This is a partial transcript of "Special Report With Brit Hume," March 14, 2005, that has been edited for clarity.

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JIM ANGLE, GUEST HOST: China's parliament passed a law today authorizing the use of force to stop any move by Taiwan to pursue formal independence. China considers Taiwan to be part of its territory. The U.S. and others consider the move provocative and dangerous. And as much as President Bush has said the U.S. would defend Taiwan if it were attacked, that's why the U.S. reacted like it did today.

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BOUCHER: It's unfortunate. It really does not serve the cause of peace and stability on the Taiwan Strait. And for that reason we believe it to be unhelpful.

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ANGLE: And all this comes, as the European Union is about to lift a long-standing arms embargo against China, that some fear will tip the balance of power in the region. What is China up to? What would lifting that embargo mean? And how does this affect U.S. interest in the region?

For answers we turn to David Lampton, director of Chinese Studies at the Nixon Center. He is here to help us work our way through this.

Thanks for joining us.

DAVID LAMPTON, DIRECTOR CHINESE STUDIES, NIXON CENTER: Good to be with you.

ANGLE: Let me ask you first, what does this new law say? And what does it mean about Chinese intentions?

Well, it basically says that if Taiwan moves in unspecified ways towards formalizing independence in a de jour sense, China will use what they call non-peaceful and other means to reverse that, or end that challenge. But it is not a war act. It doesn't commit itself to any particular set of actions.

ANGLE: It's a shot across the bow to the Taiwanese. Stop talking about independence.

LAMPTON: Right. I think it's evidence actually that the Chinese would consider this a defensive action. They're trying to get the attention of a very boisterous Taiwan politics, to say we're serious about this issue.

ANGLE: Now, the problem, of course, is that China considers Taiwan to be part of its territory, that it is sovereign over Taiwan. Taiwan thinks it is independent, even if it doesn't declare independence. We have a one China policy, which neatly sort of walks a balance through this minefield.

What -- how would you describe what our policy is, vis-à-vis China and Taiwan?

LAMPTON: Well, it's a complicated situation that goes back to World War II. But the long and short of it is we have a divided country. Korea and China really are the divided countries left from the Cold War. And what our one China policy really says is we don't care how you folks solve this problem, as long as you do it peacefully.

Because given American politics and American values, if war breaks out between a big communist China and a little Democratic Taiwan, the United States will be sucked in to something that frankly is not in our interest. So the keywords of American policy are one China, peaceful resolution, we don't care what the ultimate outcome is as long as it's peaceful.

ANGLE: But the U.S. would clearly be sucked into this if China were to do something against Taiwan.

LAMPTON: Well, I think under most circumstances we can envision the answer is yes. Obviously if Taiwan did something so provocative that Americans realized this was precipitating an unnecessary conflict contrary to our interests we wouldn't. But I think in most circumstances we can foresee the Americans would do what President Clinton did in 1996. And that is two carrier task forces to the region.

ANGLE: Have them go in there and chill a little for us, just show the flag a bit.

LAMPTON: Right. But we have to realize there's a big difference between 1996 and now. And that is the Chinese military has gained lots of capabilities. The Chinese people are more upset than they were in 1996. And I think a crisis would be very dangerous and hard to control.

ANGLE: And that is part of the worry with not only this situation but also with the E.U. The European Union lifting its arms embargo, which, as the Chinese build their military, this could make that an even more dangerous situation.

LAMPTON: Well, sure. The United States already faces a growing Chinese military, as we're all well aware. We're preoccupied in Afghanistan, Iraq and the global war of terror -- war against terror. We don't need any further problems. And we certainly don't need our allies selling technology and weapons to China that would further enhance its capabilities. So this could hardly come at a worst time from the point of view of the United States.

ANGLE: Now, why is it that the Europeans -- this arms embargo was put on after Tiananmen Square in 1989 when the Chinese brutally repressed the democracy movement there. It's been on ever since. Clearly the Europeans, who are -- seem to be united in their effort to lift this, clearly they want to have closer relations with China. What is going on there?

LAMPTON: Well, first of all, the Europeans, there is division in the European Union. But it looks like Germany, Britain and France, with the leadership in this, will prevail before long.

What is in it for the Europeans is the world's most rapidly growing economy, major economy in the world, future sales and more narrowly Airbus. A lot of this has to do with positioning themselves with the Chinese leadership to be an economically competitive position.

Just one other thing, and that is this so-called embargo since 1989 has been pretty leaky. And indeed the Europeans have been selling perhaps about 400 million a year for a number of years to the Chinese in the event. And are, in fact, the Israelis also sell -- are a major source of weaponry for China so our allies haven't been as supportive as some would suggest all along.

ANGLE: If that embargo comes off, then I'm sure U.S. military contractors would say hey, our allies are selling them military goods. Why aren't we?

LAMPTON: Well, of course this is always the problem with sanctions, particularly imposed by the United States. Because if our allies and other technologically advanced societies don't observe it, all that happens is American companies lose the profit and American workers the jobs.

ANGLE: Now, let me ask you, we have less than a minute. U.S. relations with China have improved substantially since 1989, especially in recent years. and we now depend on the Chinese to some extent to help keep pressure up on the North Koreans. We have lots of other things. About 30 seconds, where do we stand with China these days?

LAMPTON: Well, former Secretary Powell and I think Secretary Rice is developing a very good relationship with the Chinese. The Chinese would say relations are good but they could be better. The Americans would say they're pretty good.

And I think this is for a central reason and that is, neither China nor the United States can afford conflict with the other. The Chinese have massive internal problems and we are the solution or at least we can help with respect to those problems. Mostly by providing a market for Chinese goods. The United States, as I mentioned, is occupied in Afghanistan, Iraq and the global war on terror. We don't need any problems with the Chinese.

So this is a moment where our strategic interests substantially coincide. And then, most particularly on the Korean Peninsula, it's not that the Chinese have unlimited influence with the North Koreans. But they have more influence certainly than Washington.

ANGLE: Right. Right. Good.

David Lampoon, thank you very much for joining us.

LAMPTON: Good to be with you.

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