he came in and he said, there's a risk contract where we take all the risk, exploration and if we hit oil, we share production.  And this went against the three no's in China.  But a light bulb went off in Dung's head, and he had the power and strength to say, do it. And this was 15 months before his great reforms.  And he knew that the Americans, I believe, would be behind him 100 percent in the reforms and that the Americans would come in, Arco, Mobil, Exxon, Pennzoil, all of them would come in and explore offshore oil in China. I think in 1979, when George Bush saw Dung in Houston, Texas, after he made his triumphal trip to the states.  And Dung wanted to raise Taiwan with him and said you have to do more to bring Taiwan and China together.  And Bush listened to him very politely and he said to me afterward, what do you think of that idea?  And I said, I don't think it's an idea you want to plunge into very quickly.  Read about the George Marshall mission--there's an awful lot, if you get in the middle between two Chinese factions, you're going to get chewed up, watch your step. But, there's an interesting idea here, it's an interesting idea, don't discourage it from happening.  All I can say is, if you take a chronological coincidence, in September 1979, about eight months later, Jiang Zemin comes up with his nine points of peaceful unification with Taiwan.  It's no longer liberation, peaceful unification--coincidence. I think in 1985, when Bush saw Dung, he asked to see the new leadership.  Who were the young men that are coming up in your system?  And we met them and this attractive, English-speaking young man was standing there.  And George Bush said who's that?  And I said that's Hu Chi Li [ph], he's quite a guy.  He's very talented; very smart; very effective and Hu Chi Li, of course ends up in the standing committee of that the politburo at the time of Tiananmen.  And votes for--against using violence on the students.  He got purged after that.  But that man went up. And I finally think in 1989 through the intermediaries, and Scowcroft and Eagleberger at considerable political risk to himself, George Bush took the move that preserved the strategic relationship with China at a time of very great distrust and dislike.  I know, I was there.  The dissident was in the embassy, we were surrounded by guards with AK-47s, it was a very ugly time.  But, yet, he gave the signal, and out of that, I think, came our situation today. Dung changed China, he had the purpose and drive.  He did it in economics and he did it in an almost miraculous way--the achievements anybody going through China today, the East Coast, as we did, Chris and I and seeing Shanghai and Beijing, it's something else.  I hadn't been there for eight years.  Or even going out to places like Lon Jo [ph], in the West or Nonchong [ph], in Central China and seeing the great highways that go from Souther Jong Si [ph] in Central China to Northern Jong Si.  It is incredible progress that they've made.  And I think Dung takes a great deal of--should get a great deal of credit for that. But we also learn that in politics, there was Tienanmen and when it came down to the--what he perceived of as the survival of his regime and he was probably getting bad information from his mayor chung si tung [ph], and from his premier Li Pong [ph], he acted with violence and he crushed it because you don't go outside the system to change it.  I won't have any of that nonsense. I think the other thing I try to get into this book is the cyclical nature of our relationship; when one side or another tries to change the nature of the relationship at the beginning of a new administration.  An example, if President Reagan decides in 1980 that he's going to resume official relations with Taiwan, I can tell you there's big trouble ahead.  And the trip that we took to China in the summer of '80, George Bush, it was a rough, rough trip.  And Dung, himself, was leading the charge.  And if you think you're going to use your work against the Soviet Union to get us to cave on Taiwan, you aren't. We worked it out, but this led to the nastiness, in a way, of the August communique when China pushed ahead with their own agenda and tried to get us to cut off arms sales to Taiwan when we could not do it.  Read the Taiwan Relations Act. And so, we didn't do it.  And it came to a crisis.  But that crisis, was there and we went down.  But by 1984 up to '89 the relationship took off because Reagan went to China.  He handled it very well, as he does on his visits and we got the military programs going, the intelligence programs, going.  The commercial relationship is going through the roof.  Enter George Bush, Tienanmen.  It goes way down again, hits bottom and gradually we work ourselves out of this thing, so by the time George Bush is leaving office, we've got agreements on property, intellectual property, trade, the Nan Jing [ph] school, education, science and technology, we're moving ahead. Enter Clinton, I'm going to link most-favored nation to human rights.  Bang, you're down again.  And you're trying to work yourself up out of this, except it took a little longer and it took a confrontation in the Taiwan Straits in March 1996 where we sent in the carriers and they were firing missiles off the South Coast of Taiwan. But Jian Zemin comes here, puts on a cocked hat at Williamsburg, Clinton goes to China and talks about human rights and everybody comes feeling good about the relationship.  And it looks as though it's getting better.  They're going to join WTO, we get the agreement there, which is critical.  We get most-favored nation or we say form permanent normal trading relations for them against a lot of resistance.  You see it moving ahead. Enter George Bush, 43, EP-3 incident off Hainon [ph], when one of their planes crashes into our plane and goes down at sea and the pilot's killed.  Our crewmen are incarcerated.  You can just see it coming.  But, it didn't happen, because they knew how to handle it this time.  They were out in 11 days, they cut the plane back--all cut up--we got it back. But it was a sense of understanding how you managed this situation and how you could bring in.  And I think the State Department did a very good job, Gale Johnston and others who were handling this you did a very good job of getting it right.  Knowing that Jiang Zemin, when he went to Latin America, I want this thing settled by the time I come back and I want the foreign ministry to handle it and tell the military get out of there.  Because they'd lied to him about what happened in the beginning. So, you see this evolution of things.  You're beginning to handle things better.  The cyclical nature of this whole relationship is still there.  And I think we try to sort our way through what is real and what isn't where there's give and where there isn't; how to get things done; how to accept losses and move on; what has he got that I want; what have I got that he wants? And, in my own experience, I suppose because I thought I knew something about the Chinese language, I try to use the chung u [ph], as an instrument of policy.  And I can tell you, it works and it doesn't work.  As any Chinese in this audience can tell you. I once used the term yenner dah ling [ph].  Very effectively, which mean, stick your head in the sand like an ostrich when we were off fighting over something.  The other time I said shou te dod zaw [ph], and it blew up in my face.  So, I mean, we foreigners that drift into the Chinese language, learn a lesson every day. But that whole process of doing things, of getting things done, the timing and again, I say in the timing of improving a relationship in a concrete way that Bush's movement on offshore oil in 1977, I think was exquisitely timed to hit the Chinese at just the right point at the right time.  And it did contribute, I think to the reform movement in China. I think that a combination of factors led to the release of the dissident in the embassy, who was there for 13 months with me.  Coming together of a whole series of factors which could be manipulated to bring about a positive development.  Nixon and Kissinger coming over in the fall of '89 and softening the Chinese up in a way and Nixon was superb at this. Then, coming in and bringing in the inducements and the incentives and disincentives for an arrangement that would succeed and help both sides.  On our part, extending most-favored nation.  Bush would take that risk and challenge Congress.  We would encourage the Japanese to come through with their third Yen Mon [ph] package in the summer of '90. We would look to re-instituting World Bank loans because we knew how strongly the Chinese wanted those World Bank loans back.  They telegraphed their punch on that.  They, on the other hand would begin to lift marshall law in Beijing and Tibet; begin to give amnesty to dissidents; and, eventually, let Phong and his family out. A confluence of events came together where one could be ourselves out of a sticky nasty situation. On a more personal note.  In the fall of 1973, when I was slated to go to Rumania to be in the Rumanian embassy--the American Embassy in Rumania or a two-cornered shot to go to Peking, I'd be in a denied area and then go to another denied area.  I'd learned the techniques and I went through all the courses and all that sort of thing.  And then I found out that we were going to open up liaison offices in China. So, I went up to Bill Colby, who was then the, I don't know, what would you call him, director of operations, probably.  And I went in and I made my pitch to him.  I said, I think I'm your guy.  I was born there, I can hack around in the Chinese language, I know how they operate, I've done these things and a little bit high-profile.  And he said, that makes a lot of sense, why don't you talk to Schlessinger, he's the Director? And I just walked in there and Schlessinger looked at me and said what do you want young man--I'm six months older than he is, but that's all right--and he said, what's your pitch? And I gave it to him, I said I think that we ought to have a man in this group in China.  And I don't think other people want us in it.  He listened, looked at the ceiling, picked up the phone.  Give me Henry.  The rest is history.  And a man who could see immediately the importance of that move, how would it appeal to Henry and then get it done over the objections of the bureaucracy.  It wasn't an easy time, believe me.  But timing helped.  And, again, I'd say to you, EP3 incident; my getting to Peking; the offshore oil and the Northwest sites. Sitting in an office on a Saturday afternoon with the Russian--Soviet Union, NIO, they call him, National Intelligence Officer--having not much to do, feet on the desk, looking at the map, and there's this map of Northwest China and he's saying, you know, we're going to lose those sites in Iran and we haven't got any coverage and, what do you think the Chinese would do about this?   I said, what do you mean?  He said look at that topography.  And we looked at it.  And there it was, it was almost line of sight from the [inaudible]  palintinsk [ph].  And we hacked away at a memo and sent it up the line. Henry was going to China--Henry Kissinger was going, and there was a lot of--the Chinese were being particularly obstreperous at that point over Taiwan.  Chow Guang Wa [ph], was the foreign minister and he could be very unpleasant if he chose to be.  And Henry's getting beaten up and he needed ideas.  And, all of a sudden, this idea appears on his desk and he said, got it. And he went over to China and he went right to Dung and he got it to him and Dung's reaction--as I understand it, third-hand--Dung said, I like the idea, but not now, you gotta normalize first.  The Chinese are good bargainers.  And so, it didn't happen until a very talented China hand, Mike Oxonberg went into the National Security Council Staff and Bryzezinski took over as National Security Adviser and he had the group that that could carry it through and they did. So the timing element comes in.  And some people say it's a matter of luck, contacts and projecting you know more than the next guy to get ahead in this bureaucratic world. But I think my story tells you something else:  That out of tragedy, hostility, chaos, failure and success, there can come real progress and that in this era to come, that we've got to ride the streams of history that carry us forward and not get tied down into endless semantic battles with the Chinese over Taiwan independence; use of force; one China two systems. It's too much for us to handle.  Most of us haven't even read the treaty--where it's all spelled out, the games they play with each other. But we have got a very important role and I think we end up in this role.  One way or another we have to live with them, and we've had a spotty career; gone from semi-colonial to chaos to hostility to rapprochement and now we see these new problems looming ahead.  We solved a whole series of these things in different ways.  And we leave it to the very bright, intelligent, capable new generation to do it. Jeff, do you want to make a few comments? JEFF LILLEY:  No, I think--I'd be happy to answer any questions, I mean, if you want to go to that--there's a lot we can talk about. MR. LILLEY:  How you wrote the book? JEFF LILLEY:  Well, it was five and a half years of work and we had a jump-start from the Taiwanese on this, which was great. MR. LILLEY:  Norman put the book out in Chinese--put a version of the book out in Chinese, first. JEFF LILLEY:  Right.  And then PublicAffairs, our publisher here were the right people to do the job and carry us through.  But I guess I'd just say one thing that fascinated me, just to continue on a little bit of what I was saying is, that I think you'll find, when you read the book, that my father's approach towards China--his unsentimental, pragmatic approach--we make the point that my father's unsentimental, pragmatic approach really springs from some of the lessons he learned from his brother who was an idealist, a philosopher and a sentimentalist. And I think the point being that if you want to deal with China, you don't get romantic and you don't get disillusioned for all the reasons that my father said the ups and down.  So, I think in a way, it brings it, sort of tangibly to the fore through one family to see these two approaches towards China.  And sort of the thread that goes through and, I think, it sets up pretty well, my dad's distinguished career in many posts in the U.S. government. JUDGE WEBSTER:  Well, first, before we open it up to questions, I'd like to express my appreciation to Jim and to Jeff for a really insightful presentation.  You will see the whole thing with the books that you have, but I think they're entitled to an expression of thanks for that. [APPLAUSE] JUDGE WEBSTER:  Now, if I may claim the first question, because I've been itching to talk to Jim about this, and to Jeff if he has any comments. In my efforts through the years and with a great deal of help from people, some of whom are in the room from in the agency and elsewhere to learn and understand China more.  It was clear to me during the period of what we knew as the Cold War, that there was a major difference between the Soviet Union and China--both of which were growing, both of which were expressing themselves in various forms and manners. In the Soviet Union, historically, it seems to me, the first steps were the relaxation of political control through glasnost and perestroika and the opening up of ideas.  Whereas, in China, the first steps were in opening up markets and the economy and investment opportunities and growth from the outside. Each took the opposite position with respect to the other.  In the Soviet Union, there was very little real reform toward market economy, they didn't know what privatization meant; when the one of them came over here, they asked me the question, now in a market economy, who sets the prices ?  They were way behind on that. In China, they were moving fast ahead on the economic side, but keeping what they believed was an appropriate level of political control, which was far more than we exercise in this country. For them, it seemed to me, a provocation, maybe based on 2000 years of experience, but provocation came fairly easily when President Li Teng Way [ph] wanted to go to his reunion at Cornell with the incumbent president of Taiwan, that was viewed as a provocation, we were urged not to let him come back to his college reunion here. [End side 1 TAPE 1 - Begin Side 2 Tape 1] MR. LILLEY:  --to have the kind of political autonomy that it's seeking and that's why this referendum business, I think, one reason it's become so crucial, because China wants a say in the future internal democratic processes in Taiwan.  And, in fact, there's been reports in the Singapore paper, thanks to my friend from the China Times, that Chen Sheway Bien [ph] is trying to get Chinese clearance on this inauguration address.  That he's going to reinsert his four no's and a fifth one, whatevers, and he's going to try to pacify China on this in some way. And we've seen this process go on before.  The curious example of Korea comes to mind, where you had Park Chunk He [ph] coming in around '61 and lasting roughly until 1972 being present as a hard-headed authoritarian leader who did not tolerate opposition but who thought about the great economic success of Korea.  Jiang Jing Wo did this in Taiwan.  Li Gwan Yu [ph], did this in Singapore.  It leads the argument that the Asian system lends itself to a collective responsible position that you must have a strong leader, this has been our tradition, this has been our history that the chaos of bourgeois democracy is not for us. And it's interesting, when I was in China, Phoenix Radio--Rupert Murdoch's TV in Hong Kong--was playing the Taiwan elections in Beijing.  This was on March 20.  And there were the great mobs in the street and then when the election--attempted assassination and the challenged the election results came, there were demonstrations, chairs were being thrown and the Chinese looked at me and said, we don't want that kind of stuff over here.   And I said, well, certainly in June 1989, you handled it somewhat differently. So, you may have scored a point, but you probably didn't make any friends there, but my sense is we have to live with a different kind of a management technique that the Chinese will devise for their political affairs.  And it will be a more rigid system, a more authoritarian system, a less tolerant system than we have and it will be based on their own historic concepts.  And they will probably allow the economic side to evolve. Certainly, when we went over to China and talked with them, they weren't interested in my discussions on North Korea or Taiwan.  They were interested in Bruce Crovener [ph] and Chris DeMuth and Kevin Hassett have to say about the future economy of China or John Macon about Japan.  What are the lessons in Japan?  They wanted to listen to them, not to me. They wanted to find out what we thought of their present circumstances; what their difficulties were; and what sort of a way there was out.  And I think we can do something for them on this.  And I think other Americans can, too.  But this is strictly an economic process.  When we got into the situation where there was a political dimension, at least in their public meetings, they tended to become fairly dogmatic.  In private meetings much less so, but, certainly, in the public meetings, they were very careful about what they said on North Korea, for instance. So, Bill, in a long way, I would say that what comes out of this, is something that we don't really--we can't really anticipate.  It won't be the kind of scenario that we design, that's for sure.  It'll be something that they come up with. I mean, as people go back and they say when you introduce Christianity to China you get a benign God-loving kingdom?  No, you get the Taiping rebellion, where a Chinese epileptic from southern China thinks he's Christ's younger brother.  And he gets a huge army and 20 million people die.  That's the aberration--what happened is not our view of Christianity, it was something that they did to it. When you introduce Marxism and communism to China, you get the great leap forward, Mao's lunatic social engineering of communes, commune mess halls, backyard furnaces, close planning, all the things that probably killed 20 to 30 million Chinese.  Marxism didn't come out the way Lenin and Stalin had planned it.  It came out the Chinese way. So, when you introduce capitalism to China, are you going to get something that we can tolerate, we damn well better tolerate it, because it's going to be that way.  And there is no question, as I say in my summary there, that when Barbara Tuchman says in her brilliant book, that at the end, it's still well and Huang Chi Scheck and Madame Huang and all the struggles and fighting, when the Americans left, it was as though they'd never been there. That's not true.  My father came with Standard Oil in 1916 and they're selling oil and producing it in China today, Standard Oil is.  You may have ha the 4th Marines in Shanghai and the 15th Infantry in Peking, but you've got the 7th Fleet in Shanghai and Ching Dow [ph]. And the Christian religion, if you read the latest book by Jason Kindopp and Carol Hamrin, it's flourishing, Christianity is anything but dead in China. So, we do influence them, the West does influence them, but they're in charge, we're no longer in charge and I think that's the fundamental difference. Anyway. JUDGE WEBSTER:  Thanks, Jim, that's a great answer and I think, I see some hands already up, yes sir. PARTICIPANT:  Thank you.  I had the honor and pleasure of serving with Jim in Taiwan in 1982 to '84.  Jim, with extensive experience in both the Middle Kingdom and the Hermit Kingdom, how do you see the situation with China being able or wanting or really being able to assist us in getting a satisfactory with North Korea. MR. LILLEY:  Thank you, Clark.  An anecdote in this book is that we were always treated like the illegitimate child at the family reunion:  we AIT in Taipei, because we were unofficial.  I was not an ambassador, I was the director, Clark was the head of the--you were economic chief, not economic counselor.  We had--we all played games with words. But Clark was sent to a chiefs admissions conference because they wouldn't let me go because I am too high level.  So Clark went.  And Clark said it was, like, I went to the meeting and had a bag over my head the whole time.  That anecdote's in here anyway. My experiences in China most recently, and if I get personal on this, is that the Chinese work in North Korea on three levels.  The first level was the semi-public level where you would talk about it and you'd get what they called the dogmatic party approach. The Korean War was a civil war and the Americans intervened in that civil war and that's what causes the problems today--opening statement.  From then it goes down hill.  I mean, it gets into a whole series of, oh, you must do more for these poor suffering North Koreans and you're a big country and they're a little country and you can afford to make concessions and a whole string of things that they say, which are not terribly inspiring. You drop down a level, you have a private luncheon and you're interlocutor is a, let's say a former ambassador, this sort of thing and he says, you don't tell me what real turkeys these guys are, we know very well, they're terrible.  And we don't need any lectures from you how bad they are.  We know what they've done.  And if you got out as, you know, I did this program with VOA where you make a speech on North Korea and all the calls come in from all over China from Schizuan and from Har bin and from all over China.  And I would say, of the ten calls, nine of them were very hostile to North Korea.  If that's any sampling of public opinion. If you drop down to a third level and maybe after one or two drinks and you're doing this indirectly, you get some very tough talk about establishing red lines.  There will not be any nuclear weapons tests in North Korea; there will not be any multistage missile shots again or we will do something.  End of conversation. So, you get various levels and I think they can go back and forth up and down the scale as it suits their purposes for that moment.  But I think, overall, although China has backed losers in the past--Milosovic, Ceausescu [ph], Hol Pot, Hu ha, they can pick them.  Now, they've got Kim Jung Il, another Stalinist creature from the past sitting there and what are they going to do with this guy?  It's a tough problem for them.  And I'm sure they're having arguments in their own system, there are people there that are saying, look, the real problem from China, the real threat from China comes from the United States of America. If you go through their writings in the military they point this out.  And if you look at their weapons acquisitions, it's to deal with us, but I do think that the fourth-generation leadership that they have now, is determined to take a much more conciliatory course. But there are very powerful forces in China that always work against this.  Very strong reactionary forces--xenophobic, difficult.  And it's never easy for them to make decisions on issues like this--on Taiwan and very sensitive issues, India, Pakistan, various other places where they have high stakes. So, my own sense is that they've come to a fork in the road and they took it, as Yogi Bear would say.  They moved--they've realized, I think, who is going to win this thing and I would say that any American who goes through unpleasant wars--we're going through one right now, the Korean War was a very unpopular war, we lost 35,000 men in that war.  And, yet, it was a terrible loss, but it led to a startling successful foreign policy achievement, I think. And you go through the tough times, you persist, you size up the enemy, you know when to cut or when to stay.  And I think that's the decision that we're facing now.  That we stayed and through perseverance and confidence and I have great confidence in the State Department team working on North Korea.  Here's one of our guys right here.  But, I mean, other guys are very, very good.  And I think they've got a good feel for the North Koreans.  And despite all the attacks that they get, I think they're on the right track.  And I think getting this five-power coalition with Russia, Japan, South Korea, China, U.S. and pulling it together--and I think now we have the principles laid out.  No weapons of mass destruction on the peninsula, we all agree. North Korea needs the economic reform--we all agree.  There will be no pre-emptive strikes--we all agree.  It must be multilateral--we all agree. Then you start trying to herd the cats.  Then it gets tough.  Are you going to lick progress on nuclear weapons to economic aid.  And you get all sorts of hissing and well, I don't know about that.  And that seems pretty tough, these are very proud people.  And it's not easy. But I think we've made substantial progress.  The South Koreans have put conditions on their aid; the Chinese have been very helpful in ways.  They've got this terrible problem with North Korean narcotics getting into their country, counterfeiting their renminbi, North Koreans are bad actors and they're getting caught at it. And I think that this moves the process forward.  We've just got to be patient and not try to do this thing quickly.  Our concern is not to let them proliferate those weapons. You notice today in the Financial Times that Kim Yung Nom says we will not proliferate. Well, anyway, I've come out reasonably optimistic, Clark, but it's going to be a long hard struggle. JUDGE WEBSTER:  Yes, sir. MR. CARPENTER:  I'm Bill Carpenter.  Jim, I always thought I was older than you, since I was born in 1916, but I haven't finished my ninth decade yet, so, maybe I'm not.  Anyway, I'd like you to comment on the village where there's some sort of democracy going on down there.  How does that reflect in the hierarchy, is there a feeling way down the line, there might be a return to the Republic of China, that they don't want to collapse like Russia?  How do they review this thing going on at the village level, where they can do a little bit of democracy? MR. LILLEY:  Well, Jeff, your organization does that, don't they. JEFF LILLEY:  Not in-- MR. LILLEY:  International Republican Institute does that. JEFF LILLEY:  Does that mean you want me to answer? MR. LILLEY:  Well, if you feel like it. JEFF LILLEY:  I think it's up to you. MR. LILLEY:  I think, Bill, it's an experiment and it flows up and it goes down.  And I think there was a good piece in the Washington Post the other day on it.  That in certain villages, they've been able to take out a corrupt cadre and vote them out.  But in other--in most of the villages, the party guy still calls the shots.  And it's never gone up to the county level.  They did once in Sichuan and they backed away from it very quickly. But there is a process that goes on where a provincial governor who's appointed must go through some sort of a vetting process in the, let's say the provincial assembly.  So you see this thing, it's not legal, but it's a form of amorphus democracy that's going on.  And the new leadership, I think, is saying they're going to pay a lot more attention to the rural problems.  Because the rural problems are very, very bad. I think people here don't realize how bad they are.  But we had somebody from the Chinese Academy of Social Sciences and a person from Peking, come over and tell us how serious it was.  And he says, well, Hu Jin Tow [ph], so does Wun Jow Bow [ph], the premier.  And they're very concerned about it and one of the safety valves is village elections in troubled areas, but they're always going to keep it under control.  They aren't going to let it get out of hand.  So, as my wife says, if you can't deal with contradiction, don't deal with China. JUDGE WEBSTER:  Yes, ma'am. MS. LAWRENCE:  I'm Susan Lawrence [ph] with the Far Eastern Economic Review.  I was in the press corps in Beijing when you were Ambassador back in the early '90s and I've just always been very curious about the relationship you had with Pohong Li Ju [ph], the dissident who lived in the tiny resident compound with you.  I mean, anybody whose been to the embassy in Beijing, knows that's not a very big place.  What was it like having him living right there with you?  How did that affect your daily life?  Thank you. MR. LILLEY:  Well, as somebody once said, it was the man who came to dinner and stayed for 300 of them.  As you know, he was blocked from going to the first one, but we had him for 300 more, so, the Chinese have a way of always winning these arguments. I tell you, first, I was very relieved that he was Chinese and not Russian.  The Russians would be drunk and crying and God knows what they would be doing.  Phong Li Ju wasn't that way.  He was a very self-contained man.  And we set him up with his computer and his books and we had this marvelous guy, Charlie McLaughlin [ph], of US--of USIA who did a terrific job of making him feel comfortable and his wife, comfortable about it. I would see him, I'd say, once or twice a month.  We'd go over and have long talks.  And towards the end, when I was doing the negotiating, I was seeing him much more frequently.  And I became a little bit irritated at that time, because  at that time, he didn't like the leadership and he did not like Dung and it was reciprocal. And he said, he had a very good sense.  He said, I think you're winning, go for the jugular.  I said that isn't the point of the exercise, the point of the exercise is to get you out of here. And you know, he was sort of a pansy we aren't playing it rough, but his wife was really, if you look at her face, she's the tough one.  She's got the square face of determination.  And he tends to be the ball kind of a guy that rolls with things.  And he--he lived a lonely life, but he did have these inner resources and wrote papers and we had little parties for them once in a while.  And kidded ourselves that the Chinese didn't know where he was. You know, once they did, as I mentioned in the book, they had threatened to take him out.  And we made demarche to them and said, you do that and we're gone.  I mean that was my understanding anyway, I'm not sure of what the exact language was, but it was pretty tough. And then there was the issue of trying to get him out black.  That means covertly and we'd done this before when I was in a certain agency, a number of times.  In fact one time, we dressed the man up as a woman, put a blonde wig on him.  He was a Chinese defector and we walked him through and he got through.  And so, we said, well what can you do with Phong Li Ju, have a sex change operation or what? No, we weren't going to do that.  So the newsmen, God bless their hearts, Dan was probably one of them, Dan Sutherland, he was there at the time.  But they'd get over to the bar at the Great Wall Sheraton and they'd talk about the CIA ambassador who was going to smuggle him out.  And the talk got to the Chinese guys that were listening in.  And I get called into the foreign ministry and the Chinese say to me, if you think you're going to play games and get this guy out in your tricky ways, forget it. I said, you know, this conversation never took place, because are you telling me that if we have an Easter party we're going to smuggle him out as the Easter Bunny?  That was my colleague that made this remark.  And that was considered not unworkable. And I think that probably didn't work in China.  There's ways you can do it.  A large diplomatic pouch with air holes punched in it--you put him in it and he gets out on the plane and you take him out.  I mean, it--but Washington would have no part of it.  They didn't want any part of it.  And they, I think we sensed these confluences of events coming in that we're going to make it possible to get him out of there; I think Larry Eagleberger and Brent had worked out a balancing arrangement whereby he could get out. But I was disappointed in his attitude after he left.  And we kind of had a falling out, because when he came out he made some comments about Bush, which I did not appreciate at all.  And so, we do not communicate freely.  I can understand what he said, he said Bush had a double standard on China.  And I thought after what Bush went through for him, this was not exactly grateful for what we had done.  And so there were those differences. JUDGE WEBSTER:  In the back, back there.  If you're on your feet go ahead an ask the question, then next question over here, please. MR. CHIVONON:  My name is Che Chivonon [ph], Radio Free Asia.  Could you comment the role of international broadcasting?  There's no free-press in China and North Korea and [inaudible] why we are doing it? MR. LILLEY:  Well, I think the press in China is much, much freer than North Korea.  There's really no comparison.  North Korea is just a total hermit kingdom.  China has a real flow, I mean, Orville Schell has written some very good pieces about this, the White Press, the Gray Press, the Black Press in China.  Yes, they crack down when you go too far, that's no question about it, as they've done in some of the South Chinese papers recently and they give out stiff prison sentences on what happens. They're going to keep a handle on the press, I think.  They're not going to allow open criticism of the leadership.  They are going to not allow the ascendancy of the Communist Party to be challenged.  They're not going to allow Taiwan independence to be talked about or Tibetan independence.  There are certain no, no's that any good pressman in China knows he can't do. But the Chinese press is something.  I remember when they were doing the corruption trials up in Schen ya [ph], of the massive corruption in the mayor's office and all those places.  They have it here, then they have a picture of Li Pung on the next page, like this, and they have a little article on him.  Anybody seeing this thing would see a connection there.  And I'm also told that their soap operas are full of sarcasm about Communist Party cadre and people like this.  Things happen all the time. You'd never get away with that in North Korea.  So, how far it's going to go, it's hard to say.  I gather they're still jamming chinese language broadcasts into China, aren't they, Dan?  Do they jam you?  They do.  The English can go through.  English goes through Chinese can't. In North Korea, when I did the monitoring up there, it's all jammed.  It's all jammed.  So, I mean it's a question of degrees, but the Chinese have really come a long way in terms of exposing corruption and exposing people that behave badly, and you just have to be careful that this guy isn't the premier's brother-in-law, that's what you have to watch out for. PARTICIPANT:  Thank you, I'm from Nike Newspaper, Japan and I'd like to ask Mr. Lilley about how does Japanese factor affect to U.S. China relation.  When I was in China, some of the Chinese people told me that when Japan China invasion gets worse, they will become--China also will become more skeptical to U.S. prisoners in Japan or U.S. Japan security relation, so it is not so positive to U.S. China relations.  But, on the other hand, there are several people that says when Japan China relation gets worse, they more inclined to have a better relation with U.S. to contain so-called, you know, Japanese militarianism or restrain Japanese, you know, dangerous action.  So there is a kind of contradicting explanation.  So, I'd like to ask your insight from your experience, thank you. MR. LILLEY:  Well, speaking from personal experience, when I was in Peking, I thought my relationships with the Japanese were very solid.  Maybe it was a question of personalities, but the Japanese made it very clear to the Chinese at that time that the American relationship was a lot more important to them than the Chinese relationship. And that, in order for the Chinese and Japanese relationship to improve, which the Japanese wanted very much to have happen, that the Chinese had to do something about their relationship with the United States.  And I can tell you that was a big help.  That was a big help. Now, whether this attitude pertains today, is hard to say, you raise some very large strategic questions about containment; about United States containing Japanese power or Japanese and the United States containing Chinese power.  Obviously, that's part of the formula.  Yes. In this whole nuclear business in North Korea, I believe, I defer to my State Department friends, but I believe that we have made it clear to the Chinese that stopped the nuclear weapons program in Taiwan twice.  We stopped it in South Korea once.  And we're keeping the Japanese program under very tight control.  I believe the reprocessing still is done in Europe with the dangerous shipping of all these fuels across the oceans, subject to piracy. Implicit in this is if the Chinese don't do anything about the North Korean problem, they could set in motion a chain of events that will be not in their national interest.  Not for a minute are we going to give nuclear weapons to one of these places.  But it just disturbs the balance of power in a way that is negative for them. So, that's another aspect of it.  I think the Chinese know that at least when Bush came into office he made it quite clear that the Japanese/American relationship was the linchpin of our policy in Asia.  And, yet, it looks as though he probably spends a lot more time on the China relationship, because it requires that. There is an element of summitry in the Chinese relationship that's much stronger than any other country I've ever seen; the Nixon, Kissinger, Chow En Lai, Mao; the Bryzezinski, Dung arrangement; the Bush, Dung.  You've always got to have that very strong link at the top. Essential to that is to have good people under you working, people like Mike Oxenberg, Dick Solomon, others that work as the key advisers in that situation.  So, it takes, as I say, more massaging, more activity, more banquets, more vacuous phrases to make this thing go. And it's--any businessman can tell you that.  So the reality is, of course, that I think for the first time in a long time, you have a triangle between Japan and China and the U.S., which is a fairly well-balanced one.  It's largely economic. Japan is now moving into China taking advantage of its market for its own production.  The United States is doing that.  Taiwan is doing that. everybody's doing it and it holds us together in the global supply chain, which is probably, overall, I think, in the long term a positive event which breaks down national barriers, protectionism.  So, I wouldn't want to get into a game where we start tipping the balance one way or another, it seems to be going pretty well, let's leave it the way it is. JUDGE WEBSTER:  Thank you.  Yes, sir. MR. LOX:  David Lox [ph], formerly on the National Security Council and then Chairman of the American Institute in Taiwan, when Jim was out in Taipei and following that, head of the U.S./Taiwan Business Council for ten years.  And I'm going to forego the temptation to get into early, early years together. But, Jim, with all the experience you've had, you know, as you look down the pike, the rest of this century, thinking in really long terms, once we get past, hopefully, dealing with the Islamic terrorist problem, which is going to occupy us the next 10 or 15 years--I see two big trends. One is the Europe focused on it's own integration.  And the other is, how do we and the reset of the world deal with the inevitable rise of Chinese power.  You know, in the year 2050 and thereon?  And what do you think we should be doing now to raise up a generation of grandsons and daughters, et cetera?  What should we be doing to prepare for this? MR. LILLEY:  Well, David, I would take issues with the term inevitable rise of Chinese power.  I think you may see a very different picture emerging.  Certainly when we were over there, John Macon can talk about this better than I can, but we got a deeply troubled leadership about where they were going and whether they could handle the problems that had been built up because of rapid growth.  How can they use their foreign exchange reserves more effectively?  How can they release their savings rate?  What can they do about resource allocation?  How can they deal with non-performing loans? This is the full essence of their conversation.  Serious, serious problems--lack of any kind of a system of welfare; the breakdown of the medical system in the countryside; the eating up of agricultural lands by industrial expansion--big, big problems. They want peace on the periphery because they want to focus domestically.  That's why they don't want North Korea to explode or Taiwan to explode.  They want to keep it--that's why they're getting along so well, I think, with Acion in Southeast Asia; India/Pakistan.  They've been very positive, South, the Security Cooperative organization in Central Asia.  They want stability. So, if you look at the other side of this thing becoming unstuck, you might have a China that's muddling through for many, many years, decades, even.  It's hard to think about that when you look at Shanghai.  But they sure think about it.  It's on their minds. Okay, well, putting that aside and say, what if it turns out that the are able to conquer these problems; they are able to take care of their financial markets; and are able to move ahead and control inflation; and move their financing into more profitable interest rates, this sort of thing.  Will they spend it bringing up building a great power military to extend it's tentacles into Southeast Asia, Korea, Taiwan and Central Asia? That's not been the pattern--that's not been an historic pattern.  They are probably at the limits of their historic reach, at this point, I think with Sing Yung, Tibet, Hong Kong, not Taiwan yet, Manchuria.  That's about where they stood during their great years of expansion during the Ching and Tong dynasties. Would they have a sense that they could move out and take over these areas and challenge us militarily?  I can't quite conceive of that now.  They aren't good on the seas yet, and they'd have to move out into the ocean areas. Would then they--if they can't do that, would then they push upwards into Russia, Central Asia and try to turn that into a Chinese fiefdom?  I just don't see that.  I see them trying to exercise influence, getting economic dominance, but they'll join the world and they'll compete for these countries.  And they'll have to compete in Southeast Asia; have to compete in Central Asia; in Korea.  And I think we can do that.  I think we and the Europeans and the Russians and others represent other poles of power that can deal with the Chinese. So, I really don't see them becoming that kind of threat, but I would say this, stay tuned. MR. ZIEF:  Hi, my name's Justin Zief [ph], I'm from one of the four or five law firms we have in our wonderful city here.  My question goes back to your earlier statement where you said that, as China becomes more capitalistic it's going to do so in a very unique Chinese fashion. Now, my question has a bit to do with law and that is:  As China encourages countries and companies to come and invest inside of China, where do you see the Chinese system of law going?  More from rule of man towards rule-of-law, as we tend to find that historically, that rule-of-law allows for, you know, companies to have greater faith in the system in which they're dropping their money and their companies and their products, et cetera?  Thank you. MR. LILLEY:  Well, commercial law, is where they've made the greatest progress.  They realize that in order to work in the world community within WTO and other things, they've got to have a rule-of-law and to attract investment and sustain it, ergo, they are producing many, many more lawyers, as you know.  They've invited American law schools over there in a major way to set up--Tulane has a campus there.  I think Yale's law school is very much involved. But they don't really let it intrude into the political control, because the law is always going to run up against the Party.  And the Party derives its power from resource allocation, personnel appointments and control of the population.  And the rule-of-law can get in the way.  So, if the rule-of-law begins to intrude into the Party, you're going to have a problem.  And the Party, right now, I think there's kind of a division of labor that, yes, you can move the rule of law ahead in commercial, because you've got to get along with the world, but in terms of handling your internal political situation, it'll move much, much slower, because the Party wants to keep control of this process. So, I would say it would be an ongoing struggle.  There are people that would see that the Chinese concept of legalism, as Han Fate Su [ph], had it's rule-by-law.  It's the emperor's law that's carried out by the bureaucracy.  We have to substitute something that says it's bigger than the emperor.  I don't think they've quite reached that point.  I think they're a long way from that point.  That the Party, as representing the emperor, is the strongest force in China. It's loosing ground to the ministries in government and it's lost ground to the PLA, when they went in and cleaned up Tiananmen.  But it's a continuing protracted struggle, as Mao would put it.  It's going on, but the trend seems to be moving into the creeping up of the law into the commercial area and beginning to go over into the political area as the power begins to shift from the Party into the ministries. So if you look at this in the long-term, it looks to me as though the legal aspects will improve, unless there's a huge setback of some kind where they have to resort to force again and push aside all kind of restraints. It should move in this direction and you should find gradually the commercial section being--it's just being taken over by rule-of-law.  And intruding into resource allocation, which is where the Party makes all of its money and huge corruption.  That's another big factor in keeping law back.  Because so many people make their living off of corruption, big money. So, there are impediments, serious impediments. MR. GREESE:  Thank you, Jim, you're unique in having headed U.S. missions in both Taipei and Beijing and I can't resist asking you how you think that relationship might come out and with particular reference to the DBP's stand on independence for Taiwan? MR. LILLEY:  Well, David, I wrote a piece in the Wall Street Journal on this, and I was attacked as being a sellout of Taiwan.  I never have had that particular accusation made, but it was done.  And what I was saying is that the answer lies in a better understanding of the economic vitality between these two places.  And I think we've been notably deficient in that here in the States. Certainly in my experiences in looking at the product of the American information intelligence community, indicates a very serious lack of understanding.  And you have to go to people like Terry Cook and others to get a real feel for what is happening in crossed-rate relations.  Or my friends in Taiwan, people like, Ku Jun Fu [ph], or Jong Moon Fa [ph], Gou Ching Yu [ph], and people like this who really had a feel for it--hands-on feel for it. Because in all the difficulties that come up--you know, Stan Shure [ph], of Acer, was never troubled by the friction between Taiwan and China that I could see.  He said, we can handle this.  Douglas Shu [ph], wasn't.  But others--others were concerned, but I think that the big economic powers in Taiwan made a pretty clear point to Chung Schwey Den [ph], this election that they didn't like what he was doing.  It's not good for business.  And they are all Taiwanese and I think that's a force that can ameliorate the Taiwan position. I think that the focus on self-determination equals independence, as a sacred principle, the 14 points of Woodrow Wilson, this kind of thing--that it's not sacred, it's not inviolable.  You take action and you have international consequences.  And that's very clear that when you move on the President's statement last December, when Huan Jow Bow [ph], was here, clearly was a reaction to what we considered to be unilateral moves to change the status quo in ways that would bring closer the chance of hostilities.  And that was bad news. How about the sacred principle of self-determination?  Didn't you guys invent it?  Well, I can tell you that the history of self-determination has probably caused more wars than any other principle around.  And it's fine for people to determine their future, but it's the way it's done that makes all the difference in the world and I think that the consequences of actions internal in Taiwan have now become much clearer to the leadership there and we'll have to watch very closely to see what they do in terms of his inauguration address in May and how he proceeds from there with these referenda.  How much assurances does he give to China?  How much he keeps them deliberately away from any kind of change of status quo and sells them on that basis. Because, you know, I always remember that when I was over that in '97 in Taipei, and I was talking to Gu Jung Fu [ph], who was a cross-strait negotiator with Wong Dow Han [ph], of China.  And we were trying to get--now we, they were trying to get a shipping arrangement with Hong Kong--a direct shipping arrangement after Hong Kong was taken over by China.  And the gurus around this place were saying, well, it's a sovereignty issue, China can't buckle on this, they're going to stand firm on principle.  The hell they did. Gu Jung Fu said, don't worry about it, we're going to get this thing done in three to five days.  And sensible Chinese got sat down and worked it out.  And the Americans, perhaps, could run around in circles and waive their principles in the air and say nothing's going to happen.  Well it did happen and the ships go back and forth. You're now hung up on this minuet they have on one China or we won't talk to you.  Or we will talk to you if you recognize our relationship as a domestic problem.  This sort of gamesmanship with words goes back and forth. Well, I try to make the point that I think the Americans better stay out of that exchange.  And that we have an interest--our basic principle is being a strong and prosperous and effective Taiwan is a much better business partner for China than a weakened, unstable, Taiwan.  That's the second principle.  And more important is that force shouldn't be used.  This thing could be solved without force if you recognize clearly where are the positions under each side. But, you know, being in Peking and in '90 and seeing the Asian Games there and seeing all the--my old friends from Taiwan were all flocking in.  Paul [inaudible] was there, Cong Ming Shung [ph], was there--Ginny Wong was there, we all had a big party in Peking.  And now, David, you've got a million of them over there now, living. Doesn't this lead to something?  Doesn't this begin to eat away at the pontificators on dogma?  I hope so.  I'm not sure because we've had too many bad experiences with people who get carried away on this, and start shooting before they're thinking. But I look back since 1950 and the Taiwan Straits is now 54 years, and nobody gets killed.  It's not like the DMZ in Korea or Middle East or God knows, other places, Balkans, Iraq, Kuwait.  They don't kill people in Taiwan Straits, they argue about it.  They sometimes impound a ship or somebody gets hurt accidentally or some this way.  But there's way to handle this and the pattern has been to do I think in, hopefully, in a more civilized way. [End Side 2 Tape 1--Side 1 Tape 2 BLANK] [Begin Side 2 Tape 2] PARTICIPANT:  --it's a very forceful strategy to develop advanced technology industry, R&D, engineers, foreign direct investment rapid, rapid expansion of trade in both directions with just extraordinary success.  And just in U.S. trade in the last three years we've gone, in this category, advanced technology products, we've gone from balanced to a $20 billion deficit last year, based on January and February the deficit in this product has just gone through the ceiling. So, it's a extraordinary success in many ways of challenges ahead, but my question is, within the Chinese leadership cadres, is there sort of a separate orientation of these high-technology oriented people who might have a different sort of orientation, their political, their view of the future for China?  Or is this just being propelled by something that's a self-evident primary interests of China at this stage? MR. LILLEY:  Well, as I understand it, our exports to China and in the high-tech area, went up 37 percent last year.  We've had our exports have gone up pretty well, faster than Europe's.  That our companies have built the factories over there to build the dumshees [ph], the equipment that they can export from China. If you go out to Jung Wan Sun [ph], in Beijing, the northwest area where they have their concern--their Silicon Valley, it's very impressive, the build-up there.  And our people that have gone out there and looked at Heier [ph] and the various companies are really quite impressed with them. But I think the conclusion is that China still has a very long way to go and they're very dependent upon this linkage they have to Taiwan, for capital, technology, management and the United States and Silicon Valley for really cutting-edge technology. And it's all linked together. But almost all the people in the standing committee of the politburo are engineers from Ching Hua [ph], their MIT.  They know technology quite well, and they obviously have links with some of these very high-powered people that set up the companies, because they've gotten away from the institutes they used to have that did their experiments and research and development to companies to do it.  The institutes have become part of, I think, empty shells of bureaucracy.  And that controlled China, let's say into the late '80s, that's moved into the private sector and more and more is the acquisitions for military development going over there.  But if you look at their military, they're getting almost all of their powerful stuff from Russia.  They aren't producing a first-class fighter aircraft.  They have to buy the Su-27s.  They aren't producing the Sovremenny-class destroyers.  They aren't producing the surface-to-air missiles, and I think there's a feeling they got SS-18 technology from Russia. So, in that area that we were able to watch fairly closely, they're pretty darn far behind.  They have done well in certain areas like lasers.  I think Bud Cole ought to be answering this question, too.  He's followed the Chinese military a lot.  But my sense is that their fleet is pretty far behind.  They've had a lot of trouble with the Russian Kilo-class diesel submarines, and I think that a lot of their technology is derivative still, I think a good part of it. My friend Terry Cook says that Taiwan has controlling equity in about 70 percent of their information technology exports.  So Taiwan is very heavily into the advanced technology in China, very heavily into it.  So I think it's a pretty mixed picture.  I think people are concerned about their technological prowess because they're damn good at it.  There's no question about it.  God knows how many of our good scientists are from China, Chinese origin.  But they don't have quite the, I think, the critical mass that we have to develop the powerhouse thinking that comes out of a place like Silicon Valley or the Triangle down in North Carolina.  I don't think they've reached that point yet. MR. WEBSTER:  Well, we've had quite a wide range of questions, and it reflects the interests of the audience and the challenge, which  you will find the reward when you look into that book, which is really superb. I don't want to get in the way of a reception outside and the chance for each of you to take on our co-authors and ask some personal questions, but I might suggest that at this time that we adjourn with one more round of thanks. [Applause.] [Whereupon, the proceedings were adjourned.]</body></html>