INTERVIEWER: In your estimation, what are the most pressing direct threats to American national security in Asia?

JAMES LILLEY: I think obviously the most direct threat or flash point is North Korea. They have got a million-two men under arms, they have a very belligerent policy. They are a failing regime. They have lost their legitimacy in the death of their -- their great leader Kim Il Sung. They have to be managed very carefully and very firmly, and that is the number one problem we have in Asia.

INTERVIEWER: Is there a -- a power struggle in Asia, in general? Obviously, economic power has been highly influential in -- in this power stability, but there is also the East Asian arms race and the vacancy created by the end of the Cold War. What is the proper role of the United States in managing the struggle?

LILLEY:Well, I think you're quite right. I wouldn't say -- I would say economic competition is very important in Asia. The growth rates are very rapid. The -- The boat is lifting up, everybody's being lifted up except a few backward countries like North Korea and Mongolia and -- even Vietnam is coming up. Laos is still backward.

But with the increasing strength of China -- economic, military and political -- most Asians believe that we're the only offset to that strength and that forward deployment by the United States limits the Chinese options for territorial aggrandizement in the South China Sea, in the Taiwan Strait, in the (Semcocu Dehaluda) Islands off Japan. That these are all water empires and the Seventh Fleet is dominant. So, this severely limits options to use force and, therefore, most Asians, quietly, most of them, would like very much for the United States to be forward deployed for the indefinite future.

INTERVIEWER: Since the conclusion of the Cold War, the Asian region is the only region in which arms sales have actually increased, and that's been by 12 percent. ...(tape skips??)...many of these arms. What can the United States do to ensure that these arms don't tip the balance of security? (Another skip.)

LILLEY:Well, first you have to monitor what other people are doing and what their objectives are. The main concerns of Asians are Japan and China, and North Korea. China, of course, as you know, is increasing their depen -- defense budget, the known budget. Their unknown budget is probably about four times larger than their known budget, so, they're up in about a 30-, 40-billion dollar range.

Japan is roughly 40 to 50 billion. These two countries are building their arms up and they've got modern military machines. The other Asian countries, like in Southeast Asia, have gradually built up, but I don't think they're any threat to any, it's almost all defensive.

Then you get to the Korean Peninsula and you get this obsolete, obese creature in North Korea, a gigantic military eating up about 25 percent of a very poor country's GNP. And South Korea matches it with modernized military. The -- None of this is -- is -- is good, to see money being put into military when we've cut our own military budgets considerably.

But they -- they have a sense of violence -- the Korean War, the Vietnam War, wars of insurgency. They've had a record and they know that military factor is quite important and they don't trust any other country to guarantee their future, so they do it themselves. But the purchases, relatively, are fairly modest. F-16s are purchased by Singapore, Indonesia, Taiwan, Korea. F-18s by Malaysia. They're buying our radars, our aircraft, some of our ships. And my sense is the United States, of course, has benefited by this. We are the biggest arms salesman in the world. It keeps our industries going. It keeps a balance of power in Asia. It keeps countries secure.

But really, it -- it seems to me it's very important that we begin to address this the way we did in Europe with muture -- mutual balanced reduction of forces under verification. And I think the place to start that is on the Korean Peninsula and the sooner you start it, the better off you are. And this would involve American forces, North and South Korean forces.

INTERVIEWER: How do you feel about current US strategy in Asia that, on the one hand, preaches multinational solutions to ensure regional stability and security, while on the other hand continues to reply -- rely almost solely on bilateral alliances and increased arms sales?

LILLEY:Well, I think multilateral fora up to now are really only effective in the political and economic regimes -- ASEAN Regional Forum, the consortium we built up on Korea between Japan, China, US, South Korea, Russia -- can be effective in -- in dealing with a problem -- the political dimension of a problem. Like the Korea Energy Development Organization is really quite effective in -- in easing tensions between north and south, that's a very good investment. ASEAN Regional Forum is good to turn political pressure on China. Military, it's almost worthless.

The only thing that's deterrent in the American bilateral relationship with Singapore, Thailand, Philippines, Taiwan, Australia, Japan and Korea. There's no substitute for that, unfortunately. You can't -- You can't substitute regional fora for these bilateral arrangements, it simply won't work. The Clinton people tried to do this in the first term and it went absolutely nowhere. You got the ASEAN Regional Forum, you get APEC, which are good organizations, but they really have no [car horn] security content to them other than political pressure. ASEAN Regional Forum, for instance, in the South China Sea is -- is effective in getting the message to China that they are unifying the Southeast Asian nations if, in fact, China seizes a reef in the Spratleys. But the real deterrence to that is the American Seventh Fleet and the statement made by the Defense Department in 1995 that the sea lanes in that area were of critical interest to the United States and we're prepared to back it up. And you saw the Chinese immediately respond and say we never intended to interfere with sea lanes. And I think that is the kind of role we can play that's quite constructive and that ASEAN appreciates it.

They on their own plan were going to China independently and making a very strong pitch to Beijing, you've got to be more transparent in what you're doing, your objectives, your budget. Turn out a white paper on your military. What are you up to in the Spratleys? And China had to respond because these people they need as friends. So, it seems to me the combination is quite effective.

INTERVIEWER: Okay. Let's see. Recently China, as you had alluded to, announced they were boosting levels of military spending. As a matter of fact, last week they prepared the law that would bolster their position regarding retaking of Taiwan by force. They've purchased the operational destroyers from Russia. They're continuing construction of the carrier. And although they don't have the capability at present to exercise adequate force outside of their borders, it is generally expected within the next couple to three decades. How serious are these recent maneuvers by the Chinese and how may the United States best -- best handle them.

LILLEY:Well, I think this is one of the biggest puzzles we've got: Where is the CHinese military going? I think we're fairly clear on their objectives. As you say, they've passed laws that say the South China Sea is theirs, Taiwan is theirs, the (Sencocu?) Islands are theirs. They've challenged Southeast Asia. They've challenged Taiwan. They've challenged Japan. This is laid out in their legislation.

Now, capabilities. You march up with hardware -- (inaudible) 27s from Russia, kilo class submarines, SA/10 missiles, God knows what in terms of cruise missile technology, guidance systems for their I -- intermediate range ballistic missiles, all kinds of exchanges are going on, major exchanges to build up China's next generation military force. The budgets are probably four times larger than they say they are, as I mentioned earlier. This is an estimate from experts on defense.

The question is, are they really in the informational warfare era. And you can get all the hardware you want, but if you don't know tri-service exercises, if you don't know how to use sensors and fast communications and smart weapons and you're getting out on the oceans, it's very, very dangerous. You're playing in a big league match. And my own sense is that for the foreseeable future that the Chinese challenges is probably manageable.

Then you have to watch if China is able to keep up its linear economic growth, and there are some real questions about that. Everybody seems to project China is the superpower of the 21st Century. I would be very careful about that. There are many, many problems with China. They are deeply concerned about erosion of power on the periphery: Northwest China with the Moslems. Tibetans. Taiwan and Hong Kong. That could be a bone in the throat. They are taking into their whole system a vibrant capitalistic entity. That just isn't swallowed up. So, I mean, they have got real problems on their periphery, plus the fact they have a transitional leadership.

They've lost the paramount leader, Deng Xiaoping. The Lu -- new leadership has been in charge for maybe five years, but the real tests are coming. Who's going to run things? Who's -- Who's going to make the real tough decisions on failing state-owned enterprises? Who's going to really deal with corruption? Who's going to deal with disparities of wealth? Who's going to deal with a backward financial banking system? Major problems.

So, my own sense is you watch it very carefully. I'm not saying we'd like to see China fragment, it would not be in our interest. But we would like to see China join the world, become a member of the World Trade Organization, under the right terms, become an active member of APEC, become a country that carries out its responsibilities under a Nuclear Non-Proliferation Treaty, Missile Control Regime, Barrant Convention on Intellectual Property Rights.

All these thing are very important and that's where the emphasis should be and pull the thing away from military confrontation. Make very clear that force simply cannot be used to solve territorial problems. No matter what sovereignty's involved, force cannot be used and the United States is there to back this up. I think that's important.

INTERVIEWER: Okay. ...(Chitchat, change in China's leadership.)

How concerned should the United States be about the plutonium stockpiles in Japan? I had talked about earlier... This is still weapons-grade material. How -- How should the United States handle this? Is it -- Is it a threat?

LILLEY:I don't think so because I don't think Japan has the slightest chance at this point of going nuclear.

(Interruption.)

INTERVIEWER: You asked me if Japan, with its stockpile of plutonium could go nuclear, in terms of weaponry. The psychology is dead set against this. If you ever started to go nuclear in terms of weapons, you'd have massive demonstrations in the street. You'd have your government fall, I believe. The situation just simply doesn't exist, but it makes people nervous to see a country accumulate a stockpile of plutonium.

The answer is, of course, very close inspection, and that's carried out. Everybody watches that stockpile very carefully. And, as you know, it's reprocessed in Europe and then shipped back to Japan. So, people aren't comfortable. But the real answer to this is that this fast breeder reactor is not efficient. It really doesn't work. And the Japanese have looked for energy self-sufficiency using this technique. It won't work. It's very expensive, very inefficient. And we hope the Japanese will come to the conclusion that this simply is not going to work and turn to hydro power, oil, coal, and drop the nuclear option. I think that's the best news we can get.

INTERVIEWER: I agree. Although tensions on the Korean Peninsula seem to have subsided for -- for the present -- I mean, the -- the talks are ongoing. We did have the defector problem, and before that the submarine problem. But the talks -- the early indicators are that they seem to be going okay. How do you perceive the situation and -- and -- and how -- how viable is the threat on the Korean Peninsula?

LILLEY:The threat is there, but I just saw the North Koreans last night, I spent about three hours with them. And I made one very clear point to them. I said there is a no-force option on the peninsula. I've seen war in Korea, I've seen war in Vietnam, I was at the end of World War II, and I said war is absolutely no option. And they said, but, you know, if we get in a corner -- I said, no, no option.

Implicit in that is if you ever start an attack, that's the end of you. Don't even think about it. Think about other means. And I impressed them that as much as I could. They have used the threat of war very effectively to get concessions, turn Seoul into a sea of fire, this kind of talk. I said drop it, don't raise it. We've got real economic problems, political problems, let's get on with it and deal with it. And let's cut back on that military confrontation, reduce our force, confidence-building measures, focus on that.

And I think if the administration pursues that as their number one priority, it lowers the chances of war considerably. Then you get on with the idea of North-South dialogue, economic reform, support for the -- the Korean Energy Development Organization, a multi-prong policy to deal with the problems on the Korean Peninsula and defuse that very nasty, dangerous situation. We've got to get at it right now. We've made a little progress, not much, but I hope we're getting there.

The problem is that every time you give North Korea food without conditions, the price goes up. If you give them 10 million, they'll ask for a hundred million. If you give them 20 million, 200 million. They want money and they want food and they will blackmail you. They're very tough.

INTERVIEWER: Okay. Now in -- in reassessing US strategy in Asia, what are the most important objectives to keep in mind?

LILLEY:Well, I think we have a major stake in Asia. We are a major player. We guarantee the stability and security of the countries of Asia by our presence. We also are their biggest market. We have tremendous investments and, therefore, the United States should seek to maintain stability, work for economic prosperity, and hope and work for the expansion of democracy. We have a pretty good track record on that, in the Philippines, Taiwan, Japan, South Korea and Thailand.

You see it spreading, but there are a lot of people in Asia say, in democracy, we have a confucian collective responsibility system which requires a paternalistic, authoritarian state, we like that better than your system and we will challenge you in the 21st Century. So, it's not going to be easy, but you can't get hung up on democracy versus authoritarianism.

Democracy versus communism is one thing, democracy versus authoritarianism, with the trappings of democracy like in Singapore, or Malaysia, on Indonesia. They have a form of guided democracy. That's okay. I think we can live with that, we have, and we see signs of this developing in China. Rule of law, village elections, the power of the National People's Congress, it's beginning to bubble up. Don't sit there and try to pull it up by its roots to make it grow faster, let it rise up in its indigenous soil.

INTERVIEWER: And one final question. What are the limits to the United States' ability to manage security affairs in Asia? And how can the United States best counteract (inaudible)?

LILLEY:The real limit is budgetary. I mean, if you read the newspapers this morning, I'm sure you did, you saw that Secretary Cohen's real problems in Bosnia are budgetary. Two billion dollars to keep forces in Bosnia and he says we just can't do that. It's very expensive to keep aircraft carriers, anti-missile defense, aircraft wings operating. It's a very expensive proposition. Japan picks up a lot of the costs, so does Korea. We don't have any military in Taiwan, but it costs a lot of money to send carriers out there. I sends out -- (inaudible) us a lot of money to send carriers into the South China Sea.

The real restriction is budgetary. And then the second issue, I would say, is getting the support of other countries in Asia for your presence. You can't really afford too many Okinawa rape cases. You've got to consider cutting back on your ground troops. And you've got to handle these things in a way that is our mutual benefit. And that's a tough one, because when you put a lot of soldiers in a country, inevitably there will be problems, serious problems. I think that's a real problem.

Third, I think it's judging the other side's capabilities and intentions and getting it right. Americans tend to hopefully analyze the situation, hoping that the threat will go away if they analyze it away. Unfortunately, that's not the way the world works. And so, we've got to get a really objective appraisal of what the challenges are. And we've worked very hard on that, trying to lay it out, the strengths and weaknesses of the Chinese situation, the North Korean situation, where Japan might go, the implications for the arms race in Southeast Asia, we've looked at all that. And I think it's very -- it's very important that you have a very cool head, good intelligence, objective analysis. I'm not sure we have that.

INTERVIEWER: ...(Withdrawing forces, Japanese remilitarization.) And now -- how do you perceive that situation?

LILLEY:Well, I -- I think what you've got to do is to tailor your forces to the modern era. (Interrupted.)

Japan really is defended by air and naval forces. There is a very limited utility for ground forces in Japan. Korea, you've got to have the tripwire ground forces. Do you need 37,000? Think it through very carefully. Do you need 60,000 troops in Japan? Think it through very carefully. I mean, in Taiwan, we've kept stability there without a single troop on Taiwan soil.

So, you've got to think through your mix of forces. And we are sort of locked into this 100,000 forward deployed. You better get away from that. Modern warfare calls for different techniques.

INTERVIEWER: (Japan...stabilizer, leadership...) Where do they fit in the picture, as far as your addressing it, in that capacity as a leaders hip role, both today and 20 years from now?

LILLEY:Well, Japan, as -- as you know, in the past has put its emphasis on economic growth. It's got into markets all over Asia It's captured markets by price cutting, by special deals, by all kinds of things. It's a very strong power. Economically, its power is tremendous and will continue to be large, although China's challenging it, and so are we and so is Europe. (Tape on/off.

Japan will continue to be a player, but they really haven't sorted out their political-military role. There's a great deal of resentment against them on this score. There's a great deal of dom -- domestic resistance to them sending peacekeeping forces out or sending mine-sweepers to the Gulf. So, Japan goes at this very, very cautiously, and what they are doing basically is following in our wake. And I think probably most Asians would prefer it stay that way.

[End of interview.]