body as a state, but maintains a whole range of economic contacts, cultural and other contacts. Indeed as the island does now, with the Western European countries, Japan, and other important countries that no longer recognize it.

Those countries continue to maintain contractual relations for business and other purposes with the people on Taiwan. It proves a little more difficult for everything, including travel. You have to use a little more ingenuity.

But relations go on. Japanese investment has increased on Taiwan. Trade flourishes. Presumably if the security commitment can be got around, so that we find some functional substitute that will not deprive business of confidence in Taiwan's stability, then I think all of these problems can be met.

Mr. BEILENSON. We are trying to help our friend, Mr. Theroux. Let us assume that his clients have economic relations with the people on Taiwan, and somebody is in default of that. Can he go to court? How does one implement that?

Mr. LI. It is becoming quite clear in international law that an entity which controls territory and population and carries out the usual functions of government should be treated like a government, whether recognized de jure or not.

One would not want to call the Taiwan authorities a state or even a government since doing so might raise the two-China problem. But in terms of entering into contracts, undertaking obligations, and so forth, Taiwan has the legal capacity. Perhaps the only disability that such an entity has is that it cannot bring suit in an American court.

Mr. COHEN. We have a good deal of experience on the Communist side, since this is similar to Peking's plight for over a decade, when it had to devise a lot of ingenious devices which now can be employed by the entity on Taiwan. Indeed, Peking has already tolerated this, as I said in my opening statement.

JAPANESE FORMULA

Mr. THEROUX. There is another implication to the question, which I am not prepared to answer, which I think is very interesting. Can the Republic of China continue to exist over a long period of time, once the United States, which is virtually alone among its major countries which recognize it, withdrew its recognition?

Would it start going down the road of being absorbed into the People's Republic of China for practical purposes? I don't know what the answer to it is, but there is some evidence that the Japanese don't believe the Japanese formula for the United States.

Mr. BEILENSON. It is good enough for them, but it is not good enough for us.

Mr. COHEN. It was good enough for them to have. They have continued to use the formula, because the continued success of Japan's operations in Taiwan rests upon our holding the defense commitment bag. As long as we are willing to do that, in new form, Japan will adjust rather readily to the new situation.

If we were not ready to do that, the Japanese would find that they are holding the bag with Taiwan threatened, and they don't want to see that happen. They want to get the best of both worlds.

Mr. BEILENSON. They don't want that to happen either.

Mr. VALEO. I would like to note what is happening in Hong Kong. Obviously, the Chinese in Peking are dealing in realities. From what everybody can see in Hong Kong, there is no pressure whatsoever on the British to get out. The British are going ahead and even building a subway.

The rumor goes around the colony that the Chinese have in a sense encouraged them to stay, and I can see why. The problem of absorbing something like Hong Kong right now would be a devastating experience to the People's Republic. Hong Kong is so diametrically opposed to the structure on the mainland, that to move 3 or 4 million people into some sort of orderly livable situation would be almost impossible in present circumstances.

A situation somewhat like that exists in Taiwan, except much more complicated. So I don't think that Mr. Theroux need worry in his professional lifetime.

Mr. COHEN. I believe in fairness one could point out that the situation is not a precise analogy.

Mr. VALEO. I did not mean it to be precise.

Mr. COHEN. Understandably, the people in Taiwan do not want to be in a self-liquidating position. What I mean by that is, having now recently witnessed what has happened to the people in South Vietnam, and having witnessed the process of assimilation of people on the China mainland, I would not overestimate the difficulty Peking would have in assimilating both bourgeois, successful entities in Hong Kong and Taiwan, nor would I want to underestimate their desire to do so, eventually.

I think our actions have to rest on the assumption that we have to be responsible and be able to face ourselves while moving forward diplomatically, if it is possible.

Mr. LI. I have one problem with the Japan formula in addition to the major difficulty Professor Cohen discussed.

I think that on cultural grounds the United States cannot handle the enormous fictions that are needed to make the Japan formula work. We would be very uncomfortable with such fictions, and being uncomfortable, at some point, would begin to dismantle them.

Mr. BEILENSON. Is there anything that you, gentlemen. would like to add to what you have already said? I don't want to keep you any longer. You have given us 211⁄2 hours, and we appreciate enormously your having come here to share your expertise with us.

We thank you very much. If there is anything you want to add later, we would be more than happy to receive any additional statements from any or all of you, which we would be happy to include in the record.

We do, again, thank you very warmly for having given us your time to come here.

The subcommittee stands adjourned.

[Whereupon, at 3:40 p.m., the subcommittee adjourned, to reconvene at the call of the Chair.]

[From the Carnegie Endowment for International Peace, 1977] DE-RECOGNIZING TAIWAN: THE LEGAL PROBLEMS

(By Victor H. Li)

PREFACE

This study is more technical and legal than most Carnegie Endowment studies, but it has an unusual timeliness. That is why the Endowment invited Professor Li to join our Washington Center to work on this subject in the first place, and why we now feel that the results deserve prompt publication.

The policy problem is an obvious but complicated one: how to shift official recognition from Taipei to Peking, and presumably allow our defense relationships with Taiwan to lapse as well, while maintaining, and if possible enhancing, our economic and cultural ties with that island.

In the trade field, important commercial matters like loans, guarantees, and direct private investment are all invloved. In the field of private rights, matters like travel and emigration are affected. For the executive branch several elements of choice, posture, and declaratory judgment intersect in the handling of these matters in the context of derecognition and defense issues. The central tactical question is how to treat derecognition as being tantamount to the final formal termination or ebbing away of the defense treaty while preserving essential nondefense relationships.

Ultimately, such choices are not made by arguing about the law. These are policy choices, not legal requirements. But while laws need not drive policy, they may complicate it, or even jeopardize it. Hence it is now squarely in the interest of America's China policymakers to be fully aware ahead of time of the legal underbrush which composes the thicket of existing United States-Taiwan relationships.

In the process of normalization with Peking, the defense treaty itself and the subsidiary relationships of advisory personnel and arms credits shade off into more ambiguous areas like co-production and arms sales. The administration will want to consider which of these quasi-military links to Taiwan it will consider to have lapsed, which will be preserved, and why.

Likewise there could be legal obstacles to the continuation of highly desirable economic and cultural ties with Taiwan following recognition of Peking. These obstacles should be examined in order to be minimized or removed.

The potential legal predicaments following the derecognition of Taiwan can, of course, be used in advance to impede the new relationship with Peking. Indeed the potentially abortive effects to which legal

arguments can lead are likely to be the central point of policy concern emerging from the following pages. A clearer understanding of contingent future legal predicaments with a derecognized Taiwan can be turned around to become a policy obstacle to recognizing Peking in the first place. In that important sense this study can be read backward to the obvious advantage of those who want no forward movement at all. It has been United States policy since 1972 to move ahead toward normalized relations with Peking. If that policy is to be pursued seriously by the Carter administration, there is every reason to anticipate these issues clearly and, what is more, to act on them preemptively. As always, Endowment sponsorship of the report implies a belief only in the importance of the subject. The views expressed are those of the author. Comments or inquiries on this and other work of the Endowment are welcome and may be addressed to the Carnegie Endowment of International Peace, 345 East 46th Street, New York, New York 10017 or 11 Dupont Circle N.W., Washington, D.C. 20036. THOMAS L. HUGHES, President, Carnegie Endowment for International Peace.

MAY 2, 1977.