The following is a rush transcript of the July 27, 2010, edition of "Special Report With Bret Baier." This copy may not be in its final form and may be updated.


RI TONG-IL, NORTH KOREAN SPOKE SMAN: It will be a physical response, against the threat imposed by the United States militarily. It is no longer the 19th century which is maintained the gunboat diplomacy at that time.

HILLARY CLINTON, U.S. SECRETARY OF STATE: It is distressing when North Korea continues its threats and causes so much anxiety among its neighbors and the larger region. The United States stands in firm support of the defense of South Korea.


BRET BAIER, ANCHOR: Just before this show started tonight, North Korea issued a statement through the Korean News Agency threatening a sacred war with the U.S. This comes as military exercises have started off the Korean peninsula in direct response to the sinking of a South Korean warship in March that killed 46 sailors back then in that attack.

North Korea denies any responsibility, but the U.S. and the international community lay the blame squarely on Pyongyang.

Also, you may have seen this picture of Secretary Clinton and Secretary Gates in the demilitarized zone. The border between North Korea and South Korea. There you see a North Korean soldier looking through the window there. It's an ominous picture on the front page of a couple of newspapers here in the U.S. Tensions -- the bottom line, tensions are rising tonight.

Lets' bring in the panel, Bill Kristol editor of The Weekly Standard, Juan Williams, news analyst for National Public Radio, and syndicated columnist Charles Krauthammer.

Bill, we'll start with you, since we didn't see you there. What do you think?

BILL KRISTOL, EDITOR, THE WEEKLY STANDARD: It's my mysterious image. They can't show me straight on in the camera.

What I think North Korea is a horrible regime that kills people and has gotten away with things in the past. I think Secretary Clinton and Gates have been strong. This is a case where the Obama administration came into office disliking what the Bush administration had done vis-a-vis North Korea. They missed some opportunities, perhaps, to bring them into the international community. Announcing a new relationship with China, strategic reassurance. Deputy Secretary of State Jim Steinberg giving a speech on this.

They’ve been mugged by reality. The problem wasn't Bush, the problem was North Korea. And China has not been responsible. The big underlying story is China has not helped us make North Korea a somewhat more responsible state.

I think the Obama administration to its credit recognized that, and now they sound like a traditional American administration, saying we're standing by the allies, we’re standing by the South Koreans, we’re standing by the Japanese. They’re being dismissive, as I think they should be, on the North Korean front, and this is the bigger underlying story and they are rethinking their attitude towards China, which they hoped to be helpful international partner. Now they treat them with much more wariness.

BAIER: Juan, many times in the U.S. we're dismissive of North Korea threats, as they talk out a lot. But General Clapper, Lieutenant General Clapper, who is nominated for the national intelligence director, said in his testimony this is a very dangerous time when it comes to the North.

And the provocation with that warship, taking down the South Korean warship indicates to him and the intelligence community he said that this is extremely dangerous.

JUAN WILLIAMS, NEWS ANALYST, NATIONAL PUBLIC RADIO: It is dangerous. I think it's important, you know, Hillary Clinton used language, the word "belligerent" and "isolated" regime. When you think about the belligerence, it also that they lie. They said they had nothing to do with the sinking of the warship, which is evident to everybody, even their supporters in China that say yes, we understand what happened here. So they think they can get away by lying to the world.

China really has to step up to the plate. This week, after the Asian Security Conference that Secretary Clinton and Gates attended --

BAIER: In Vietnam.

WILLIAMS: Right. They were very concerned about the idea that China continues to have dispute about series of island in the South China Sea with Vietnam. Of course, they have been encouraged by some of China's action, especially with regard to Iraq.

You know, not sufficiently that they would change anything greatly, but that they started to cooperate in terms of the foreign policy instead of act like they have no responsibility in terms global affairs.

When it comes to North Korea, here is the question. Are they going to stand with the United States in dealing with the problem that is right in their neighborhood, or are they going to say it's none of our business, and then allow the United States and allow North Korea to become entangled? That’s a problematic situation given the power that China has.

BAIER: Charles.

CHARLES KRAUTHAMMER, SYNDICATED COLUMNIST: I think we know the answer. The answer is that China is not going to act on our behalf. The administration as the former administration, after a while of trying, realizes that China has no interest in helping us or taming their allies in Pyongyang.

They also don't want consequences of what would happen to them if there were collapse of regime and flood of refugees. So they have every interest to maintain it as a problem.

So I think it's good that we realize the Chinese is not going to help us. It takes years for administrations to understand that. I think the administration's response has been exactly right -- speak softly and carry a big stick. We have a carrier in the legion now. 8,000 troops and F-22s, which is a presence we’ve never had in the air.

The presence of the secretary of state and defense in Seoul essentially warning the North Koreans that an attack will be an attack on the United States. This is dangerous, because they're capable as it did 60 years ago in June, of a surprise attack. And the reason it's more dangerous today than normal is because it is enduring a succession crisis. The leader is dying.

BAIER: Kim Jong-il.

KRAUTHAMMER: And whenever you have a crisis in a secretive and isolated regime you can get all kinds of actions that are highly irrational and which could result in a war. It's not likely we'll have a war, but the probability is not zero.

BAIER: The intelligence community believes North Korea has at least one nuclear weapon. They have been testing long-range missiles, a three-stage missile that if it worked could reach the western part of the United States. It hasn't worked, as we have seen, yet. Charles, how real is the threat of putting that all together to us?

KRAUTHAMMER: In the near term I don't believe it's anything that the North Koreans would contemplate using. Nobody has used a nuke in war since Hiroshima and that was a different circumstance. It's not a usable weapon.

But it is used as a deterrent. The threat of it is to deter anyone else invading you with a conventional army. That's why it helps the North Koreans.

But I cannot imagine they would have a military use for a nuke. A crude weapon, hard to deliver. It’s not going to reach us. It could only attack the South. It would mean utter devastation and destruction of the North, which is not in their interest. They're irrational, but that is completely nuts.

BAIER: Could we shoot it down, Bill, if they fired a missile this way?

KRISTOL: I hope so, but probably not. They could also proliferate, which is why they are a dangerous regime. Not just that they would attack us, but they're short of cash, and there are regimes out there that might like some nuclear technology. They have proliferated in the past. So they are dangerous.

I do want to say about the Obama administration that with all the talk of the power and the new attitude, this gunboat diplomacy, as the North Korean diplomat said, and that's my favorite kind of diplomacy. I give the Obama administration credit for understanding that good diplomacy is gunboat diplomacy.

BAIER: Keep an eye on the news from your computer even while you’re at work. The news ticker at the bottom of the screen on the channel runs on FoxNews.com. So you can take the news ticker from the Web site and embed it in yours. Just go to FoxNews.com. Click on embed link next to ticker at the top of the site. Then it goes onto your computer. Imagine that. We'll be right back with the Friday lightning round.


BAIER: Every week on the FoxNews.com/specialreport homepage, viewers vote on the topic we should to discuss first in the Friday lightning round. Today, winner is -- drum roll, please -- the newly minted tea party caucus in the House of Representatives. There you see the votes -- 4,306 votes for the tea party caucus. So what about it? We're back with the panel. A good or bad thing? What will it do? Charles?

KRAUTHAMMER: I think it's risky for the members of Congress, because as you is an in the announcement by Michele Bachmann, who I assume is the chair --

BAIER: Representative from Minnesota.

KRAUTHAMMER: Right. She went to great pains to dissociate herself from and emphasize they're not a part of or members of or connected with the movement. They are essentially just sympathetic.

However, anytime or anyone on the fringe of the movement says anything odd, loony, or extreme, they will asking the members of the caucus for a reaction. If Rand Paul reiterates his questions about the Civil Rights Act, they're going to ask Michele Bachmann. So I think it's unnecessary association in an election year where the Republicans already have the wind at their back.

BAIER: Juan?

WILLIAMS: Well, you know, I guess they think this is politically advantageous to them, otherwise they wouldn't be doing it. They think this is going to get them votes because they are riding a wave.

When I look around, and, you know, see what Michele Bachmann had to say at the press conference, I can't tell what exactly they stand for. They made it clear they dissociate themselves from most of the tea party activities. But they say simply don't want to raise taxes or think government should be bigger. Most Americans believe that, but you have to have some shape to it. I think this is a deeper problem. And when you look at Sharron Angle in Nevada. When you look at Marco Rubio in Florida, and look around the country, you see that, in fact you could make the case that the tea party candidates are not helping the Republican brand. So will the tea party caucus help the Republican brand in the House? I don't know.

BAIER: Bill?

KRISTOL: Yes. It will. Trust me.

WILLIAMS: I'm glad you're reassured.

KRISTOL: I've spoken the tea party, I love the tea party people, most of them, almost all of them. Look, that's where the energy is. Michele Bachmann is a heroine of the tea party and encourages them, and it makes sense to be welcome to them in a quasi-official way.

Obviously there’s millions of people involved and it’s decentralized, so some guy somewhere will say something stupid. But some non-tea party Republican will say something stupid somewhere. I mean, Michael Steele the chairman of the Republican Party and he said a few stupid things. I go with the tea party over the establishment, still.

BAIER: Second topic -- Charlie Rangel, former chairman of the House Ways and Means Committee. He will face next week what is essentially a trial in the ethics committee in the house for a long list of charges.

You may remember the House Speaker Nancy Pelosi in September of 2008 said these charges and all the investigation will be finished by the end of this Congress. That was 2008. She was talking about January of 2009. We're July 2010. Back with the panel. Bill?

KRISTOL: I have a soft spot for Charlie Rangel. He is a little corrupt probably, but he doesn't do as much damage for other big-spending Democrats that wasted money.

BAIER: You had them at the tea party thing. I think you lost them there.


WILLIAMS: This is just so sad because he is a revered figure not only in the black community but in Congress. He has been around 40 years. And there’s a great irony here. Remember, he came in office replacing Adam Clayton Powell, saying that Adam Clayton Powell, who ethics problems, needed to be thrown out, and he was a reformer. Now 40 years later here is Charlie Rangel now mired in his own ethics problem, and guess who is running against him in Harlem? Adam Clayton Powell Jr., the son. I don't think he can beat Charlie Rangel, but I share Bill's feelings. It's so sad. I think Charlie Rangel is one of the good guys in Washington.

BAIER: If he didn't take taxes on his vacation home and a long list of things, including some rent control issues in New York, if that all pans out, Charles?

KRAUTHAMMER: If all that is true, but if he gets a Bill and Juan on the jury he will be acquitted.

I think the Democrats are very afraid of this trial in September. Remember, the administration began with the theme that Democrats lay taxes but don't pay them. Geithner, Tom Daschle, et cetera, and this would remind people of that theme which sort of gone away about Democrats. He was, of course, head of the -- Charlie Rangel was the head of the tax writing committee.

BAIER: So you are say culture of corruption --

KRAUTHAMMER: It reminds them Democrats don't pay taxes as a theme. That's not what Democrats want to have in an election year when they are losing anyway.

BAIER: Quickly, MSNBC anchor Ed Schultz at Net Roots Nation conference in Las Vegas talking about the interview we had on the show. He said "I busted my a-s-s for Obama. He doesn't come on Ed, he goes on Bret Baier on Fox News in my time slot." And he said, “MSNBC did a hell of a job fighting for healthcare.” Down the line -- what do you think of that? Charles?

KRAUTHAMMER: Spoken like a party hack. I work for the party. Where is my payoff? The answer is it's not there because nobody watches your show.

WILLIAMS: I don't think he gets half the ratings of this show.

BAIER: That is a fact. Bill?

KRISTOL: I wasn't invited to speak at the net roots nation. I'm kind of upset about that, actually. Nor have I been invited to be on his show. Here I am, stuck with you, Bret.

BAIER: Thank you.

KRAUTHAMMER: You're going to be on the Rangel jury, that's why.

BAIER: That's right, the Rangel jury.

That's it for the panel.