[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]



 
  THE FUTURE OF UNITED STATES-CHINA TRADE RELATIONS AND THE POSSIBLE 
           ACCESSION OF CHINA TO THE WORLD TRADE ORGANIZATION

=======================================================================

                                HEARING

                               before the

                         SUBCOMMITTEE ON TRADE

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                            NOVEMBER 4, 1997

                               __________

                             Serial 105-72

                               __________

         Printed for the use of the Committee on Ways and Means

                               ----------

                     U.S. GOVERNMENT PRINTING OFFICE
52-839 CC                    WASHINGTON : 1999




                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky                WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                         Subcommittee on Trade

                  PHILIP M. CRANE, Illinois, Chairman

BILL THOMAS, California              ROBERT T. MATSUI, California
E. CLAY SHAW, Jr., Florida           CHARLES B. RANGEL, New York
AMO HOUGHTON, New York               RICHARD E. NEAL, Massachusetts
DAVE CAMP, Michigan                  JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota               MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
WALLY HERGER, California
JIM NUSSLE, Iowa


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                               __________

                                                                   Page

Advisory of October 22, 1997, announcing the hearing.............     2

                               WITNESSES

Office of the U.S. Trade Representative, Susan G. Esserman, 
  General Counsel................................................    31
U.S. Department of State, Howard H. Lange, Acting Deputy 
  Assistant Secretary of State for East Asian and Pacific Affairs    39

                                 ______

American Electronics Association, James F. Whittaker.............    61
Aronson, Robert R., Ross Manufacturing Corp., and Revpower 
  Limited........................................................   102
Bereuter, Hon. Doug, a Representative in Congress from the State 
  of Nebraska....................................................    14
China WTO High-Tech Coalition, James F. Whittaker................    61
Cohen, Calman, J., Emergency Committee for American Trade........    82
Cox, Hon. Christopher, a Representative in Congress from the 
  State of California............................................    18
Emergency Committee for American Trade, Calman J. Cohen..........    82
Ewing, Hon. Thomas W., a Representative in Congress from the 
  State of Illinois..............................................    19
Giordano, Nicholas, D., National Pork Producers Council..........    98
Hewlett-Packard Co., James F. Whittaker..........................    61
Hills & Co., Julius Katz.........................................    51
ITT Industries, Wingate Lloyd....................................    56
Katz, Julius, L., Hills & Co.....................................    51
Levin, Hon. Sander M., a Representative in Congress from the 
  State of Michigan..............................................    12
Lieberman, Hon. Joseph I., a U.S. Senator in Congress from the 
  State of Connecticut...........................................     7
Lloyd, Wingate, U.S. Chamber of Commerce, and ITT Industries.....    56
National Pork Producers Council, Nicholas D. Giordano............    98
Ross Manufacturing Corp., Robert R. Aronson......................   102
Semiconductor Industry Association, George Scalise...............    75
Stewart, Terence P., Stewart and Stewart.........................    89
Sunkist Growers, Michael Wootton.................................   108
U.S. Chamber of Commerce, Wingate Lloyd..........................    56
Whittaker, James, F., Hewlett-Packard Co., American Electronics 
  Association, and China WTO High-Tech Coalition.................    61
Wootton, Michael, Sunkist Growers................................   108

                       SUBMISSIONS FOR THE RECORD

American Beekeeping Federation, Inc., American Honey Producers 
  Association, Inc., and Fresh Garlic Producers Association, 
  joint statement and attachments................................   114
American Honey Producers Association, Inc., joint statement and 
  attachments (See listing under American Beekeeping Federation, 
  Inc.)..........................................................   114
Andersen Worldwide, Charles P. Heeter, Jr., statement and 
  attachment.....................................................   122
Cast Iron Soil Pipe Institute, statement and attachment..........   127
Committee on Pipe and Tube Imports, and Weirton Steel Corp., 
  joint statement................................................   129
DeLaney, Paul H., Jr., Law Office of Paul H. DeLaney, Jr., 
  statement and attachments......................................   131
Frenzel, Bill, Brookings Institution, statement..................    50
Fresh Garlic Producers Association, joint statement and 
  attachments (See listing under American Beekeeping Federation, 
  Inc.)..........................................................   114
NACCO Materials Handling Group, Inc., statement and attachment...   139
National Juice Products Association, statement and attachment....   141
U.S. Integrated Carbon Steel Producers, statement................   143
United States Council for International Business, Abraham Katz, 
  letter and attachments.........................................   147
Weirton Steel Corp., joint statement (See listing under Committee 
  on Pipe and Tube Imports)......................................   129


  THE FUTURE OF UNITED STATES-CHINA TRADE RELATIONS AND THE POSSIBLE 
          ACCESSION OF CHINA TO THE WORLD  TRADE  ORGANIZATION

                              ----------                              


                       TUESDAY, NOVEMBER 4, 1997

                  House of Representatives,
                       Committee on Ways and Means,
                                     Subcommittee on Trade,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:03 a.m., in 
room 1100, Longworth House Office Building, Hon. Philip M. 
Crane (Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON TRADE

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE

October 22, 1997

No. TR-18

                  Crane Announces Oversight Hearing on

                the Future of United States-China Trade

                Relations and the Possible Accession of

                 China to the World Trade Organization

    Congressman Philip M. Crane (R-IL), Chairman, Subcommittee on Trade 
of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on the future of United States-China 
trade relations and the possible accession of China to the World Trade 
Organization (WTO). The hearing will take place on Tuesday, November 4, 
1997, in the main Committee hearing room, 1100 Longworth House Office 
Building, beginning at 10:00 a.m.
      
    Invited witnesses include United States Trade Representative, 
Charlene Barshefsky, and Under Secretary of State for Economic, 
Business and Agricultural Affairs, Stuart Eizenstat. Testimony will 
also be received from private sector witnesses. Congressmen Doug 
Bereuter (R-NE) and Tom Ewing (R-IL) have been invited to testify on 
H.R. 1712, the ``China Market Access and Export Opportunity Act of 
1997.'' In addition, any individual or organization not scheduled for 
an oral appearance may submit a written statement for consideration by 
the Committee or for inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    Article XII of the Agreement Establishing the World Trade 
Organization states that any State or separate customs territory may 
accede to the WTO ``on terms to be agreed between it and the WTO.'' In 
practice China, Taiwan, and other applicants must negotiate terms for 
membership in the WTO in the form of a Protocol of Accession. Through 
the operation of a Working Party, the United States, and other WTO 
members have an opportunity to review the trade regimes of applicants 
to ensure that they are capable of implementing WTO obligations. In 
parallel with the Working Party's efforts, the United States and other 
interested member governments conduct separate negotiations with the 
applicant. These bilateral negotiations are aimed at achieving specific 
concessions and commitments on tariff levels, agricultural market 
access, and trade in services, of particular interest to the member 
country involved.
      
    China applied for accession to the General Agreement on Tariffs and 
Trade in July 1986, and work has proceeded sporadically in the China 
Working Party since that time to negotiate the conditions upon which 
China will enter the WTO.
      
    In negotiating the terms of its accession to the WTO, China takes 
the position that the United States should grant China unconditional, 
most-favored-nation (MFN) trade status, a change requiring legislation. 
Sections 402 (a) and (b) of the Trade Act of 1974 set forth criteria 
which must be met, or waived by the President, in order for the 
President to grant MFN status to non-market economies such as China. 
Conditional, non-discriminatory MFN trade status was first granted to 
the People's Republic of China, pursuant to Title IV, on February 1, 
1980, and has been extended annually since that time. Extensions are 
granted based upon a Presidential determination that such an extension 
will substantially promote the freedom of emigration objectives in 
Title IV of the Trade Act of 1974, the so-called Jackson-Vanik 
amendment.
      
    The annual Presidential waiver authority under Title IV expires on 
July 3 of each year. The renewal procedure requires the President to 
submit to Congress a recommendation for a 12-month extension by no 
later than 30 days prior to the waiver's expiration (i.e., by not later 
than June 3). The waiver authority continues in effect unless 
disapproved by Congress. Disapproval, should it occur, would take the 
form of a joint resolution disapproving the President's determination 
to waive the Jackson-Vanik freedom of emigration requirements for 
China.
      
    H.R. 1712, the ``China Market Access and Export Opportunity Act of 
1997,'' introduced by Congressmen Doug Bereuter (R-NE) and Tom Ewing 
(R-IL), would encourage the People's Republic of China to join the WTO 
by removing China from Title IV of the Trade Act of 1974, and 
authorizing the President to raise tariffs on Chinese imports, if China 
fails to take adequate steps to become a WTO member.
      
    In announcing the hearing, Chairman Crane said: ``It is indeed 
frustrating for those of us who support normalizing U.S. trade 
relations with China to observe that China's WTO negotiations--in 
progress for over a decade--are still far from concluding. When 
measured against the obligations and commitments observed by other WTO 
members, China's proposals for liberalizing its trade regime remain 
seriously inadequate. I continue to hope that China will come forward 
with meaningful offers to breathe life into trade talks which are, for 
now, largely stalled.''
      

FOCUS OF THE HEARING:

      
    The focus of the hearing will be to examine the future of United 
States-China trade relations and the problems and opportunities 
associated with the entry of China into the WTO. Testimony will be 
received on objectives for the negotiations with China, as well as on 
the anticipated impact of its WTO membership on U.S. workers, 
industries, and other affected parties. Members of the Subcommittee 
would also welcome testimony on: (1) how progress in China's WTO 
negotiations are affecting the pending application of Taiwan to join 
the WTO, (2) whether the terminology ``most-favored-nation treatment'' 
should be changed in order to reflect more accurately the nature of the 
trade relationship with China, and (3) views on H.R. 1712.
      

DETAILS FOR SUBMISSIONS OF REQUESTS TO BE HEARD:

      
    Requests to be heard at the hearing must be made by telephone to 
Traci Altman or Bradley Schreiber at (202) 225-1721 no later than the 
close of business, Tuesday, October 28, 1997. The telephone request 
should be followed by a formal written request to A.L. Singleton, Chief 
of Staff, Committee on Ways and Means, U.S. House of Representatives, 
1102 Longworth House Office Building, Washington, D.C. 20515. The staff 
of the Subcommittee on Trade will notify by telephone those scheduled 
to appear as soon as possible after the filing deadline. Any questions 
concerning a scheduled appearance should be directed to the 
Subcommittee on Trade staff at (202) 225-6649.
      
    In view of the limited time available to hear witnesses, the 
Subcommittee may not be able to accommodate all requests to be heard. 
Those persons and organizations not scheduled for an oral appearance 
are encouraged to submit written statements for the record of the 
hearing. All persons requesting to be heard, whether they are scheduled 
for oral testimony or not, will be notified as soon as possible after 
the filing deadline.
      
    Witnesses scheduled to present oral testimony are required to 
summarize briefly their written statements in no more than five 
minutes. THE FIVE-MINUTE RULE WILL BE STRICTLY ENFORCED. The full 
written statement of each witness will be included in the printed 
record, in accordance with House Rules.
      
    In order to assure the most productive use of the limited amount of 
time available to question witnesses, all witnesses scheduled to appear 
before the Subcommittee are required to submit 200 copies of their 
prepared statement and an IBM compatible 3.5-inch diskette in ASCII DOS 
Text or WordPerfect 5.1 format, for review by Members prior to the 
hearing. Testimony should arrive at the Subcommittee on Trade office, 
room 1104 Longworth House Office Building, no later than Friday, 
October 31, 1997. Failure to do so may result in the witness being 
denied the opportunity to testify in person.
      

WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE:

      
    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit at least six (6) 
single-space legal-size copies of their statement, along with an IBM 
compatible 3.5-inch diskette in ASCII DOS Text or WordPerfect 5.1 
format only, with their name, address, and hearing date noted on a 
label, by the close of business, Tuesday, November 18, 1997, to A.L. 
Singleton, Chief of Staff, Committee on Ways and Means, U.S. House of 
Representatives, 1102 Longworth House Office Building, Washington, D.C. 
20515. If those filing written statements wish to have their statements 
distributed to the press and interested public at the hearing, they may 
deliver 200 additional copies for this purpose to the Subcommittee on 
Trade office, room 1104 Longworth House Office Building, at least one 
hour before the hearing begins.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be typed in single space on legal-size paper and may not exceed a total 
of 10 pages including attachments. At the same time written statements 
are submitted to the Committee, witnesses are now requested to submit 
their statements on an IBM compatible 3.5-inch diskette in ASCII DOS 
Text or WordPerfect 5.1 format. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, full address, a telephone number where the witness or the 
designated representative may be reached and a topical outline or 
summary of the comments and recommendations in the full statement. This 
supplemental sheet will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                


    Chairman Crane. The Subcommittee will come to order. Will 
everyone please be seated. Good morning. This is a meeting of 
the Ways and Means Trade Subcommittee, to consider the critical 
issue of United States-China trade relations, and to assess the 
progress in the negotiations for China to join the WTO, World 
Trade Organization.
    It is indeed frustrating to those of us who support 
normalizing United States trade relations with China to observe 
that the negotiations between that country and the WTO, in 
progress for over a decade, are still far from a conclusion. 
When measured against the obligations and commitments observed 
by other WTO members, China's proposals for liberalizing its 
trade regime remain seriously inadequate. If China joins the 
WTO, the terms on which it accedes will have a huge impact on 
the opportunities available to United States firms and workers 
in the 21st century. However, I know I speak for many of my 
colleagues when I say that the United States should not engage 
in these talks indefinitely. Either China offers to make the 
necessary reforms of its closed system in the near future, or I 
would support deploying United States negotiators to another 
assignment until such time as China is willing to work out a 
commercially acceptable agreement.
    Today we will hear from two administration witnesses who 
will discuss the results of the summit meeting last week 
between President Clinton and President Jiang Zemin. I am 
interested in hearing their thoughts on the summit, and 
specifically whether it succeeded in injecting any momentum 
into the lackluster WTO negotiations. I note that the focus of 
the summit was on areas other than trade, and I'm interested in 
what the USTR, U.S. Trade Representative, sees ahead for the 
United States-China economic relationship in light of these 
factors.
    Finally, I welcome the testimony of my colleagues, Doug 
Bereuter and Tom Ewing, who will discuss legislation they have 
drafted, H.R. 1712, which is designed to spur progress in 
China's WTO negotiations.
    Now I would like to yield to my distinguished colleague 
from California, Mr. Matsui, for an opening statement.
    Mr. Matsui. Thank you, Mr. Chairman, for these hearings 
today on the future of United States-China trade relations and 
the possible accession of China to the World Trade 
Organization. I would also like to welcome Mr. Lieberman, Mr. 
Bereuter, Mr. Levin, Mr. Ewing, and certainly Mr. Cox from 
California.
    At last week's summit here in Washington, it was agreed by 
the United States and China that China's full participation in 
the multilateral trading system is in their mutual interest. It 
was further agreed by both sides to intensify negotiations on 
market access and on implementation of the WTO principles so 
that China can accede to the WTO on a commercially meaningful 
basis at the earliest possible time. In light of this renewed 
commitment by both sides on China's accession to the WTO, this 
hearing is indeed timely.
    Our traditional relationship with China has become one of 
the most important and complex of all trade relationships. 
Consequently, I would submit that the negotiations on the terms 
and conditions for China's entry into the WTO will be the most 
important trade negotiations in which the United States is 
involved in the coming years. Clearly, the economic stakes with 
China are high. China is now the world's 10th largest trading 
country. Given the impressive growth of the Chinese economy and 
its population of 1.2 billion people, 22 percent of the world 
population, China's presence as a world trade partner will only 
increase.
    Unfortunately, as the commercial importance of China has 
grown, so has our bilateral trade deficit. Last year, our 
bilateral trade deficit grew to nearly $40 billion. This year 
the deficit will be in the range of $46 billion. This is 
clearly unacceptable. One way to reduce this deficit is through 
greater access to the Chinese market and continuing reform of 
the Chinese economic system. This can be accomplished in part 
by China's accession to the WTO on sound commercial terms.
    Let me reiterate for the record my longstanding position on 
this issue. The United States should support Chinese accession 
to the WTO provided it is done on a commercially sound basis 
and with full acceptance by China of the basic obligations of 
the WTO system. Moreover, our trade negotiators in the 
administration should take whatever time is necessary to pursue 
negotiating options that ensure these negotiations are done 
properly and not hastily.
    A key issue is whether the United States should grant China 
unconditional MFN, most-favored-nation status, upon China's 
completion of the terms of accession to the WTO. Granting China 
unconditional MFN will require an act of Congress, so Congress 
must continue to be an active partner with the administration 
in formulating the United States negotiating position. 
Moreover, there continues to be lively debate in Congress on 
how the Congress should go about extending unconditional MFN to 
China and under what circumstances. Several bills have been 
introduced, and will undoubtedly be the subject of discussions 
at today's hearing.
    In conclusion, Mr. Chairman, let me state that prior to 
last week's summit, it appeared China was unable or unwilling 
to come forward with a set of offers on WTO accession that 
would provide and move the process forward. Last week's summit 
may have breathed new life into these negotiations. Only time, 
however, will tell. Given the importance of these negotiations, 
it is absolutely essential that we in Congress continue to work 
closely with the administration to both promote and safeguard 
United States commercial interests, and to ensure that the deal 
reached lays a significant solid foundation for congressional 
action on unconditional MFN for China.
    I welcome today's witnesses and look forward to their 
testimony. Again, thank you, Mr. Chairman.
    Chairman Crane. I want to thank the witnesses in advance 
for their prepared testimony. I would ask that you please try 
and keep your oral remarks to under 5 minutes. Please submit 
your written text for the printed record. It will be made a 
permanent part of it.
    The first witness today is our distinguished colleague from 
Connecticut, Senator Lieberman, who has introduced in the 
Senate legislation similar to the Bereuter-Ewing bill. We'll 
then proceed with Sandy Levin from Michigan, Doug Bereuter from 
Nebraska, Chris Cox from California, and Tom Ewing from my home 
State of Illinois. Please proceed in that order.
    [The opening statement of Hon. Jim Ramstad follows:]

Statement of Hon. Jim Ramstad, a Representative in Congress from the 
State of Minnesota

    Mr. Chairman, thank you for calling today's hearing to 
discuss US-China trade relations and the possible accession of 
China to the WTO.
    Earlier this year during the MFN hearings and debates, we 
discussed in depth our relationship to China. It continues to 
be an important issue we must review often since the U.S.-Sino 
trade relationship is very important to U.S. businesses and 
jobs.
    China is one of the fastest-growing markets in the world 
and is home to over 1.2 billion people--20% of the world's 
population. US-China bilateral trade has grown from $2 billion 
in 1978 to nearly $60 billion in 1996--a 3000% increase!
    And my own home state of Minnesota exports about $120 
million annually of manufactured goods and agricultural 
products to China, excluding Hong Kong. Almost 200 Minnesota 
companies do business with China, making it our eighth largest 
trading partner--and growing. Some 60 Minnesota companies have 
joint ventures, factories or branch sales offices in China.
    I know the Minnesota business community is excited about 
future opportunities with China. The recent US-China talks, in 
which President Clinton pledged to allow American companies to 
begin bidding on $60 billion in Chinese energy contracts and 
the President of China promised to reduce tariffs on $1.2 
billion of US computers and telecommunications equipment will 
directly impact Minnesota companies like Honeywell and 3M, as 
well as many others.
    But, according to Sung Won Sohn, Chief Economist of Norwest 
Corporation, many nontariff barriers remain as major factors 
impeding economic progress between our countries. We must take 
steps to remove these impediments. Through our policy of 
engagement, I believe we can, after much hard work, achieve 
progress on economic and political issues in China that are 
important
    Knowing how crucial a normal, engaged relationship between 
the US and China is for improving the lives of people in both 
countries--as well as those of Hong Kong, Taiwan and other 
Pacific Rim nations--I want to thank you again, Mr. Chairman, 
for calling this hearing. I look forward to hearing from 
today's witnesses about the importance and implications of US-
China Trade relations and China WTO accession.
      

                                


STATEMENT OF HON. JOSEPH I. LIEBERMAN, A U.S. SENATOR FROM THE 
                      STATE OF CONNECTICUT

    Senator Lieberman. Thank you, Mr. Chairman. Good morning, 
Mr. Chairman, Mr. Matsui, Members of the Subcommittee. Thank 
you for giving me this opportunity to say a few words about our 
relations with China, particularly our trade relations, and 
then to talk about H.R. 1712.
    Mr. Chairman, we are at a critical juncture in our 
relations with the PRC, People's Republic of China. How we 
choose to manage China's emergence as a major global power will 
profoundly affect the shape, not only of the global order, but 
the future prosperity of our workers and industries. I believe 
we have got to work to establish an acceptable framework for 
peacefully integrating China into the evolving economic, 
security, and political systems of international order. The 
core question that we in this Congress must face is whether to 
continue our current path of cooperation and integration or 
choose the path of containment and isolation.
    Mr. Chairman, the administration has made its choice. I 
think it is the correct one, which is for cooperation and 
integration. We in Congress are sending mixed and often 
negative signals. During this session there has been much 
debate about what direction we should take in our relations 
with China. Much of the legislation that has been introduced 
has assumed the worst, centered on containment, and favored 
economic sanctions to remedy just about every Chinese 
transgression. This policy is ultimately premised, I believe, 
on a view that China will inevitably be our next great enemy. 
But it seems to me that treating China as our inevitable enemy 
is the surest way to guarantee that result.
    What we need here is not just sticks, but carrots as well. 
I say that because on balance, China's economic and political 
reforms are becoming more, not less consistent with America's 
core values. The transformation of a socialist command economy 
into a controlled market system has allowed for the emergence 
of a new class of entrepreneurs, and has promoted individual 
freedom to decide what to consume, where to live, what to do 
for a livelihood, and with much more freedom what to say and 
think, what to say to each other.
    The state sector of the economy--and I think this is a very 
important result of trade and economic growth--the state sector 
of the economy has steadily declined and increasing numbers of 
Chinese now work for employers that do not answer directly to 
the Central Government or the Communist Party. That means the 
Communist Party's ability to control and monitor the social, 
political, and economic lives of individual Chinese citizens 
has diminished substantially.
    So the movement in China, thanks in good measure to trade 
and economic growth, is in our direction. On the other hand, 
there's an awful lot that still falls short of our ideals and 
principles. Here, particularly in the subject of this hearing, 
we have a large and growing trade deficit with China that is 
unacceptable. A prosperous and stable relationship will only 
continue for as long as we have fair access to China's markets. 
Therefore, bringing China into the World Trade Organization 
will only help in establishing a level playingfield for us to 
compete with China.
    To encourage China's current path of reform and 
development, and to help ensure that China's inevitable 
transformation into a global and strategic superpower occurs in 
a way not adverse to American interests and values, I believe 
we must have a policy that aims at integration instead of 
isolation, and really relies on carrots, saving the sticks for 
when they are most needed. In that sense, it is time for 
Congress to end our mixed messages and ambivalence, the noise 
that makes us feel good but doesn't lead to much, and to work 
together across party lines to build a bipartisan consensus for 
a new China policy.
    Toward that end, 2 weeks ago I was privileged to introduce 
the U.S.-China Relations Act of 1997 in the Senate, along with 
a bipartisan group of colleagues: Senators Chuck Hagel, Bob 
Kerrey, and Frank Murkowski. In that legislation, which deals 
with our strategic relationship with human rights concerns, 
environmental concerns, and so forth, we embraced in total H.R. 
1712, the measure introduced by Congressmen Bereuter and Ewing, 
because we think it is a perfect combination of carrots and 
sticks, holding out the hopes, setting a path for accession of 
China to WTO and thereby getting us over the annual spasms 
related to the consideration of MFN status, but containing 
within it the stick of a snapback tariff to create greater 
incentive for movement forward.
    I am going to leave the discussion of the details of the 
bill to its originators. Let me just say that I believe it 
holds hope of creating a win-win situation. A win for the 
United States in terms of access to Chinese markets, a win for 
China and particularly for its people, as we help them walk the 
road not only to a better life, but to a freer life.
    Mr. Chairman, I would like to ask your permission to 
include the rest of my statement in the record as if read. 
Thank you for your courtesy in allowing me to come over and say 
a few words this morning.
    Chairman Crane. Without objection so ordered.
    [The prepared statement follows:]

Statement of Hon. Joseph I. Lieberman, a U.S. Senator from the State of 
Connecticut

    Mr. Chairman, distinguished Members of the Committee, I 
appreciate this opportunity to discuss my views on the future 
of U.S.-China trade relations.
    We are at a critical juncture in our relations with the 
People's Republic of China. How we choose to manage China's 
emergence as a major global power will profoundly impact the 
shape of the global order and the future prosperity of our 
workers and industries. This is not dissimilar to the late 19th 
century when Japan and Germany emerged to challenge Britain for 
world leadership.
    British diplomacy failed although its task was not an easy 
one. Two terrible wars have stained the history of this 
century. We must try to do better. We must work to establish an 
acceptable framework for peacefully integrating China into the 
evolving international economic, security, and political 
systems. And the core question is whether to continue on our 
current path of cooperation and integration or choose the path 
of containment and isolation.
    During this session there has been much debate about which 
direction we should take in our relations with China. Most of 
the legislation that has been introduced regarding China has 
assumed the worst, centered on containment, and favored 
economic sanctions to remedy a host of Chinese transgressions. 
This policy of containment is ultimately premised on a view 
that China will be our next great enemy.
    Some of my colleagues ask us to pass laws that use 
punishment as the primary tool in our bilateral relationship. 
These proposals overlook a number of realities: the 
ineffectiveness and unproductiveness of punitive legislation in 
changing China; the importance of maintaining and fostering 
trust and confidence in such an important bilateral 
relationship; the real potential for retaliation by China; and 
the potential upsides of a constructive relationship with 
China. Ultimately, those bills proposing containment of China 
will neither achieve their stated aims of changing China's 
behavior nor promote America's more general national and 
international interests.
    The rest of the world will not join us in our effort to 
isolate China. That makes containment unworkable. Our best 
policy option is to work to integrate China. Just this past 
week, the U.S.-China summit realized the first steps towards a 
more integrated and cooperative relationship with China. We 
should be encouraged and press forward for more contact with 
China.
    But before rushing to any conclusions about China's 
intentions, it is helpful to take a closer look at its 
development over the past 20 years. China has been engaged in a 
slow but steady effort to integrate itself into existing 
international systems. It has made efforts to be active in the 
United Nations, it has participated in a number of multilateral 
organizations, and has adapted some domestic institutions and 
policies to the demands of the international community.
    I visited China last March with my friend and distinguished 
colleague, Senator Connie Mack of Florida, and was struck by 
the revolutionary changes occurring there. This time the 
revolution is being driven not by Mao's little red book, but by 
the mass quest for cellular telephones and personal computers, 
and incidentally, all the personal freedom of communication 
that goes with them.
    The central government in China is still not tolerant of 
opposition. Political and religious dissidents are in jail. I 
was disappointed that President Jiang did not use the summit as 
an opportunity to release Wei Jing Sheng. On the other hand, 
average Chinese seem to have lost their fear of open and 
spirited conversations with Westerners. And Senator Mack found 
the Catholic Churches during that Holy week before Easter 
packed with worshipers.
    On balance, China's economic and political reforms are 
becoming more, not less, consistent with American core values. 
The transformation of a socialist command economy into a 
controlled market system has allowed for the emergence of a new 
class of entrepreneurs and has promoted individuals' freedom to 
decide what to consume, where to live, what to do as a 
livelihood. The State sector of the economy has steadily 
declined, and increasing numbers of Chinese now work for 
employers that do not answer directly to the central goveist 
Party. This means that the Communist Party's ability to control 
and monitor individual's social, political, and economic lives 
has diminished substantially. Explicit political reforms have 
been fewer, but today there are more local elections being held 
in China than at any other time in its modern history. The 
legal system has been reinvented over the past two decades, and 
has seen in recent years substantial (though still inadequate) 
improvements in criminal procedure and judicial review of 
administrative abuses. It can be said in summary that, the 
reforms of the past two decades have led to increased personal 
liberty, a strengthened legal system, and the beginnings of a 
civil society, although there is still a very long way to go.
    The Chinese government has undertaken a slow but steady 
deregulation of the economy since it allowed for free 
enterprise in the countryside in 1982. Deregulation and the 
marketization of the Chinese economy has led to unprecedented 
improvements in the living standards--and purchasing power--of 
ordinary Chinese. In the past 15 years, China's per capita GDP 
has more than tripled, from $889 to $2,923, and is forecast to 
be $4,190 in 2000. Not uncoincidentally, China's demand for US 
exports has increased in similarly substantial leaps. US goods 
and services exports destined for China have increased from 
$3.7 million in 1980 to $11.1 billion in 1995. China is now 
America's fifth largest trading partner. Similarly, US Foreign 
Direct Investment in China has increased significantly.
    On the other hand, we have a large and growing trade 
deficit with China that is unacceptable. A prosperous and 
stable relationship will only continue for as long as we have 
fair access to China's markets; and bringing China into the 
World Trade Organization will only help in establishing a level 
playing field for us to compete with China.
    The United States, along with its trading partners, have 
spent nearly half a century writing the rules for disciplined 
but fair international economic relations. From the Kennedy 
Round to the establishment of the World Trade Organization in 
1994, the United States has been instrumental in establishing 
the new international trade order. We should continue to lead 
by bringing China into the WTO on terms that not only will 
expand global economic opportunities for all member economies 
but also will preserve our domestic economic interests.
    The time has come for China to be full member of the new 
global economic system and to share in the maintenance and 
growth of that system. The sooner China is a part of the WTO 
the better for everyone.
    This is why Senators Hagel, Kerrey, Murkowski and I decided 
to include Representative Beureuter and Ewing's proposal for 
giving China permanent MFN into our U.S.-China Relations Act of 
1997. It is important to get China into the WTO, but also to 
hold them to high standards. We should not allow for a 
transition period for the PRC in fulfilling fundamental 
obligations of the WTO, including national treatment, 
transparency, and judicial review. There must be real market 
access for agricultural products and services (this includes 
the right to establish services in the areas of insurance, 
value added telecommunications, financial services, 
distribution, and business services such as after-sales 
services). The PRC should agree to eliminating nontariff 
barriers in not more than 5 years from the time of accession. 
The PRC should agree to lifting trade-related investment 
barriers within 2 years of accession. And most importantly, we 
must develop a multilateral review mechanism to ensure the 
China is meeting the obligations of the WTO and create 
appropriate enforcement mechanisms, in the Office of the USTR, 
to monitor the PRC's implementation of the WTO.
    To encourage China's current path of reform and development 
and to help ensure that China's inevitable transformation into 
a global economic and strategic power occurs in a way not 
adverse to U.S. interests or values, the U.S. must have an 
active China policy that aims at integration instead of 
isolation, and relies on carrots rather than sticks. It is time 
for Congress to end the ambivalence and build a consensus for a 
new China policy. Towards that end, along with my distinguished 
colleagues Senators Hagel, Kerrey, and Murkowski, I introduced 
the U.S.-China Relations Act of 1997.
    This legislation assumes that China will emerge as a 
superpower in the coming decades and become a nation with which 
the United States can and must have cooperative relationships--
and that our relationships will be more cooperative if our 
economic, strategic, human rights, and environmental relations 
are viewed as distinct components of a larger, mutually-
beneficial whole. It is based on a conclusion that China today 
is different from the China of the Cultural Revolution two 
decades ago and the China of Tiananmen Square a decade ago.
    In addition to calling for the granting of permanent MFN 
upon China's accession to the WTO, the ``U.S.-China Relations 
Act of 1997'' requires the President to provide an annual 
accounting of our economic relationship with China. The 
President would be required to submit an annual Economic 
Balance of Benefits Study to the Congress. The report would 
analyze the impact of existing bilateral trade agreements with 
China on U.S. employment, balance of trade, and U.S. 
international competitiveness.
    To further promote China's integration, the Act encourages 
China's future participation in the OECD and G097 meetings by 
requiring the President to develop criteria for support of 
China's participation in the Organization for Economic 
Cooperation and Development and G097 meetings, two groups that 
China is far from being accepted into, but in which it aspires 
to membership.
    It is also important not to lose sight of the fact that our 
trade relationship is one part of a larger relationship. To 
support our economic relations we must also maintain 
cooperative strategic and political relations. The Act requires 
greater information on energy and national security issues. The 
President should establish a bilateral U.S.-China committee on 
energy security and one for food security. These committees 
would help develop a bilateral policy for securing a stable 
supply of energy from politically volatile regions and securing 
food for China's large population. The bill also includes a 
Sense of the Senate Resolution that the President and Congress 
continue to expand contact and exchanges between U.S. and 
Chinese national security personnel.
    Human rights are fundamental and cherished American values, 
as well as a key concern that drives U.S. foreign policy. This 
heritage of idealism and support for individual rights dates 
back to the founding of our country and is a profound asset to 
U.S. leadership in the world.
    The United States must do what it can to work with China to 
promote human rights through changes in their institutional, 
legal, and political structures. Moreover, international 
interaction and economic growth have and will, over time, help 
inculcate the rule of law in China. It is incumbent of the 
United States to encourage this dramatic transformation of 
China's legal regime. The ``U.S.-China Relations Act of 1997'' 
encourages change in China by promoting dialogue between 
professional groups, by creating incentives for China to 
establish the rule of law and a civil society, but retaining 
the Presidential option of imposing sanctions in the event of 
an absence of progress over time.
    There is, however, one provision more than any other that 
characterizes the tone and thrust of this Act. It calls for the 
formation of a commission to prepare a profile of China 
province by province. This profile then would serve as a basis 
for consideration of transactions with China by the Export-
Import Bank and the Overseas Private Investment Corporation in 
those identified provinces.
    This provision is particularly helpful in improving and 
strengthening our relations with China. By opening up OPIC 
programs to regions that have acceptable human rights, labor, 
and environmental standards, we are increasing investment into 
China at the same time we are advancing our values. It is a 
provision that encourages China to improve its human rights 
record without punitive economic sanctions. It uses a carrot 
instead of a stick.
    America's economic and strategic interests, as well as our 
fundamental values, are best served by encouraging China on its 
path of economic and political reform.
    China's geopolitical and economic rise are inevitable 
developments. How we react to China's transformation and manage 
the bilateral relationship, however, is within our discretion. 
U.S.-China relations are at a critical turning point, and the 
real challenge before us now is how to peacefully integrate 
China into the world community, and work with China to ensure 
world prosperity and stability in the 21st century.
    Mr. Chairman and distinguished members of the Committee 
thank you for this opportunity. I ask that my complete 
statement be included in the record.
      

                                


    Chairman Crane. Thank you for giving us your time, Senator.
    Mr. Levin.

STATEMENT OF HON. SANDER M. LEVIN, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF MICHIGAN

    Mr. Levin. Thank you, Mr. Chairman. First, if I might, let 
me sincerely congratulate you and the Subcommittee for holding 
this hearing. There has been too little attention to the issue 
of Chinese WTO accession and our economic relationship in this 
Congress. It took a back seat during the recent visit of 
President Jiang Zemin and probably appropriately so; human 
rights issues were more center stage. But it's critical that we 
increasingly turn to the issue of our economic relationships.
    The visit here was a mixture of communication and kind of 
peaceful confrontation on human rights issues. I think we need 
to have the same kind of approach on economic issues. There's a 
huge distance between containment on the one hand and 
acquiescence on the other. I am opposed to either one.
    China's economy is now the second largest in the world and 
is predicted to become the first in the next several decades. 
It's not only going to become perhaps the largest, but it's a 
very different economy than that of the United States, Japan, 
or Western Europe. The role of the State is dramatically 
different, both in terms of ownership and management of the 
economy.
    We are going to become increasingly competitive or there 
will be increasing competition from China. It's not just a 
matter of toys and footwear. If you look at the data, even 
today they show the five largest exports of China, after toys 
and footwear are data processing equipment, electrical 
machinery, and telecommunications equipment.
    There have been several approaches suggested as to our 
economic relationships with China. One is to negotiate, to 
essentially bring them into the WTO and then negotiate the 
tough issues. I think that would be a serious mistake; I think 
it would be doomed to failure. A second approach, which the 
United States has been taking, is to negotiate first, but to 
focus on market access issues, to bring China in on 
commercially acceptable terms, but with the market access focus 
being primary.
    But I want today to emphasize that there are issues beyond 
market access: export controls that China now imposes, 
subsidies, and there's a protocol that has been suggested 
through WTO that I think is totally unsatisfactory. Local 
content issues, technology transfer requirements, labor market 
standard issues, environmental standard issues are today being 
discussed through fast track.
    There was an article in the Washington Post on October 25 
that had this headline: ``China Plays Rough: Invest in Transfer 
Technology or No Market Access.'' It discusses the experience 
of GM, General Motors. When I was in China, I discussed that: 
In order for China to give its acceptance to GM's plant, there 
was a requirement of technology transfer. It requires that GM 
set up five training institutes for automotive engineers, and 
includes an understanding that after 5 years, China will 
enforce its local content requirements. So while much of the 
content in the Buick Regal that comes off the assembly line 
today is made in the United States, after a few years that's 
not going to happen.
    So let me just conclude by urging that you very much 
continue this debate. I would also urge, Mr. Chairman and the 
Members who have come here today for this important subject, 
that we should not give up our leverage here in the Congress. 
There are some who argue that we should approve any Chinese 
accession to WTO. However you come out on that, I don't think 
we want to give up our only other leverage, our only existing 
leverage: that relates to permanent MFN status for China.
    This is going to be a tough, difficult series of 
negotiations. There is a lot at stake for the United States, 
for its businesses and workers. We should be patient. It's 
important that it be done in the right way. Thank you, Mr. 
Chairman.
    [The prepared statement follows:]

Statement of Hon. Sander M. Levin, a Representative in Congress from 
the State of Michigan

    Thank you, Mr. Chairman, for giving me this opportunity to 
testify on a truly vital trade issue.
    Just look at the numbers. China's real GDP more than 
quadrupled in the fifteen years after its historic re-opening 
in 1979. By some measures, China now has the world's second 
largest economy. It also holds the second largest bilateral 
trade deficit with the United States, behind Japan.
    Let's face it: the impact of China on the world trading 
system and the U.S. economy over the next decade will be 
powerful.
    So we better get it right. And that means taking the time 
to get it right.
    In the long run, the best hope for stabilizing trade 
relations lies in China's accession to the World Trade 
Organization on commercial, as opposed to political, terms. 
This would bind China to the open market principles that 
undergird the global trading system. China is both a developing 
country and one of the largest economies in the world. Any 
terms of accession must recognize this duality: China must 
commit to abide by free market norms, yet implementation can 
take place over a specified period of years.
    But it's going to be a lot harder than it sounds.
    We all agree that China should accede on ``commercially 
acceptable'' terms. But that begs the question: what does 
``commercially acceptable'' mean when applied to a non-market 
economy, over 40 percent of which is made up of state-owned 
enterprises, and much of which is subject to central- and 
regional-government control, all on a scale that dwarfs every 
other economy but our own?
    The answer is that the term ``commercially acceptable'' has 
no objective meaning in relation to China, which has an economy 
that is far from ``commercial'' in any familiarly capitalistic 
way and which is far from ``acceptable'' in any economic, let 
alone political, parlance. Instead, the term ``commercially 
acceptable'' means what we and the rest of the WTO community 
and China say it means.
    So the debate is not really about what is ``commercially 
acceptable,'' but rather what is best for the economic, 
political and military security of all nations and, in 
particular, what is best for the WTO and the market economies 
that belong to it today?
    Already we hear some say that it would be better to get 
China into the WTO quickly and then sort out our disagreements. 
And we hear others say that China should be let in as soon as 
it offers more meaningful market access.
    In my judgment, both of these schools of thought head us in 
the wrong direction.
    First, our main leverage with China lies in negotiating the 
terms of accession. Once China is in, many countries will not 
have the temerity to challenge China even when it bends or 
breaks WTO rules. China will then be able shape the WTO in its 
image, rather than the WTO shaping China. The time to sort out 
our differences and to chart a clear path to China's compliance 
with free market norms, as embodied in the WTO rules, is before 
accession, not after. Cutting corners in admitting China to the 
WTO would not only perpetuate our bilateral trade deficit but 
would undermine the entire global trading system. Most 
immediately, China's accession will set an important precedent 
for future accessions by similar non-market economies like 
Russia, Saudia Arabia, Eastern Europe, and Vietnam. But other 
dangers abound: with the recent financial turmoil in Asia, some 
of China's neighbors may be actively looking for an alternative 
to the Western economic model.
    Second, agreeing to core WTO principles like national 
treatment, most favored nation treatment, and transparency, and 
agreeing to tariff reductions and market access should be the 
beginning, not the end of the negotiations. Then we've got to 
ask ``market access to what?'' To the small fraction of China's 
economy that's subject to market forces? NO! We've got to 
address the unique problems presented by state-owned 
enterprises, state-directed comglomerates, and export 
targeting. We've also got to ensure that there's an independent 
judiciary and the rule of law to enforce contract and other 
rights. And we ought to insist on minimally free markets for 
labor, as well as minimum environmental standards. The 
extensive intertwining of government and private sectors in 
China and in other non-market economies demands special 
attention and may require new rules to deal with government 
subsidization. And we ought to consider the transitional 
mechanisms used to integrate the nonmarket economies of 
Hungary, Poland and Romania into the WTO's predecessor, the 
GATT, in the 1960s. These mechanisms essentially prescribed 
that, during the transition period, imports into the nonmarket 
economy rise by a fixed percentage each year while free market 
economies retain the right to unilaterally limit nonmarket 
exports to their markets to prevent market disruption.
    Finally, let me say a word about those who would downplay 
China's significance by saying that imports from China are 
mainly toys and footwear. The problem is that the toymaker of 
today is the automaker of tomorrow.
    While it's widely recognized that China exports a lot of 
toys to the U.S., it's also true that three of China's other 
top-five exports are data processing equipment, electrical 
machinery, and telecommunications equipment. And a recent news 
article describes China's plans to produce Buick Regals that 
will be made initially with mostly U.S. parts but eventually--
because of China's domestic content requirements--will be made 
exclusively of Chinese parts and exported abroad. As former 
Commerce Undersecretary of International Trade Jeffrey Garten 
wrote in last week's Financial Times, China ``is fast moving 
upmarket, selling more sophisticated manufactured products.''
    In the end, I believe that patience in negotiating the 
terms of China's accession to the WTO is vital because progress 
on economic relations will have an enormous impact on the human 
rights and national security dimensions of our relationship 
with China and the rest of the world.
    As we patiently negotiate the terms of China's accession, 
we must not hesitate to aggressively take unilateral action 
under Section 301 of U.S. trade laws to combat China's unfair 
trade practices wherever possible.
    Also, to provide our negotiators with additional leverage 
in the accession talks and to ensure that U.S. interests are 
fully promoted, I believe that it is preferable that Congress 
should vote on the final accession agreement as it does with 
all major trade pacts. While this would be the first time 
Congress has voted on an accession agreement, in my view it 
would be appropriate because of the sheer size of China's 
economy. But Congress will play a vital role in any event. 
China's accession to the WTO will be linked to granting MFN on 
a permanent basis, and Congress would need to act on that 
proposition after seeing the actual terms of accession.
    So I congratulate the Subcommittee for holding this 
hearing. We need to be engaged on this critical set of issues. 
They are not easy ones, and reasonable people can differ. But 
it is essential to face the issue head on, and the sooner the 
better.
      

                                


    Chairman Crane. Thank you, Sandy.
    Next, Mr. Bereuter.

 STATEMENT OF HON. DOUG BEREUTER, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF NEBRASKA

    Mr. Bereuter. Thank you, Mr. Chairman and Mr. Matsui, 
Members of the Subcommittee. First let me thank you for holding 
these very timely hearings. I know it's extremely busy for all 
of us so I will be concise as you request.
    As we all know, last week President Clinton hosted Jiang 
Zemin for the first Sino-American summit on United States soil 
since 1985. One year after that last official State visit in 
1985, the People's Republic of China formally applied to become 
a signatory to GATT, the General Agreement on Tariffs and 
Trade. Since then, there have been more than 20 working party 
meetings in Geneva, and many more bilateral meetings between 
our trade negotiators to bring China into what we now call the 
World Trade Organization.
    Despite these multiple efforts, there has been very little 
real progress in getting China to formally bind itself to 
international trade rules. Nearly every news commentator on 
last week's summit, from the New York Times to the Associated 
Press, has stated that one big failure of the summit was a 
noticeable lack of progress in these decade-old negotiations. 
Earlier this year conventional wisdom was that this summit 
would showcase an agreed framework for China's WTO accession. 
Yet as recently as last week, the Journal of Commerce called 
Beijing's effort to get into the WTO a ruse.
    Examining the PRC's offer in many areas--from financial 
services to agriculture to rules on investment--leads one to 
conclude that the Journal of Commerce is correct. Meanwhile, 
China's trade surplus with the United States is growing 
significantly and the growth rate for United States exports are 
stagnant. Therefore, in both political and economic terms, the 
huge and growing trade deficit is unsustainable in this 
country. We must have change.
    It is really not too surprising that China's offer to 
become a member of the WTO is woefully inadequate and that the 
decade-old negotiations have stalled. As a recent New York 
Times editorial pointed out, Beijing's hesitation is 
unsurprising. It already reaps without making concessions the 
benefit of the same tariff status we grant to member countries 
of the WTO without being a member of that organization. This 
guarantees that Chinese exports to the United States are taxed 
no more than exports from any WTO member. Incidentally, the 
European Union countries have not automatically granted China a 
similar free ride.
    Recognizing that China gets this free ride to United States 
markets without giving United States exporters similar 
treatment, Representative Tom Ewing and I have introduced 
legislation that gives American trade negotiators the tools to 
pry open China's market. The China Market Access and Export 
Opportunities Act, H.R. 1712, requires that China make either 
an acceptable offer to join the WTO or face snap-back tariffs, 
generally tariffs in the 4- to 7-percent range as contrasted to 
the Smoot-Hawley level tariffs of about 44 percent. Now that's 
a reasonable approach to negotiations that are going nowhere 
and a U.S. trade deficit that is rapidly growing and 
unsustainable.
    The Bereuter-Ewing legislation would help induce China's 
leaders to comply with world trade rules by eliminating our 
annual most-favored-nation review when China accedes to the 
WTO. Most people think that just happens; it doesn't. This 
would eliminate Beijing's contention that China could make all 
of the major structural and trade liberalization changes 
necessary to join the WTO, only to have the U.S. Congress 
continue its annual MFN reviews. Alternatively, if the 
President determines that China is not making significant 
progress toward WTO membership or if Beijing denies United 
States exporters adequate interim market access, the China 
Market Access and Export Opportunities Act would require the 
President to impose pre-Uruguay round tariffs, tariffs which 
were in effect on December 31, 1994, on one or more categories 
of imports from China. As I said, those are in the range of 4 
to 7 percent, in contrast to the Smoot-Hawley 44 percent 
average. Those are mandated, of course, if MFN is revoked. 
Their imposition would be a realistic enforceable response to 
China's closed markets. Beijing would be compelled to take 
notice.
    Currently, China's leaders ignore Congress' annual threat 
to revoke MFN because they know we will not impose such 
draconian tariffs on United States imports. Six months after 
the law's enactment, the President would be required to 
announce the tariff increases that he deems appropriate. Six 
months later, he would impose the tariffs selected if China 
still does not meet the bill's criteria. This process would 
give the administration an entire year for serious WTO 
accession negotiations with the additional leverage of modest, 
if realistic, tariff increases.
    Moreover, in opposing tariffs, the President would be given 
wide discretion to select items for tariffs, to set tariff 
rates differentially but within statutory limits, and to modify 
tariff rates depending upon Beijing's response.
    Our scalpel-like tariff raising mechanism, rather than the 
meat ax Smoot-Hawley level tariffs of the annual MFN process, 
would greatly increase the U.S. Trade Representative's ability 
to negotiate a commercially acceptable protocol for China's 
accession to the WTO.
    Seeing the red light, I'll respect that. I do have a couple 
more paragraphs, but you have the full statement before you. 
Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Hon. Doug Bereuter, a Representative in Congress from the 
State of Nebraska

    As we all know, last week President Clinton hosted Jiang 
Zemin for the first Sino-American Summit on U.S. soil since 
1985. One year after that last official state visit in 1985, 
the People's Republic of China formally applied to become a 
signatory to the General Agreement on Tariffs and Trade. Since 
then, there have been more than 20 working party meetings in 
Geneva and many more bilateral meetings between our trade 
negotiators to bring China into what we now call the World 
Trade Organization. Despite these multiple efforts, there has 
been very little real progress in getting China to formally 
bind itself to international trade rules. Nearly every news 
commentary on last week's Summit--from the New York Times to 
the Associate Press--has stated that one of the big failures of 
the Summit was a noticeable lack of progress in these decade-
old negotiations.
    Earlier this year, conventional wisdom was that this Summit 
would showcase an agreed framework for China's WTO accession. 
Yet, as recently as last week the Journal of Commerce called 
Beijing's efforts to get into the WTO a ``ruse.'' Examining the 
PRC's offers in many areas from financial services to 
agriculture to rules on investment leads one to conclude that 
the Journal of Commerce is correct. Meanwhile, China's trade 
surplus with the United States is growing significantly and 
growth rates for U.S. exports are stagnant. Therefore, in both 
political and economic terms, the huge and growing trade 
deficit is unsustainable in this country. We must have change.
    It is not surprising that China's offers to become a member 
of the WTO are woefully inadequate and that the decade-old 
negotiations have stalled. As a recent New York Times editorial 
pointed out, ``Beijing's hesitation is unsurprising. It already 
reaps, without making concessions, the benefit of [the same 
tariff status we grant to member countries of the WTO without 
being a member of that organization.'' This guarantees that 
Chinese exports to the U.S. are taxed no more than exports from 
any other WTO counties. Incidentally, the European Union 
countries have not automatically granted China such a ``free 
ride.''
    Recognizing that China gets this ``free ride'' to U.S. 
markets without giving U.S. exporters similar treatment, 
Representative Tom Ewing (R-IL) and I have introduced 
legislation that gives American trade negotiators the tools to 
pry open China's markets. The China Market Access and Export 
Opportunities Act (H.R. 1712) requires that China make either 
an acceptable offer to join the World Trade Organization or 
face ``snap-back'' tariffs. That's a reasonable approach to 
negotiations that are going nowhere and a U.S.-China trade 
deficit that is rapidly growing and unsustainable.
    The Bereuter-Ewing legislation would help induce China's 
leaders to comply with world trade rules by eliminating our 
annual most-favored-nation (MFN) review when China accedes to 
the WTO. This would eliminate Beijing's contention that China 
could make all the major structural and trade liberalization 
changes necessary to join the WTO only to have the U.S. 
Congress continue its annual MFN reviews.
    Alternatively, if the President determines that China is 
not making significant progress toward WTO membership, or if 
Beijing denies U.S. exporters adequate market access in the 
interim, the China Market Access and Export Opportunities Act 
would require the President to impose pre-Uruguay Round tariffs 
(tariffs in effect on December 31, 1994) on one or more 
categories of imports from China. Because these tariffs average 
from 4%-7%, rather than the Smoot-Hawley (44% average) tariffs 
mandated if MFN is revoked, their imposition would be a 
realistic, enforceable response to China's closed markets and 
Beijing would be compelled to take notice. Currently, China's 
leaders ignore Congress' annual threat to revoke MFN because 
they know we will not impose such draconian tariffs on U.S. 
imports.
    Six months after the law's enactment, the President would 
be required to announce the tariff increases that he deems 
appropriate. Six months later, he would impose the tariffs if 
China still did not meet the bill's criteria. This process 
would give the Administration an entire year for serious WTO 
accession negotiations, with the additional leverage of modest, 
but realistic, tariff increases. Moreover, in imposing the 
tariffs, the President would be given wide discretion to select 
items for tariffs, to set tariff rates differentially but 
within the statutorily imposed limit, and to modify tariff 
rates depending on Beijing's response. Our scalpel-like tariff 
raising mechanism--rather than the ``meat axe'' Smoot-Hawley 
tariffs of the annual MFN process--would greatly increase the 
United States Trade Representative's ability to negotiate a 
commercially acceptable protocol for China's accession to the 
WTO.
    China's desire to join the World Trade Organization 
represents an historic opportunity for the United States to 
level the playing field for U.S. companies and workers to sell 
their products in China. However, this opportunity will be lost 
if the U.S. Congress and the Administration do not agree on a 
strategy to coax China into that organization. The China Market 
Access and Export Opportunities Act is a tough but reasonable 
way to pressure Beijing to eliminate those trade barriers which 
currently stand between China and its membership in the WTO. 
The economic and trade liberalization reforms in China, which 
this legislation promotes, will reduce our enormous bilateral 
trade deficit and benefit U.S. workers and consumers while 
stimulating the most positive forces of political and social 
change in China.
    In conclusion, Mr. Chairman, I urge this committee to ask 
the Administration whether it will devise a new strategy for 
China's WTO accession after a decade of failed negotiations. If 
they don't have such a strategy, they should either get on 
board with this approach or get out of the way. From my 
perspective, the status quo of these negotiations with China is 
no longer acceptable. China's new WTO accession strategy is to 
close deals with Japan and the European Union while blaming the 
United States for blocking its membership. Congressman Ewing 
and I want to eliminate the PRC's excuse for not putting 
forward a commercially acceptable protocol. We are very open to 
discuss and negotiate changes to our legislation. We 
acknowledge it is not perfect; for example, we have endorsed 
the excellent suggestion by Representative Chip Pickering to 
tie the snap-back trigger in our legislation to the date of the 
expiration of our bilateral trade agreement with China 
(February 1, 1998). But we strongly believe that something like 
our legislation is necessary to coax China into the WTO.
      

                                


    Chairman Crane. Thank you, Doug.
    Mr. Cox.

STATEMENT OF HON. CHRISTOPHER COX, A REPRESENTATIVE IN CONGRESS 
                  FROM THE STATE OF CALIFORNIA

    Mr. Cox. Thank you very much, Mr. Chairman. Thank you also 
to the Ranking Member, whose statement at the outset I agree 
with completely. The question is not whether the People's 
Republic of China should be admitted to the WTO, but when, and 
on what terms.
    The terms should be commercially reasonable. They should be 
sound. That must be the focus of our negotiations. The object 
of our policy should be to increase two-way trade with China so 
that more American products and services are sold in China and 
so that the standard of living on both sides of the Pacific 
will rise. The best way to increase American access to the PRC 
market is first, to eliminate trade barriers, both tariff and 
nontariff; second, to encourage the transition from a 
Communist, state-controlled economy to a competitive market 
economy; and third, to encourage the transition from the 
political rule of commerce to an authentic rule of law.
    In each of these three areas, the status quo in the 
People's Republic of China renders it unready and unfit for 
accession to WTO membership.
    Communist China's transition to a market economy is 
proceeding. That is encouraging, but it is unfair at present to 
say that the economy of the People's Republic of China is based 
on competition between commercial firms independent of state 
control and significant State subsidy, a requisite for WTO 
membership. Instead, we find today that two-thirds of the urban 
work force continue to be employed in state-owned industries, 
pursuing state industrial policy, with massive state subsidies.
    While we must continue to encourage the People's Republic 
of China to reduce its tariffs to permit global trade on fair 
terms, the PRC maintains very high tariffs on foreign imports, 
including products such as automobiles, where the tariffs are 
as high as 150 percent.
    The rule of law covers dispute resolution, contracts, 
banking, commercial law, and many other areas. In each of these 
areas, serious problems exist in the PRC by virtue of its 
Communist rule. Disputes are governed by at least five 
overlapping and inconsistent authorities. Chinese courts 
regularly refuse to honor international arbitration awards, 
despite the PRC's accession 10 years ago to the New York 
Convention on Foreign Arbitral Awards.
    According to a recent Clinton administration report, a 
large number of regulations affecting imports remain 
unpublished, despite Communist China's commitment 5 years ago 
to publish all laws and regulations affecting imports.
    So, the question is, will we best succeed in each of these 
three areas by quickly admitting the People's Republic of China 
into the WTO, or by negotiating their accession on these terms?
    The People's Republic of China, in its application to the 
WTO, has complicated this equation by applying as a developing 
rather than as a developed nation. Accession on such terms 
would relieve it of the obligations to reduce its tariffs and 
eliminate its subsidies for government-controlled industries. 
The People's Republic of China should not be granted entry into 
the WTO with a leisurely schedule for removing barriers to 
trade, whether they be tariffs, unpublished regulations acting 
as nontariff barriers, or the myriad subsidies and requirements 
on foreign investors that violate free market norms.
    Let me close with one final point. Charlene Barshefsky 
wrote me a letter on February 13 of this year in response to 
questions I posed to her in a Commerce Committee meeting. She 
wrote as follows: ``Regarding WTO accession for Taiwan and the 
PRC, administration policy is that each accession will be 
judged on its own merits. Further, in our view, all WTO 
accessions, including those of the PRC and Taiwan, must and 
will be based on commercial, not political, criteria.''
    As you all know, Taiwan's application for admission to the 
WTO is presently being held hostage by the People's Republic of 
China, not as a commercial matter but as a political matter. 
Taiwan's merits for admission to the WTO do not even compare 
with those of the PRC; they are far more advanced. It has a 
free market economy that's existed for more than three decades. 
It has a GNP that is the world's 20th largest. I should point 
out that the per capita GNP, gross national product, of the 
People's Republic of China ranks it below the Congo. Taiwan's 
foreign exchange reserves are the third largest in the world. 
Taiwan has become the seventh largest foreign investor in the 
world, and its purchases from the United States are more than 
60 percent greater than purchases by the People's Republic of 
China.
    Taiwan is the only nation among America's 10 largest export 
markets that is not a member of the WTO. Most important, Taiwan 
has already agreed to reduce the tariff level of many of its 
products and to eliminate nontariff barriers as a condition of 
its admission to the WTO.
    In short, the People's Republic of China is not ready for 
and does not meet the criteria for admission to the WTO--
certainly not as a developing nation, and not yet as a 
developed nation--while Taiwan can easily exceed all of the 
requirements for admission to the WTO.
    I hope that the administration continues to adhere to the 
policy outlined in Charlene Barshefsky's letter to me in 
February of this year. I hope that the Congress will do so as 
well. Our objective should be to see to it that both Taiwan and 
the People's Republic of China are ultimately admitted to the 
WTO, as Mr. Matsui said, on commercially fair and reasonable 
terms.
    I thank the Chairman.
    Chairman Crane. Thank you, Chris.
    Mr. Ewing.

STATEMENT OF HON. THOMAS W. EWING, A REPRESENTATIVE IN CONGRESS 
                   FROM THE STATE OF ILLINOIS

    Mr. Ewing. I would like to thank my good friend, the 
Chairman of the Subcommittee, for holding this hearing. Mr. 
Chairman, Mr. Matsui, Members of the Subcommittee, I 
congratulate you on the leadership which you have given on 
trade issues. I hope that that leadership will pay off this 
week with one more victory for fast track before we leave to go 
home.
    Mr. Chairman, I would like to begin by providing the 
Subcommittee with a little insight into the process that gave 
way to the introduction of the Bereuter-Ewing bill, H.R. 1712. 
It is a combination of H.R. 35 introduced by Congressman 
Bereuter, and H.R. 941 introduced by myself. At the time I 
drafted H.R. 941, negotiations over China's entry into the 
World Trade Organization had momentum. An agreement was 
predicted by the time the People's Congress met in September. 
With this timetable in mind, I designed H.R. 941 to show that 
Congress was willing to discuss permanent most-favored-nation 
status and to fulfill our obligation under article I of the 
GATT with respect to the People's Republic of China.
    I wanted to provide the U.S. Trade Representative with a 
carrot, in the hopes that it would entice the Chinese into 
meeting their stated timetable. However, in the months the 
followed, negotiations with the Chinese seemed to run out of 
steam, and the possibility of getting a deal done at the time 
this year was called into question. This changed the way I 
looked at the negotiations. While I still recognize the 
importance of granting China most-favored-nation status on a 
permanent basis upon entering the WTO, I began to see that our 
Trade Representative would also need a stick to go along with 
the carrot. Congressman Bereuter and I realized that by 
combining our two bills, we would effectively arm the Trade 
Representative with the power needed.
    Negotiations with China over entry into the WTO have 
dragged on for nearly 10 years. I was sorry to see that 
virtually no progress was made during the summit. Every 
magazine and newspaper article that I have read on these 
negotiations has a quote from the Chinese official regarding 
their desire for permanent MFN. Why don't we have permanent 
MFN? Well, there could be two reasons. One reason could be that 
the Chinese are really bluffing when they talk about getting 
into the World Trade Organization. The second might be that 
they don't think the United States is serious and that our 
negotiator really doesn't have the power to grant them most-
favored-nation status which, of course, is the truth without 
congressional action.
    If the Chinese are negotiating in good faith, then we 
should move on. Either way, this bill clears the way for an 
agreement by removing the issue of permanent MFN from the table 
and eliminates the ability for the Chinese to use that as an 
excuse for not making a commercially acceptable offer.
    The WTO membership for China is not, as it has been 
characterized, a gift to China. I am constantly amazed by the 
argument because it is so obviously in the U.S. interest to 
have a multilateral forum to settle trade disputes.
    In my full remarks, I have listed several examples of how 
that has worked to our benefit. The American economy--be it 
manufacturing, agriculture, or the need for more and better 
jobs for American workers--would benefit from a stable and 
reliable Chinese market and from WTO membership for China. That 
would go a long way toward providing what we need in our 
relationship with China.
    I thank you, Mr. Chairman, for the opportunity to testify 
on our bill, and for the opportunity for this Subcommittee to 
consider the legislation which Congressman Bereuter and I have 
introduced. I would also ask permission that the full text of 
my remarks be entered in the record. Thank you.
    [The prepared statement follows:]

Statement of Hon. Thomas W. Ewing, a Representative in Congress from 
the State of Illinois

    I would like to thank my friend from Illinois, the Chairman 
of this Subcommittee, for holding this hearing. Mr. Chairman 
and Members of the Subcommittee, your leadership on trade 
issues has been an integral part of the success we have had on 
trade votes. Lets hope we can get one more victory this year by 
passing Fast Track later this week.
    Mr. Chairman I would like to begin by providing the 
Subcommittee with some insight into the process that gave way 
to the introduction of the Bereuter-Ewing bill. H.R. 1712 is a 
combination of H.R. 35 introduced by Rep. Doug Bereuter and 
H.R. 941 introduced by myself. At the time I crafted H.R. 941, 
negotiations over China's entry into the WTO had momentum and 
an agreement was predicted by the time the Peoples' Congress 
met in September. With this timetable in mind, I designed H.R. 
941 to show that Congress was willing to discuss permanent MFN 
and to fulfill our obligations under Article 1 of the GATT with 
respect to the People's Republic of China. I wanted to provide 
USTR with a carrot in the hopes that it would entice the 
Chinese into meeting their stated timetable. However, in the 
months that followed negotiations with the Chinese seemed to 
run out of steam and the possibility of getting a deal done at 
all this year was called into question. This changed the way I 
looked at the negotiations. While I still recognized the 
importance of granting China permanent MFN upon entering the 
WTO, I began to see that USTR would also need a stick to go 
along with the carrot. Doug and I realized that by combining 
our two bills we would effectively arm USTR negotiators with 
the necessary leverage to complete this process.
    Negotiations with the Chinese over their entry into the WTO 
have dragged on for nearly 10 years and I am sorry to see that 
virtually no progress was made during the summit. Every 
magazine or newspaper article that I have read on these 
negotiations has a quote from a Chinese official regarding 
their desire for permanent MFN. There are two possible reasons 
that the permanent MFN issue is brought up so often by the 
Chinese. One reason could be that they are bluffing and they 
are simply using this as an excuse not to make the necessary 
reforms and concessions for a commercially viable agreement. 
The second reason could be that the Chinese are negotiating in 
good faith but see little reason to make serious reforms and 
concessions when U.S. negotiators do not have the statutory 
authority to provide China with permanent MFN thus forcing them 
to negotiate once with the Administration and once with 
Congress. I believe that the real reason may be combination of 
both. Regardless of which reason you tend to believe, the 
Bereuter-Ewing bill is the solution. If the Chinese are indeed 
bluffing this bill calls that bluff and forces the PRC to get 
serious or face a credible, but moderate, tariff increase. If 
the Chinese are negotiating in good faith, then this bill 
clears the way for an agreement by removing the issue of 
permanent MFN from the table. Either way, this bill eliminates 
the ability for the Chinese to use permanent MFN as an excuse 
not to make a commercially acceptable offer.
    WTO membership for China is not, as it has been 
characterized, a gift to China. I am constantly amazed by that 
argument because it is so obviously in the U.S. interest to 
have a multilateral forum to settle trade disputes. In order 
for China to get into the WTO, they will have to reduce and in 
many cases eliminate tariffs and non-tariff barriers that 
currently impede market access for U.S. exports. In addition, 
WTO membership will lock-in these reforms and prevent 
backsliding. This is extremely important for agriculture. For 
years the U.S. negotiated with the European Union, on a 
bilateral basis, over an EU ban on hormone treated beef. The 
science that the EU hid behind was laughable but these 
bilateral negotiations produced no results. Then the WTO came 
into existence and the U.S. sought relief from the WTO dispute 
resolution panel. Low and behold, the WTO ruled that the EU ban 
was not for public health but an unfair trade barrier. As 
American wheat growers know, there is a similar situation 
ongoing with China. Currently, China refuses to allow U.S. 
wheat grown in northwestern United States into their market 
because of what they claim is a dangerous fungus present on 
this wheat. This fungus, known as TCK smut, is completely 
harmless and is consumed here in the U.S. without incident. 
Once in the WTO, this ban would likely be exposed as an unfair 
trade barrier and would clear the way for U.S. wheat to gain 
access to the Chinese market. Backsliding is also a serious 
concern for agriculture. While corn, soybeans and other 
oilseeds have enjoyed good access to the Chinese market, a 
recent decision by China to arbitrarily raise tariffs on 
American soyoil shows how easily this trend can be reversed 
without WTO protections. American agriculture needs the stable 
and reliable Chinese market and WTO membership will go along 
way towards providing that reliability and stability.
    Thank you Mr. Chairman for the opportunity to testify and I 
would be glad to answer any questions that the Subcommittee 
might have.
      

                                


    Chairman Crane. Yes, indeed. Thank you, Tom.
    I would like to address a couple of questions to Tom and 
Doug. First, many observers have stated that permanent MFN 
status is a carrot to use as negotiating leverage to get China 
into the WTO. Your legislation grants China permanent MFN upon 
its accession to the WTO. If we were to grant China the benefit 
of permanent MFN through legislation, before talks are 
concluded, how would this impact Ambassador Barshefsky's 
negotiations with the Chinese?
    Doug, do you want to go first and then Tom?
    Mr. Bereuter. If I understand it correctly, if we would 
grant them MFN before they come into the WTO, it completely 
disarms our negotiator. There really would be no leverage then 
to have the Chinese make changes to give us adequate market 
access. I think it would be a substantial mistake, a very 
serious mistake, if we granted it before WTO negotiations have 
been completed.
    Mr. Ewing. The legislation which we have introduced would 
not give them permanent most-favored-nation status until they 
were a member of the WTO. That's the carrot. I agree with 
Congressman Bereuter, it would be a mistake to give that to 
China until they had made their necessary changes to get into 
World Trade Organization.
    Mr. Levin. Mr. Chairman, might I just quickly comment?
    Chairman Crane. Sure thing, Sandy.
    Mr. Levin. Very quickly, I would think we would want to 
retain that in terms of our ambassador's negotiating position. 
But I think we should also understand that if Congress acts now 
and relates it to when accession occurs, we are essentially 
giving up Congress' role. I think this is such a serious issue; 
we need to be an active participant.
    Chairman Crane. Yes. Doug.
    Mr. Bereuter. I would like to make just a brief followup 
comment on that. Of course, MFN--whether or not we grant it, 
whether we approve the President's decision to extend it--
should really be based upon China's performance in the trade 
area. There are a whole range of actions that we can and do 
take on things that are outside trade. So it seems to me 
entirely appropriate: If they solve the problems that we in the 
international community believe are in China and make the kind 
of changes necessary in their economy and structure to come 
into the WTO, then there is no legitimate reason for the annual 
MFN extension debate. Because that is meant to be a trade-
related action. It has brought in a whole variety of 
discussions, a laundry list of concerns we have with the 
Chinese, but we have means of more directly approaching those 
issues, and MFN should be maintained as a trade-related item.
    Mr. Ewing. Mr. Chairman, if I may. I think Mr. Levin's 
comment and our response really gets to the crux of the issue 
we're laying before your Subcommittee. It's kind of a chicken-
or-egg issue: Do we put that out there so China knows they can 
have most-favored-nation status when they move or do we hold it 
back saying, You move and then we'll give it to you.
    I think for 10 years we have been in the position of 
saying, You move and we'll give it to you. Now we want to put 
it out there and say, It's there; Congress has acted. You move 
and you get it.
    Chairman Crane. In your bill, what does adequate market 
access mean as a standard that the President must use as a 
basis to impose snapback tariffs?
    Mr. Bereuter. Mr. Chairman, adequate market access is a 
standard currently existing in United States law in several 
places. Most recently, it is a standard the President is 
supposed to apply to all countries that are not members of the 
WTO to determine whether he should utilize existing snapback 
tariff raising authority.
    Adequate market access is also a lower standard than the 
reciprocal standard in section 405 of the Trade Act of 1974; 
the President must apply every 3 years when he is required to 
review the 1979 bilateral trade agreement between the United 
States and China, which expires once again next February.
    So we took language that is in existing law and inserted it 
in this legislation for that purpose.
    Chairman Crane. Do you want to add anything to that, Tom?
    Mr. Ewing. No. I think he has covered it.
    Chairman Crane. Would specific industry sectors, such as 
toy manufacturers, be particularly harmed if the snapback 
mechanism in your bill were imposed by the President?
    Mr. Bereuter. Mr. Chairman, it depends entirely on what 
exports the President would choose to apply the new 4- to 7-
percent tariff rate average on. He can, of course, bring them 
up to the pre-Uruguay round level of December 31, 1994. He can 
do it on some products; he can do it on all products. He can do 
it differentially. When he sees progress, he can lower or 
increase them differentially all under the cap, of course.
    Now, toy manufacturers specifically, I would say this: Some 
categories of products like toy imports receive greater tariff 
reductions during the Uruguay round than other categories of 
products. Therefore, they are potentially exposed to greater 
tariff snapbacks imposed by the President. But, of course, he 
wouldn't have to take it up to the limit of where they were in 
December 31, 1994.
    So it is really giving the USTR and the President the kind 
of leverage they need to make the best case for the Chinese to 
pay attention to us. These are the kind of reasonable increases 
in tariffs that can be differentially imposed on exports and 
really be imposed. They are not a hollow threat, like going 
back to Smoot-Hawley level tariffs at 44 percent on average.
    Mr. Levin. Mr. Chairman, can I just comment briefly on the 
leverage?
    Chairman Crane. Sure thing.
    Mr. Levin. Very briefly, I think it's interesting to have 
this kind of a proposal, especially when 10 years ago, we 
fought over the use of such approaches vis-a-vis Japan. But I 
think it's a mistake to think that the basic missing piece of 
the equation, vis-a-vis China today, is lack of leverage. Our 
administration has a lot of leverage, for example, the use of 
301. We have the leverage of the largest market for Chinese 
goods. More than the lack of leverage, there is the issue of 
what our battle plan is, I think. What is our bottom line, and 
how do we get there?
    I think the significance of this hearing, Mr. Chairman and 
Mr. Matsui and my colleagues who have joined in with you, is 
that this is a rather unique occasion. We need to do more of 
this, to talk through where we are going, to handle these vital 
and difficult issues on trade with the fastest growing and 
second largest economy--and a very differently structured 
economy.
    Mr. Bereuter. Mr. Chairman.
    Chairman Crane. Yes, Doug.
    Mr. Bereuter. The leverage that we have today relates to 
our bilateral trade relationship with China. It is not leverage 
that really is aimed at pushing them to make the changes 
necessary to come under the WTO. What we should be wanting to 
do is subject them to international trade rules. That will 
serve our purpose. It is beneficial to the United States. 
Beyond that, frankly, it benefits every other country in the 
world once we move them into the international trade 
arrangements.
    The leverage on 301 is strictly the leverage that we can 
apply on our bilateral trade relationship. It's important, but 
our objective must be to get them into the WTO--and not under 
any conditions, but under the right conditions where they have 
really made the structural changes and the changes in tariffs 
and nontariff barriers that cause them to deserve to have WTO 
membership. We cannot reward them prematurely; it would be 
inappropriate.
    Chairman Crane. Mr. Matsui.
    Mr. Matsui. I would like to thank all four gentlemen, and, 
of course, Mr. Lieberman as well. Actually I don't have a 
question. I just appreciate the point of view of all four of 
you and Mr. Lieberman.
    I think Mr. Bereuter, Mr. Levin, and others have pretty 
much stated the issue. This hearing obviously serves a purpose 
in helping us define our priorities in terms of what we want to 
do when we do negotiate with the Chinese. One of the 
frustrations I think all of us have had--the four of you and 
all of us on this Subcommittee--is the fact that when we were 
discussing MFN, we had five or six other Members before us. 
Their main thrust was the release of the dissidents, certainly 
having the International Red Cross visit the dissidents, the 
whole issue of human rights, forced abortions, sale of organ 
parts and things of that nature. Somehow, we have to come to 
grips with what our priorities are in our negotiations with the 
Chinese.
    I think, at least the thrust from what I am hearing here, 
that the deficit and obviously market access are important 
issues. But we can't expect to take the entire relationship we 
have with the Chinese, and every issue every one of the 435 of 
us are concerned about, and then dump it on the middle of 
negotiations. I think it is our responsibility, as well as the 
administration's, to try to come up with a set of priorities, 
define those priorities, and then move forward. I think that, 
hopefully, will be what comes out of this and any other 
hearings as we move along.
    Chairman Crane. Thank you.
    Mr. Thomas.
    Mr. Thomas of California. Thank you very much, Mr. 
Chairman. I join my colleague from California: It's nice to 
have a Trade Subcommittee hearing on China which is focused on 
economic issues. We have had so many that have been focused on 
aspects other than economic.
    I am also absolutely convinced that all of us believe that 
China's accession to the WTO is, as it always has been, 
primarily in the hands of China. Our goal--and that's why I do 
want to applaud my colleagues Mr. Bereuter and Mr. Ewing--is to 
create a clear understanding in the Chinese of the path it 
takes to get there. That's why I'm not opposed to taking 
something like most favored nation and having it available to 
the trade ambassador and the President as a tool or a carrot to 
move China in the direction she may need to go. But I do think 
of paramount importance is getting China to understand that a 
set of behavioral parameters are necessary to be met by them 
before they receive accession.
    I believe your product is better than anything I have seen. 
Combining the two bills is an absolute positive. There may be 
problems with some of the timelines in the bill but, overall, 
it is absolutely the best thing that I have seen.
    I want to agree briefly with my colleague from California, 
Mr. Cox. I just find it ironic that once again, China wants to 
dictate terms, notwithstanding what its current ``market 
economy'' looks like in the area of antidumping and tariff laws 
in the United States, that China wants to be considered a 
market economy. When we dealt with Poland, Romania, and Hungary 
under the former regime on GATT, they were nonmarket economies 
in dealing with dumping and the rest. I think it is absolutely 
correct to view that position with China as well. I am 
concerned about the size of the tariffs on a number of 
agricultural products.
    To a certain extent, we have to place a degree of trust in 
the hands of those individuals who negotiate on behalf of the 
United States. I am pleased to say that over the years I have 
been on this Subcommittee with different administrations, 
almost without exception, the U.S. Trade Representatives have 
been people that we could trust. I have sometimes been 
concerned about the resources available to them vis-a-vis other 
areas of the Federal Government--their ability to do what has 
been placed before them as timely or as well as they would 
like. We will be very mindful of that and make sure that they 
have as many resources as possible.
    But until and unless we find additional areas that we can 
add to this legislation, Mr. Chairman, I am very pleased with 
the work product of our colleagues on other Committees 
concerned about this. I see this as a major step forward in 
communicating to China, This is what you do if this is what you 
want. If you want it, you do this. If you don't want it, then 
it's up to you. I am very pleased with my colleagues' 
presentation, and would invite any comments.
    Mr. Bereuter. Mr. Chairman, may I just respond briefly?
    Thank you very much, Mr. Thomas, for your comments. I 
certainly am in agreement with them, and thank you for the 
compliments that you have extended to us. I would say this: Of 
course any legislative product almost always can be improved. 
We welcome suggestions in that respect. We hope that you can 
move this legislation, or your own product, based upon the 
concepts within our bill.
    In my full written statement, you will see a reference made 
to Congressman Chip Pickering of Mississippi. He has been very 
interested and helpful to us. For example, he came up with an 
idea which I think has merit: that the trigger date for the 
President's decision within this bill should really be at the 
end of our current bilateral trade agreement with China, which 
is February 1998. The President routinely extends that, but as 
he suggests, that is probably the appropriate time for the 
trigger date.
    Mr. Thomas of California. Thank you very much, Mr. 
Chairman. Thank you all.
    Chairman Crane. Thank you.
    Mr. Houghton.
    Mr. Houghton. Thank you, Mr. Chairman. Gentlemen, it's good 
to be with you and thank you for your comments. It seems to me 
that there are two issues here. First is two-way trade; second 
is abiding by the rules of international trade. I think we have 
been talking about the latter more than the former. I think 
your bill, H.R. 1712, makes a lot of sense, that it is moving 
in the right direction.
    But the thing I really question underneath is, Are we 
really serious as a Congress? Mr. Levin and I have talked about 
this many times before vis-a-vis Japan, about making sure that 
trade is fair. If it's fair, it's both ways. We have not 
exercised any of the prerogatives which we have, through a 
variety of laws, to make sure that's happened. We still have 
this tremendous imbalance of trade with Japan. We are going to 
have a tremendous imbalance of trade with China. The thing that 
I worry about is that we'll have the legal documents and they 
will abide by the basic constructs of the WTO, and yet we still 
will have this tremendous imbalance in trade. I want to know if 
anybody would like to make a comment on that.
    Mr. Bereuter. Mr. Houghton, I think we have the structure 
now in the WTO. The United States needs to bring cases there, 
including on nontariff barriers, where that is an acceptable 
procedure. We have to push them toward completion.
    As you know, the United States has brought more cases 
before the WTO than anyone else. I think that's entirely 
appropriate. As you also know, it's the nontariff barriers and 
the kind of cultural impediments that are thrown in the way of 
adequate access to Japanese markets by the bureaucracy. So it 
is that area, not in the formal tariffs or quotas, which we 
have successfully knocked down.
    But it is through WTO that we now have the mechanism to 
bring down those existing inequities. We have to have the 
courage and the tenacity to really insist that there is a 
followthrough. We have a real test now with the European Union. 
Now that we have had a favorable ruling toward us on a 
particular issue that you are familiar with, we have to see if, 
in fact, it is implemented. It's a real test.
    Mr. Levin. Let me just say, in response to your salient 
question, that the bilateral trade relationship is important in 
addition to the rules of WTO. Today I wanted to emphasize the 
difficulty of integrating China into the WTO system, to plead 
with all of us on this Subcommittee and other Committees to pay 
attention to it. It far overshadows some other trade issues 
because of the size of China and the difficulty of its 
structures. It is so far away from being a free market economy. 
We have to face up to how this is integrated into the WTO 
system.
    We have some very tough issues, and I don't think we have 
adequately faced them in a number of instances. I mentioned 
subsidies, but there are others.
    Mr. Houghton, I think your question asks whether there are 
issues that can't be resolved solely through the WTO and 
China's accession to it. I think the answer to that is clearly, 
yes. We have learned from our relationships with Japan, Korea, 
and other countries that the WTO regimen today is inadequate in 
terms of nontariff barriers. I don't see how anybody can say 
that there are adequate safeguards. If there were, we wouldn't 
be negotiating for improvements in the WTO regimen. I think 
that's true of a whole variety of trade issues. I view trade 
issues not in a narrow sense, but in a broader, I think 
realistic, sense.
    So I think your question is absolutely on point: WTO 
accession for China has some very tough issues. But if we 
resolve those, as difficult as they are, do not think that 
there would be no need to pay attention to issues in our 
bilateral relationship. They cannot be resolved through the WTO 
alone.
    Mr. Ewing. Amo, I think you really get to the very bottom 
line, that's fair trade between China and the United States 
that doesn't have a tremendous imbalance. I wouldn't want to 
speak for my colleague Mr. Bereuter, but I don't think our bill 
addresses all those problems. I think you take it a step at a 
time. I think we're moving in that direction by considering 
legislation such as we have introduced. It won't bring about a 
total solution. But we didn't get here in 1 or 2 years. It will 
take some years to do that, but it ought to be our goal.
    Mr. Cox. I would just add to what has been said that the 
handover of Hong Kong on July 1 offers an opportunity for the 
People's Republic of China to gain even more familiarity with 
the terms of trade that the rest of the world finds 
commercially reasonable. Hong Kong is a separate member of the 
WTO already. It retained its separate membership in the WTO 
after July 1. Because our own policy of one China is consistent 
with the PRC's policy of one China, accepting America's seventh 
largest trading partner and largest non-WTO market, namely 
Taiwan, into the WTO right now would actually provide an 
enhanced opportunity for the People's Republic of China to 
again gain access to the norms of commercial dealing which 
actually stand to benefit, as we here in this room all 
understand, the People's Republic of China. Political 
insistence on doing something else is actually self-abnegation 
from a trade standpoint for the PRC. It does not benefit them. 
It does not increase their standard of living. So that is why, 
when we are looking for carrots, I suggest that we take very 
literally the words of Charlene Barshefsky in her letter to me: 
That we assess the separate merits of the applications of 
Taiwan and the People's Republic of China for admission to the 
WTO.
    As you know, under Article XXXIII of the General Agreement 
on Tariffs and Trade, a working group was appointed that's now 
looking at Taiwan's WTO accession. I think it makes a great 
deal of sense because some of these things are not strictly 
lawyers' points. That's the point you made. Some of it's 
cultural; some of it's the norms of trading and dealing. To the 
extent that there are more Chinese involved in the WTO, we're 
better off.
    Mr. Houghton. Can I just make one further comment, Mr. 
Chairman?
    Chairman Crane. If it's brief.
    Mr. Houghton. I'm not sure I can make it brief; I'll do the 
best I can. I really believe that if we are going to reach out 
to the rest of the world, we must reach out meaningfully to 
China. We must take them as they are, as they are moving toward 
rather than as we would like to see them at the moment. Yet, at 
the same time, I think that we have got to put the flow of 
trade in perspective, which I don't think we do. This is not 
just a Chinese issue, it's an overall issue so we don't end up 
as a warehouse for goods we can't afford to buy. Thank you.
    Chairman Crane. Mr. Ramstad.
    Mr. Ramstad. Thank you, Mr. Chairman, for calling this 
hearing. I want to commend our colleagues on this panel for the 
bipartisan, enlightened, and pragmatic approach they bring to 
this crucial trade relationship. I represent almost 200 
Minnesota companies which do business with China, making it our 
eighth largest trading partner--and growing. Almost 60 
Minnesota companies have joint ventures, factories, or branch 
sales offices in China.
    The question I get asked by representatives of those 
companies each year is, Why do you engage in the annual ritual 
of self-flagellation, also known as the China MFN renewal 
debate. So I commend you and your legislation as alternatives 
to this annual ritual.
    I would like to ask any of the panelists--perhaps Mr. Levin 
has the best pipeline downtown--whether you have gotten any 
comments from the administration on your legislation?
    Mr. Levin. It's not mine.
    Mr. Ramstad. On this legislation. I realize you're not a 
sponsor, Mr. Levin, but----
    Mr. Levin. No. I think we need to engage China; we need to 
engage ourselves on where these negotiations are going. We 
really haven't done that. As you hear the testimony this 
morning, Mr. Ramstad--and I have had a chance to glance over 
some of it. I think that what leaps out--there are differences 
of opinion--but what leaps out is that what the terms of the 
rules of competition with China turn out to be and how they are 
shaped, in terms of their accession to WTO and otherwise, are 
going to be critically important to businesses and workers in 
this country.
    What the testimony says to me is, We want more trade. But 
we have to be concerned about under what conditions. That is 
not a direct answer to your question because I don't know 
precisely what the administration's position is. I think, 
though, we need to rely less on what we do legislatively at the 
moment and more on engaging the administration in an honest, 
direct way on our direction on this issue.
    Mr. Ramstad. So the administration hasn't expressed a 
position on this legislation to your knowledge?
    Mr. Levin. Not that I know.
    Mr. Ramstad. Or the knowledge of the authors?
    Mr. Levin. Not that I know of.
    Mr. Bereuter. Mr. Ramstad, at the working level we have 
found very supportive comments from various agencies; I won't 
be more specific, but more than one. We have a problem, as you 
know, in that sometimes people forget that there can be good 
ideas on both ends of Pennsylvania Avenue. The track record 
suggests that it's time for the legislative branch, consulting 
of course with the executive branch, to break the impasse and 
give the trade negotiator some of the tools that she needs.
    I don't expect her at this point to come forward and say 
positively. It needs to be elevated to the highest level in the 
administration. They need to look realistically at what the 
opportunities and the prospects are for real progress. I hope 
they will do that.
    Mr. Ramstad. I understand our differences, Mr. Levin, and 
your differences with the authors on this. I was just trying to 
find out whether the administration has provided any input on 
this at all. I probably directed the question to the wrong 
person.
    Let me ask you a little more substantive question: Have 
snapback tariff approaches been used before? If so, have they 
been effective, to your knowledge?
    Mr. Ewing. I can't answer whether they have been used 
before, though I am assuming they have.
    What I think is effective is for the administration to have 
the power of some comeback, some penalty, some retort for 
unfair trade activities that may be imposed on us. I think 
history would show that generally there's a standoff and then 
an agreement; it's worked out and we move on. That to me is the 
real purpose of having the snapback: It gives the President, 
whoever he might be, real power in negotiating any trade 
disputes.
    Mr. Levin. Mr. Ramstad, about 10 years ago, a form of this 
was proposed relating to market access. We had a donnybrook of 
a debate over this type of approach.
    I am not conceptually opposed to it under any 
circumstances. I just think we need to ask whether the problem 
is that there aren't enough tools in the hands of our 
negotiators, or is it to figure out where we are really going.
    My judgment is that it is less a question of our power than 
it is a challenge of figuring out where we're really going on 
these very thorny issues. But in answer to your question--it's 
a good one--they have been proposed.
    Mr. Ramstad. Thank you, Mr. Chairman.
    Chairman Crane. Ms. Dunn.
    Ms. Dunn. Thank you very much, Mr. Chairman. Welcome, 
gentlemen. It's been an interesting debate. I especially 
appreciate the Chairman's effort to disconnect trade from some 
of the areas that we all appreciate are terribly important for 
us to look into.
    I will tell you, being from a trade State like Washington, 
where we have Boeing Aircraft, Microsoft, and all sorts of 
other export materials, I still am intrigued by the point that 
Mr. Cox makes. I would like to ask each of you to answer this 
question. Is the obvious disconnect that exists between 
Charlene Barshefsky's letter and the actual policy that we're 
following--which is, in my mind, very, very political--what do 
you think about the true status of our approach to the WTO, 
which, I think everybody admits, says Taiwan waits until China 
gets in?
    What do you think about that? What is the reality of it? 
What do you think would happen with mainland China if Taiwan 
were allowed accession to the WTO? Start with Mr. Bereuter.
    Mr. Bereuter. I believe Taiwan ought to have WTO membership 
as soon as they qualify for it. If that's before the PRC, which 
is quite likely, then so be it. They have some things to change 
too. They are not quite ready to have WTO membership, but they 
could do it in a flash. They could make those changes in a 
flash and be brought in.
    I think certainly the reaction of mainland China is not 
going to be positive, but it provides one more incentive for 
the Chinese to make the changes. Tell me a single incentive at 
work in United States-China trade that would cause the PRC to 
make the necessary changes. I don't think there are any at all. 
It's not a matter of deciding where we are going or giving the 
trade negotiator the adequate tools. It's both. But there is no 
reason why Taiwan cannot be brought in to the WTO as soon as 
they meet the qualifications, in my judgment.
    Mr. Levin. I think it's a really good question. I don't 
think there ought to be any sequential linkage that's 
automatically done. I do think, though, that you have to look 
at the issue in relationship to our overall relations with 
China. I just don't think you can totally separate the trade 
issues from broader diplomatic ones, because they rebound into 
trade issues.
    I do think we ought to look at China's WTO accession 
basically as a trade issue. This set of questions about WTO 
accession illustrates that trade needs to be looked at in a 
broad rather than narrow way. Market access, as I said before, 
is too narrow a concept. We're talking about a whole host of 
issues, embedded in the Chinese structure, that are going to 
impact competition between the United States and China.
    I think we ought to look at the economic issues in their 
own right. But I don't think I could say that if I were 
negotiating or advising people who were negotiating with China 
and Taiwan that I would think the issue of sequence irrelevant. 
Because for China, it clearly isn't.
    Mr. Ewing. I think the question is a very good one. I 
personally would hope that economies like Taiwan, wherever they 
exist around the world, should be brought into WTO as quickly 
as possible. I see the WTO as an opportunity for our country to 
have the most level playingfield with those with whom we do the 
most business. I think that helps industry. I think it helps 
agriculture. I think it helps American workers for that to come 
about.
    The sequence--whenever a party is ready, we certainly ought 
to be encouraging them to be full and complete partners of the 
WTO.
    Ms. Dunn. Thank you, Mr. Chairman.
    Chairman Crane. Thank you all very much for your testimony 
today regarding China and its possible accession to the WTO.
    We'll now turn to Ms. Esserman, General Counsel for the 
U.S. Trade Representative's Office, and Howard Lange, Acting 
Deputy Assistant Secretary of State for East Asia and Pacific 
Affairs. We look forward to your comments about where China is 
in the process to join the WTO and whether the summit last week 
will add any momentum to the discussions. Please proceed in the 
order I introduced you.

STATEMENT OF SUSAN G. ESSERMAN, GENERAL COUNSEL, OFFICE OF THE 
                   U.S. TRADE REPRESENTATIVE

    Ms. Esserman. Good morning, Mr. Chairman and Members of the 
Subcommittee. It is a pleasure to be here today to discuss 
United States-China trade relations and China's efforts to join 
the WTO. Mr. Chairman, as you know, the United States-China 
relationship is complex and multifaceted, encompassing a wide 
range of issues that go far beyond trade. At the summit last 
week, Presidents Jiang and Clinton had a frank and indepth 
exchange on the wide array of issues affecting our bilateral 
relations, ranging from human rights to nonproliferation to 
environmental protection. Trade was also the subject of the 
summit. We made progress on specific bilateral issues and 
China's accession to the WTO, which I will review in a moment.
    Trade is an increasingly important part of our 
relationship. China is the fastest growing economy in the 
world, and early in the next century it may have the world's 
largest economy. Today China is the 10th largest trading nation 
and the United States' 4th largest trading partner. Over the 
past decade, United States exports to China have nearly 
quadrupled.
    The administration has two principal goals in its trade 
policy with China. First and foremost, we continue to pursue 
actively market-opening initiatives on a broad scale for U.S. 
goods, services, and agricultural products. United States 
businesses should have access and necessary protections for 
their properties in China's market equivalent to that which 
China receives in the United States. Especially in light of our 
trade deficit, we must see a greater balance in our trade 
relationship with high growth for our exports to China in areas 
where United States companies maintain a comparative advantage.
    Second, a fundamental principle of our policy has been 
working to ensure that China accepts the rule of law. That is, 
ensuring that China's trade and economic policies are 
consistent with international trade practices and norms. 
Indeed, this adherence to international norms is fundamental to 
advancing the entire range of issues between our countries. We 
have pursued these goals both through WTO accession 
negotiations and bilateral initiatives. While our bilateral 
trade agreements cover specific sectors of United States trade, 
negotiations on China's accession to the WTO provide an 
opportunity to address trade issues for all sectors of the 
economy in a comprehensive and systematic fashion.
    Turning to the WTO, China has now adopted a more serious 
attitude about the accession negotiations. Earlier this year, 
negotiators reached agreement on a series of issues relating to 
WTO rules, with China making new commitments related to 
national treatment, transparency, TRIPs, Trade Related Aspects 
of Intellectual Property Rights Agreement, and agriculture 
export subsidies.
    At last week's summit meeting, President Jiang recognized 
that China's accession to the WTO must be based on commercially 
meaningful commitments. The Presidents agreed to intensify 
negotiations on market access including tariffs, nontariff 
measures, services standards, agriculture, and on 
implementation of WTO principles so China can accede to the WTO 
on a commercially meaningful basis at the earliest possible 
date.
    During the summit, China made two announcements of 
importance in the WTO market access negotiations. First, China 
expressed its intention to join the Information Technology 
Agreement as soon as possible. The ITA, as it's called, calls 
for elimination of tariffs on all information technology 
products by the year 2000, with staging permitted for a limited 
number of products. This will lead to the elimination of 
tariffs on a wide range of products important to the United 
States such as semiconductors, computers, telecommunications 
equipment, and software, and therefore constitutes a major 
reduction in tariffs on a number of important sectors. It also 
constitutes an important gain because this is an area where 
China's market is growing rapidly. China's announcement on ITA 
is also significant as it is the first time that China has 
decided to participate in a zero-for-zero initiative.
    China's second announcement at the summit indicated a 
willingness to make further substantial cuts in its tariffs 
that would lower its overall average tariff rate. China's 
applied rate has been 23 percent. On October 1, China announced 
reductions in its tariffs resulting in an overall average 
tariff rate of 17 percent. Offering further tariff reductions 
that result in substantially lower average tariff rates is a 
positive step.
    The assessment of tariff concessions, however, depends not 
only on the average tariff rate but also on whether China meets 
United States requests on priority products. China also gave us 
a new written services offer, an indication that China is now 
taking the negotiations on services more seriously. While some 
improvements in the offer were made, U.S. requests in important 
areas like distribution, telecommunications, financial and 
professional services were not sufficiently addressed. We will 
continue to seek substantial improvements in the services 
offer.
    While the summit will form the basis for intensive 
negotiations on market access over the months ahead, much 
remains to be done. Like every accession negotiation, the 
details are enormously important.
    Over the past year, we have also made some progress on the 
rules and general principles that are the foundation of the 
WTO; I would just like to review a couple of these advances. 
First, on trading rights, or the right to import and export 
directly: In March, China agreed to increase progressively the 
right to import and export products so that at the end of 3 
years, all foreign individuals and companies and all companies 
in China will have the right to import and export all products 
throughout China. This commitment represents a major change in 
China's trading system since only a few companies in China now 
have the right to import goods directly from the United States. 
This is an important step in providing national treatment to 
U.S. exports.
    China has agreed to eliminate other practices that 
discriminate against imported goods and foreign producers of 
goods in China. For example, China will eliminate its system of 
dual pricing for products and services related to production, 
distribution, marketing, and sales of goods in China. Under the 
old system foreigners were charged much more for air or rail 
freight, or preferential access to these services was granted 
to a domestic producer. China has already begun to dismantle 
its system of dual pricing, thus putting United States invested 
companies on a more equal footing.
    China has also made important commitments in the 
transparency area, such as making information available to 
other governments and to people engaged in trade on all of the 
issues covered in the WTO. Translations of laws and regulations 
will be available, and WTO members will have the opportunity to 
comment on proposed laws and regulations before they become 
effective. China has also agreed that it will enforce only 
those laws and regulations that they publish.
    China has agreed to establish independent tribunals to 
review administrative actions relating to the implementation of 
WTO agreements, and also to grant the right to seek this 
judicial review. Both steps will help address corruption and 
encourage the development of the rule of law in China.
    China has also committed to implementing the TRIPs 
agreement immediately upon accession, thus foregoing any 
transition period. On agriculture rules, China has agreed not 
to use export subsidies for agriculture products.
    While much work remains on important protocol and rules 
issues, China has agreed to several significant reforms of its 
trade regime this year.
    I would like to briefly turn to bilateral issues, where we 
also made progress at the summit. The administration reached an 
agreement that secures important market access for foreign 
financial information companies operating in China such as Dow 
Jones and Reuters, and ensures that Chinese companies and 
financial institutions will continue to have access to United 
States information services.
    Second, China will now license a second United States 
company to provide insurance in China. Many highly qualified 
United States companies are seeking to enter China's growing 
market for insurance. We will continue to press China to expand 
access to other United States insurance companies, enabling 
them to provide the full range of insurance services.
    Finally, last week the United States and China signed an 
agreement with respect to space launches that will provide 
effective price disciplines in some of the most rapidly growing 
areas of commercial space launch activity.
    Bilateral initiatives and agreements have been and continue 
to be an important mechanism to address specific sectoral 
problems requiring immediate action. Monitoring and enforcing 
current agreements are also an important part of our work with 
China. For example, in the area of intellectual property, 
significant progress in dampening piracy has been achieved 
since 1996. Intellectual property rights, IPR, enforcement is 
now part of China's nationwide anticrime campaign. China has 
shut down 41 factories with 58 CD production lines. 
Nevertheless, problems remain, particularly in end-use piracy 
of business software and the market access area.
    In the agricultural area, we continue to press for the 
removal of sanitary and phytosanitary barriers to our 
agricultural exports. While we have made progress on products 
such as apples, cherries, and grapes, we still face barriers to 
U.S. exports of citrus, Pacific-Northwest wheat, stone fruit, 
and beef, pork, and poultry products.
    In all these areas, we continue work to further open 
China's markets for United States products. As the Subcommittee 
is aware, this administration has demonstrated a willingness to 
threaten or impose sanctions to achieve its objectives, as has 
been the case in both the intellectual property area and 
textiles.
    In sum, while China has made progress in its WTO accession 
negotiations, these negotiations are complex and will require 
extensive further work. China's accession to the WTO is in the 
interests of the United States, but only on the basis of a 
commercially meaningful agreement. We are prepared to move 
quickly, but the pace is up to China.
    We look forward to working with the Congress, this 
Subcommittee, and the private sector as we continue to pursue 
this important objective. Thank you.
    [The prepared statement follows:]

Statement of Susan G. Esserman, General Counsel, Office of the U.S. 
Trade Representative

    Mr. Chairman and members of the Committee, it is a pleasure 
to appear before you today to discuss U.S.-China trade 
relations and the People's Republic of China's efforts to join 
the World Trade Organization (WTO). After describing the 
general trade relationship with China, I will discuss the 
status of our negotiations for China's accession to the WTO, 
including progress made at last week's summit, and then turn to 
some of our bilateral initiatives.
    President Clinton and President Jiang Zemin met last week 
and held an important and constructive summit meeting. The two 
Presidents had an in-depth and frank exchange of views on an 
array of issues affecting the entire relationship ranging from 
human rights to non-proliferation and environmental protection. 
They agreed to sustained high-level dialogue through regular 
summits and communication.
    On the trade front, we made progress on specific bilateral 
issues and China's accession to the WTO. Such progress is 
important, since China is one of the fastest growing economies 
in the world, with growth rates averaging around 10 percent in 
recent years. Already possessing the world's largest 
population, by early in the next century, China may have the 
world's largest economy.
    Today, China is the world's tenth largest trading nation 
and the United States' fourth largest trading partner. U.S. 
exports to China have nearly quadrupled over the past decade. 
The United States is China's largest export market. U.S. 
imports from China were nearly $51.5 billion in 1996 (or more 
than 20 percent of China's exports to the world). By contrast, 
U.S. exports of goods to China last year stood at $12 billion. 
This year, we estimate that the United States' largest trade 
deficit in goods and services will be with China, surpassing 
the deficit with Japan.
    While the large trade deficit with China is the result of 
many factors, an important factor is China's failure to provide 
increased market access as demonstrated by a 2 percent growth 
in U.S. exports to China in 1996 and 5 percent growth in U.S. 
exports this year. This is in contrast with a 28 percent growth 
in China's exports to the United States this year. We must see 
greater balance in our trade relationship--with high growth in 
our exports to China particularly in sectors where U.S. 
companies are most competitive.
    Despite China's movement away from a centrally planned 
economy toward a quasi-market economy in recent years, China's 
markets still remain relatively closed. China is pursuing an 
export-led growth strategy while protecting its domestic 
markets through high tariffs, quotas, restrictive standards and 
activities of state trading enterprises. In addition, China's 
failure to meet fundamental international norms--such as 
national treatment, transparency, or the right to import or 
export freely--deprives U.S. exports of a level playing field 
on which to compete.
    The Administration trade policy with China is clear. First, 
we will continue to pursue market opening initiatives on a 
broad scale for U.S. goods, services and agricultural products 
through the WTO accession process and bilateral initiatives and 
agreements. U.S. businesses should have access--and the 
necessary protection for their properties--in China's market, 
equivalent to that which China enjoys in the U.S. market.
    The second fundamental principle of our trade policy is to 
ensure that China accepts the rule of law. We seek to encourage 
China to develop trade and economic policies that are 
consistent with international trade practices and norms. The 
rule of law is an important part of ensuring that China 
provides meaningful market access and underpins our bilateral 
and multilateral agreements.

                             WTO Accession

    Both China and the United States agree that China's 
accession to the WTO must be on a commercially meaningful 
basis. While our bilateral trade agreements cover specific 
segments of U.S. trade, negotiations on China's accession to 
the WTO provide an opportunity to address trade issues in a 
comprehensive and systematic fashion for all sectors of the 
U.S. economy. The process of negotiating the terms of China's 
accession to the WTO is a major focus of our efforts to expand 
market access for U.S. exports, and to bring China into the 
international rules-based trading system.
    China's WTO accession negotiations encompass a number of 
elements that we can broadly divide into two categories. The 
first concerns the rules and general principles, such as 
national treatment, transparency, elimination of non-tariff 
measures and compliance with WTO agreements such as the 
Agreement on Application of Sanitary and Phytosanitary 
Measures. This category would also include any agreed 
transition periods and other specific provisions to address 
particular aspects of China's trade regime, e.g., antidumping 
rules and safeguards. The second broad category concerns the 
details of market access for industrial and agricultural goods 
and services. China's tariff and services schedules are an 
integral part of the protocol. All elements of this package: 
market access for goods, agriculture and services, acceptance 
of rules, safeguards and timing, must come together for China's 
accession to move forward.
    China has now adopted a more serious attitude about the 
accession negotiations. Early this year, negotiators reached 
agreement on a series of issues related to WTO rules making new 
commitments related to national treatment (trading rights and 
non-discrimination), transparency, the TRIPs Agreement, and 
agriculture export subsidies. On the market access front, 
China's announcement at last week's summit that it intended to 
participate in the Information Technology Agreement as soon as 
possible and that it would agree to further cuts in its 
tariffs, marked important progress in the negotiations. Let me 
now briefly review the progress that has been achieved on rules 
issues and the Summit announcements.

Trading rights (the right to import and export)

    In March, China agreed to increase progressively the 
availability of the right to import and export products so that 
at the end of three years all foreign individuals and companies 
and all companies in China will have the right to import and 
export all products throughout China. This commitment 
represents a major change in China's trading system since only 
a comparatively few companies in China now have the right to 
import goods directly from U.S. companies. This is an important 
step in providing national treatment to U.S. exports.

Non-Discrimination

    China has agreed to eliminate other practices that 
discriminate against imported goods and foreign producers of 
goods in China. For example, China will eliminate its system of 
dual pricing for products and services related to production, 
distribution, marketing and sale of goods in China. Under the 
old system, foreigners would be charged much more for air or 
rail freight or preferential access to these services would be 
granted to a domestic producer. China has already begun to 
dismantle its system of dual pricing, thus putting U.S. 
invested companies on a more equal footing.
Transparency

    China has committed to making information available to 
other governments and to people engaged in trade on all of the 
issues covered in the WTO. Translations of laws and regulations 
will be available and WTO members will have the opportunity to 
comment on proposed laws and regulations before they become 
effective. Furthermore, China has agreed that it will enforce 
only those laws and regulations that they publish.

Judicial Review of Administrative Decisions:

    China will have independent tribunals for the review of 
administrative actions relating to implementation of the WTO 
Agreements and grant the right to seek judicial review of these 
administrative actions. Both steps will help address corruption 
and encourage development of the rule of law in China.

Intellectual Property Rights

    China has committed to implement the Agreement on Trade 
Related Aspects of Intellectual Property Rights (TRIPs) upon 
accession.

Agriculture

    China has agreed not to use export subsidies for 
agriculture products.
    Agreement on these points represents progress in the 
negotiations. A great deal of work, however, still remains to 
be done on market access, implementation of WTO rules and our 
safeguards.
    Although China has made some progress, China has not yet 
presented an acceptable offer on market access issues. China's 
proposal on tariffs needs improvement on timing of cuts and the 
number and level of tariff peaks and we need to reach agreement 
on the cuts on U.S. priority products. We have yet to reach 
agreement on acceptable phase-out periods for China's remaining 
quotas, licensing and tendering requirements. Other issues, 
such as China's application of mandatory standards for imports, 
customs valuation and licensing affect our exports access to 
China's market and must be addressed.
    On agriculture, for example, we are now engaged in 
intensive discussions on market access for key U.S. export 
products. These discussions encompass tariff levels, 
administration of the tariff rate quotas that China wants to 
put in place, the activities of state trading enterprises and 
the details of China's implementation of the WTO Agreement on 
Agriculture. We and other WTO members are also urging China to 
implement the Agreement on Sanitary and Phytosanitary Measures 
fairly and effectively.
    Services is an area of particular concern to the United 
States and other WTO members. For example, China's commitment 
on trading rights is only the first step in ensuring that U.S. 
exports reach customers in China. The ability to engage in all 
elements of distribution, including after sales maintenance and 
repair, is key to establishing long term relationships in the 
market and thus real market access for goods. We are seeking 
significant commitments from China in a number of other service 
sectors including telecommunications, financial services, 
including insurance, professional services and others. We need 
to see substantial and comprehensive improvements in China's 
market access offer on services.

                             Summit Results

    At last week's summit meeting, President Jiang recognized 
that China must accede to the WTO on a commercially meaningful 
basis. The Presidents agreed ``to intensify negotiations on 
market access, including tariffs, non-tariff measures, 
services, standards and agriculture and on implementation of 
WTO principles so China can accede to WTO on a commercially 
meaningful basis at the earliest possible date.'' We are 
prepared to move quickly, but the pace is up to China. Congress 
has an important role in these negotiations as the 
Administration will continue to consult closely with members as 
negotiations proceed.
    During the summit, China made two announcements relevant to 
the WTO. First, China expressed its intention to join the 
Information Technology Agreement (ITA) as soon as possible. The 
ITA calls for elimination of tariffs on all information 
technology products by the year 2000, although extended staging 
may be allowed for a limited number of products, but no longer 
than to the year 2005. China must negotiate and all ITA 
participants must agree to any staging beyond the year 2000. 
The ITA permits countries and separate customs territories in 
the process of acceding to the WTO to participate in the 
Agreement, China may participate in the Agreement prior to 
completing the WTO accession process. China's participation in 
the ITA means that countries accounting for approximately 95 
percent of trade in these products are participants in the 
Agreement.
    Elimination of tariffs on a wide range of products on which 
the United States is highly competitive is an important benefit 
for the United States. This constitutes a major reduction in 
tariffs in a number of important sectors. China's market for 
ITA products is growing rapidly. One estimate places China's 
total imports of ITA products at $14.5 billion in 1996 and 
other estimates are higher. According to industry estimates, 
China imports about 10 percent of its information technology 
products from the United States. China's announcement on the 
ITA is also significant as it is the first time that China has 
decided to participate in a zero-for-zero initiative.
    China's second announcement at the summit indicated a 
willingness to make further substantial cuts in its tariffs 
that would lower its overall average tariff rate. Previously, 
China's applied tariff rate averaged 23 percent. On October 1, 
China announced reductions in its tariffs that result in an 
overall average tariff rate of 17 percent. Offering further 
tariff reductions that result in a substantially lower average 
tariff rate is a positive step. Ultimately, our assessment of 
the tariff reductions will depend on whether China meets U.S. 
requests on priority products and satisfies other key criteria.
    China also gave us a new written services offer, an 
indication that China is taking the negotiations on services 
more seriously. While some improvements in the offer were made, 
U.S. requests in important areas like distribution, 
telecommunications, financial and professional services were 
not sufficiently addressed. For example, China's offer covers a 
number of services sectors generally, but provides for 
liberalization only in a very limited or ``experimental'' 
basis. That liberalization is frequently restricted to certain 
geographic regions. In the telecommunications sector, for 
example, the offer would permit establishment of two telecom 
joint ventures with a twenty five percent equity cap in two 
cities in all of China. We will continue to seek substantial 
improvements in the offer.
    The summit resulted in progress that will form the basis 
for intensive negotiations over the months ahead. Our 
negotiators will meet again over the next few weeks to discuss 
China's market access offers. The APEC Ministerial meetings in 
Vancouver in November will serve as another important 
opportunity for discussion. In addition, the next round of 
formal Working Party meetings is scheduled for December.

                  Bilateral Initiatives and Agreements

    Bilateral initiatives and agreements have been and continue 
to be an important mechanism to address specific sectoral 
problems that require immediate action. Monitoring and 
enforcement of current agreements are also an important part of 
our work with China. In these contexts, the Administration has 
demonstrated its willingness to impose sanctions to achieve its 
objectives. Another important result of our bilateral 
initiatives is that they often compliment and reinforce the 
multilateral aspects of U.S. trade policy towards China. Our 
bilateral agreements on intellectual property rights, for 
example, provided the foundation for China's commitment to 
implement the TRIPs agreement immediately upon accession to the 
WTO. Similarly, effective implementation of agreements and rule 
of law is a principle that underlies both our bilateral and 
multilateral agreements.

                          Recent Developments

    The Administration has reached an agreement with China that 
provides an interim solution to a longstanding problem 
regarding regulation of U.S. companies providing financial 
information to China's market. The interim solution secures 
important market access for foreign financial information 
companies such as Dow Jones and Reuters operating in China and 
ensures that Chinese companies and financial institutions will 
continue to have access to U.S. information services. While the 
agreement provides an interim solution, we continue to seek 
commitments from China to provide expanded market access and 
national treatment for financial information services in 
China's WTO accession negotiations.
    A second recent development involves the insurance services 
sector. While the United States is requesting China to make 
significant improvements in its GATS schedule on insurance 
services, in the interim, we are pleased that China has 
announced that a second U.S. company, will be licensed to 
provide insurance in China. Many highly qualified U.S. 
companies are seeking to enter China's growing market for 
insurance products and we will continue to press China to 
expand access to other U.S. insurance companies and to enable 
them to provide the full range of insurance services.
    Finally, last week the United States and China signed an 
agreement with respect to space launches that will provide 
effective price disciplines in some of the most rapidly growing 
areas of commercial space launch activity. The agreement puts 
new provisions into effect as part of the 1995 U.S.-China space 
launch accord which clarify conditions included in the pricing 
of launch services. More information and greater certainty will 
be provided to industries interested in participating in this 
market.

               Ongoing Monitoring and Enforcement Actions

    As a result of our bilateral agreements, U.S. access to 
China's market is far greater now than it was. Nevertheless, 
our access falls far short of what it should be. Monitoring 
implementation and enforcement of these agreements is one way 
to expand U.S. access and build a foundation for future 
agreements. Let me briefly review our efforts on some of our 
significant bilateral agreements.

          Bilateral Agreements on Intellectual Property Rights

    In 1995, the United States reached an agreement with China 
on intellectual property rights enforcement, particularly 
copyrights and trademarks, and improved market access for U.S. 
firms in the computer software, motion picture, publishing and 
sound recording industries. In the 1995 Agreement, China 
committed to put a basic structure in place for enforcement of 
IPRs at the central and provincial level and in major cities. 
China also undertook improved Customs enforcement of IPRs at 
the border and strengthened protection for well-known 
trademarks.
    Over the next year, we carefully monitored China's 
implementation of the 1995 Agreement. While China created 
enforcement task forces and embarked on some enforcement 
efforts, overall piracy rates remained extremely high and U.S. 
companies were frustrated in their efforts to achieve market 
access. That is why, in May 1996, the Clinton Administration 
threatened to take action against China for its failure to 
implement satisfactorily commitments from the 1995 Agreement.
    In June 1996, after substantial verification activities by 
the U.S. government and U.S. industry, we decided that the 
Chinese had taken a critical mass of enforcement actions in 
connection with the 1995 Agreement. Since June 1996, we have 
seen continued progress and continuing problems. IPR 
enforcement is now part of China's nationwide anti-crime 
campaign. China has put in place a functioning enforcement 
system, based on the 1995 and 1996 agreements, to protect 
intellectual property. Chinese authorities have shut down 41 
factories with 58 CD/CD09ROM production lines, radically 
cutting back on pirated sound recording production in South 
China. China's judicial system has become involved in combating 
IPR piracy and the number of decisions and the severity of 
penalties have increased.
    Despite China's increased efforts, problems remain, 
particularly in the area of end-use piracy of business 
software. Piracy rates of entertainment software (game CD's) 
are also high.
    Besides enforcement activities, our copyright industries 
have made some limited headway on market access. For example, 
access for foreign sound recordings, stagnant at 120 titles 
three years ago, reached approximately 1000 titles in 1996. The 
elimination of quotas should pave the way for Chinese record 
companies to sign licensing arrangements that capitalize on the 
companies' entire catalogues. Given that our copyright 
industries are among the most competitive in the world, we will 
continue to push for further market access openings in this 
important area. Moreover, our bilateral IPR dialogue with China 
is active and we expect progress on fully implementing our IPR 
agreements and addressing specific concerns that develop.

                                Textiles

    Our February bilateral textiles agreement builds on and 
improves the 1994 Textiles Agreement with China. For the first 
time, our bilateral agreement provides market access for U.S. 
textiles and apparel into China's market. China also agreed to 
ensure that non-tariff barriers do not impede the achievement 
of real and effective market access for U.S. textile and 
apparel exports.
    Under this bilateral agreement, China will lower tariff 
rates over the next 4 years. For certain high priority 
products, China agreed to accelerate tariff reductions so that 
they are completed within two years. The first cuts became 
effective on October 1 of this year.
    The issue of illegal transshipments of textiles from China 
has been a significant concern in the past. In the February 
1997 Agreement, we reduced China's quotas in fourteen apparel 
and fabric product categories where China agreed that 
violations of the 1994 Agreement, through transshipment or over 
shipment, had occurred. Moreover, a special textiles import 
safeguard mechanism will remain in effect until four years 
after the WTO Agreement on Textiles and Clothing has 
terminated.

                        Market Access Agreement

    Obtaining effective implementation of the October 1992 
market access agreement is another example of the 
Administration's continuing pursuit of market openings. In that 
Agreement, China committed to make significant changes in its 
import regime, i.e., to eliminate import substitution policies, 
publish its trade laws in an official journal, apply the same 
testing and standards requirements to domestic products and 
imports, decrease tariffs on certain products, apply sanitary 
and phytosanitary measures only based on scientific principles 
and eliminate licensing and quota requirements on more than 
1,200 products.
    China has taken some significant steps in implementing the 
1992 Agreement. China's trade regime is now more transparent; 
China has lowered tariffs on many products and has eliminated 
well over a thousand non-tariff barriers. While China has 
removed a substantial number of these barriers, we are 
concerned with China's tendency to substitute other barriers 
for the ones removed. On some products in the medical equipment 
sector, for example, China has replaced a quota with a 
tendering and registration requirement, which still impedes 
market access.
    A number of other market access problems remain, in 
particular for U.S. agricultural products. In the 1992 
Agreement, China committed to eliminate unscientific sanitary 
and phytosanitary restrictions used as barriers to market 
access. China's implementation of this commitment remains 
incomplete. Over the last four years, we have reached agreement 
on measures that permit the importation of live horses; 
delicious variety apples and cherries from Washington State, 
apples from Oregon and Idaho; cattle, swine, and bovine 
embryos. This month U.S. growers exported their first shipments 
of grapes to China. This new market for grapes could reach more 
than $45 million in the next two to three years.
    We still face unjustified sanitary and phytosanitary (SPS) 
restrictions on U.S. exports of citrus, Pacific-Northwest 
wheat, stone fruit, beef, poultry and pork products. While 
China has granted some access for beef, poultry and pork 
products through certification and grant of import quotas to 
individual processing plants, China needs to provide a system 
wide certification of U.S. plants and eliminate quotas.
    For other agriculture products, we seek protocols that will 
permit access into China's market in the immediate future. We 
are particularly disappointed with the lack of progress during 
talks last month on completing a protocol for exports of U.S. 
citrus to China. Although considerable amounts of U.S. citrus 
enter China through Hong Kong, Chinese plant quarantine 
officials have been unwilling to establish formal channels for 
U.S. exports of oranges, grapefruit and other citrus products. 
Other countries in Asia accept U.S. citrus. U.S. experts have 
spent considerable time and effort addressing China's SPS 
concerns and we believe that a protocol permitting exports from 
all major citrus producing states should be completed.

                               Conclusion

    While China has made progress in its WTO accession 
negotiations, those negotiations are complex and will require 
extensive further work. The Administration is determined to see 
China accede to the WTO, but only on the basis of a 
commercially meaningful agreement. As we proceed along this 
difficult course, we are committed to working with Congress to 
ensure that our mutual objective is achieved.
      

                                


    Chairman Crane. Thank you, Ms. Esserman.
    Mr. Lange.

STATEMENT OF HOWARD H. LANGE, ACTING DEPUTY ASSISTANT SECRETARY 
  FOR EAST ASIAN AND PACIFIC AFFAIRS, U.S. DEPARTMENT OF STATE

    Mr. Lange. Thank you, Mr. Chairman, for the opportunity to 
appear before the Subcommittee. I would like to offer a very 
brief statement which I hope provides a context for discussion 
of the WTO accession process and broader economic relations 
with China.
    The administration believes that United States interests 
are best served by a secure, stable, and open China. The manner 
in which we engage China will help determine whether it becomes 
integrated into international norms and institutions, or 
whether it becomes isolated, hostile, and unpredictable. We 
believe the strategy of comprehensive engagement is the best 
approach to encourage the development of a China which is a 
constructive player in international systems.
    Let me mention a few areas in which we have a strong 
interest in engaging China. China is a nuclear weapons state 
and a producer of sophisticated technology. If we are to have a 
world in which weapons of mass destruction are effectively 
controlled, it will require China's cooperation and adherence 
to international proliferation norms. Combating alien 
smuggling, narcotics trafficking, and terrorism also requires a 
China which participates constructively with a network of 
international institutions that attack such problems. China's 
participation in international efforts to address global 
warming is critical. China has played a very helpful role in 
recent years in support of our efforts to keep peace and 
stability on the Korean peninsula.
    In no area is China's adherence to international norms more 
important than human rights. Exposure to the outside world and 
the exchange of goods, ideas, and people has brought increased 
openness, social mobility, and personal liberty to China. 
Nevertheless, China continues to deny or curtail basic freedoms 
including the freedom of speech, association, and press and the 
freedom to practice religion. China must do much more to bring 
its human rights practices into accord with international 
norms.
    Trade, which is the principal focus of this hearing, of 
course, is an area where China's integration into international 
institutions, especially the WTO, can reinforce the positive 
evolution of China and its institutions. Ms. Esserman has 
covered this issue, including our bilateral trade relationship, 
in detail.
    I would note, however, that the value of a commercially 
viable WTO accession package to Americans goes well beyond 
dollars and cents. Increasing China's awareness of 
international trade norms includes recognition of fundamental 
concepts of the rule of law such as transparency, contract 
sanctity, and the need for an independent judiciary. These 
concepts will have an impact across the board. Our trade agenda 
actively and directly supports the broader agenda of our 
engagement policy.
    Against the backdrop of our overall strategy, let me sketch 
some summit results. First, the two Presidents had a good 
exchange of views on the international situation, on United 
States-China relations, and the important opportunities and 
challenges facing the two countries. They also had a very frank 
exchange of views, both in private and in public, on the areas 
where we differ, notably human rights. We achieved a number of 
concrete outcomes. I will cite some of those outside the area 
of trade, which Ms. Esserman has covered in her testimony.
    As a result of the summit, we are bringing China's nuclear 
nonproliferation policies and practices into line with 
international norms. We are enhancing cooperation in addressing 
the intertwined issues of energy and the environment. We will 
be holding regular summits and other meetings at senior levels. 
We are enhancing cooperation in law enforcement and in 
promoting the rule of law in China. We are also taking steps to 
develop military-to-military relations.
    Even in the area of human rights, where we have such 
obvious differences, China has recently taken some positive 
actions. China is inviting a group of American religious 
leaders to visit. China has also agreed to begin preparatory 
talks on establishing a forum for United States and China NGOs, 
nongovernmental organizations, to discuss human rights. She is 
signing the International Covenant on Economic, Social and 
Cultural Rights, and is studying the Covenant on Civil and 
Political Rights. We will continue our strong efforts to 
advance our interests in this area, which is critical to 
maintaining a healthy and positive relationship with China.
    In conclusion, Mr. Chairman, a commitment to advance United 
States interests by promoting China's adherence to 
international norms will remain a central theme of our efforts 
in all areas of our relationship including, certainly, the area 
of trade. Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Howard H. Lange, Acting Deputy Assistant Secretary for 
East Asian and Pacific Affairs, U.S. Department of State

    Thank you for the opportunity to appear before the 
Subcommittee. I'd like to offer a brief statement which I hope 
provides a context for the discussion today of the WTO 
accession process and broader economic relations with China.

                       Comprehensive Engagemement

    The Administration believes that US interests are best 
served by a secure, stable and open China. The manner in which 
we engage China will help determine whether it becomes 
integrated into international norms and institutions or whether 
it becomes isolated, hostile, and unpredictable. We believe the 
strategy of comprehensive engagement is the best approach to 
encourage the development of a China which is a constructive 
player in international systems.
    Administration policy is to encourage China's integration 
into global institutions and its adherence to international 
norms, and to maintain a constructive and productive 
relationship with China. Attainment of these objectives is 
important to the security and well-being of Americans. China is 
a nuclear weapons state and producer of sophisticated 
technology. If we are to have a world in which weapons of mass 
destruction are effectively controlled it will require China's 
cooperation and adherence to international proliferation norms. 
Combatting alien smuggling, narcotics trafficking, and 
terrorism, also require a China which participates 
constructively in the network of international institutions 
that attack such problems. As the second largest emitter of 
greenhouse gasses, China's participation in international 
efforts to address global warming is critical. In recent years 
China has played a very helpful role in support of our efforts 
to keep peace and stability on the Korean peninsula. Yet we 
hope for more progress on security issues, with, for example, 
increasing transparency in China's own military establishment.
    In no area is China's adherence to international norms more 
important than human rights. Exposure to the outside world and 
the exchange of goods, ideas, and people has brought increased 
openness, social mobility and personal liberties to China. 
While these developments are positive, they are not sufficient. 
China continues to deny or curtail basic freedoms, including 
freedom of speech, association, press, and freedom to practice 
religion. China must do much more to bring its human rights 
practices into accord with international norms.
    The recent history of Asia shows that over time, economic 
development leads to growth of an educated and aware middle 
class and of a civil society. This in turn leads to democracy, 
and this is the path we want to encourage China to travel.
    Trade, the principal focus of this hearing, is an important 
area where China's integration into international institutions, 
especially the WTO, and adherence to international norms can 
reinforce a positive evolution of China and its institutions. 
Your USTR witness will cover this issue, including our 
bilateral trade relationship, in detail, and I will defer to 
her for that discussion. I would emphasize, however, that the 
value to Americans from a commercially viable WTO accession 
package goes beyond dollars and cents. China's increasing 
recognition of international trade norms entails the 
recognition of fundamental concepts of rule of law, such as 
transparency, contract sanctity, and the need for an 
independent judiciary. These concepts will have an impact 
across the board as we work with China to address all the 
issues I have cited above, including weapons proliferation, 
human rights, and the environment. In this sense our trade 
agenda actively and directly supports the broader agenda of our 
engagement policy. Far from being in conflict with our overall 
goals, our trade objectives support what we are trying to 
accomplish.

                             Summit Results

    Against this backdrop of our overall strategy, let me 
sketch some summit results, which we believe have furthered the 
goals I have described.
    First, I'd note that the two Presidents had a good exchange 
of views on the international situation, US-China relations, 
and the important opportunities and challenges facing the two 
countries. They also had a very frank exchange of views, in 
public and private, on the areas where we differ, especially 
human rights. Direct communication between the top levels of 
our governments is essential to addressing differences, 
deepening mutual understanding, and avoiding misconceptions. In 
addition, we achieved a number of concrete outcomes, including:
     bringing China's nuclear non-proliferation 
policies and practices into line with international norms;
     enhancing cooperation in addressing the 
intertwined issues of energy and the environment;
     holding regular summits and other meetings at 
senior levels, which will help us expand cooperation and narrow 
differences with China;
     enhancing cooperation in law enforcement, 
including stationing of DEA officers at our Embassy in Beijing, 
and in promoting the rule of law in China;
     taking steps to develop military-to-military 
relations in ways that minimize the chance of miscalculation, 
advance transparency, and strengthen communication.
    In the area of human rights, China has recently taken some 
positive actions, which include inviting a group of American 
religious leaders to visit China to observe Chinese religious 
practices; agreeing to begin preparatory talks on establishing 
a forum for US and China NGOs and officials to discuss human 
rights; and signing the International Covenant on Economic, 
Social, and Cultural Rights. Human rights is perhaps the most 
difficult area of our relationship and the one in which 
progress is slowest and most difficult to measure. We will 
continue our strong efforts to advance our interests in this 
area, which is critical to maintaining a healthy and positive 
relationship with China.
    A commitment to advance US interests by promoting China's 
adherence to international norms will remain a central theme of 
our efforts in all areas of our relationship with China, 
including nonproliferation, human rights, and law enforcement, 
as well as trade.
    Thank you.
      

                                


    Chairman Crane. Thank you, Mr. Lange.
    Ms. Esserman, I have long supported negotiating a free 
trade agreement with Taiwan. However, China has insisted that 
it be granted membership in WTO ahead of Taiwan. The question 
in my mind is, with that reversion of Hong Kong back to the 
mainland, doesn't mainland China have membership in the WTO? I 
mean, Hong Kong has got it; it's a part of China. It's probably 
the biggest means of goods and services flowing in and out of 
China. How do you make the distinction?
    Ms. Esserman. Hong Kong is treated as a separate entity 
under the WTO.
    Chairman Crane. It may be treated as a separate entity, but 
it isn't. I mean, it's a Province of China.
    Ms. Esserman. Well, first and foremost, as we have all 
discussed today, in order to become a member of the WTO, the 
entering country must accept the full range of responsibilities 
and obligations required of a WTO member. China has not done 
that yet. It would not be appropriate at this time, simply 
because Hong Kong is a member, for China to be a member of the 
WTO.
    Chairman Crane. If California were a member of the WTO, 
that wouldn't necessarily qualify the United States as a 
member?
    Ms. Esserman. No, it would not.
    Chairman Crane. It seems to me that that argument could 
have been raised with President Jiang while he was here, that 
we're going forward now with WTO accession for Taiwan, another 
Province of China, and maybe in another century they will be 
reunited with the mainland.
    But at any rate, let me get onto a couple of other items. 
The joint United States-China statement issued after the summit 
used the phrase ``commercially meaningful'' instead of 
``commercially viable'' when describing an adequate WTO 
Agreement on China. Does this reflect any change in United 
States policy, and how does ``commercially meaningful'' differ 
from ``commercially viable?''
    Ms. Esserman. Mr. Chairman, ``commercially meaningful'' has 
the same meaning to us as ``commercially viable.'' It means 
genuine access in the area of goods, services, agriculture, and 
compliance with WTO rules upon accession.
    Chairman Crane. OK. I just wanted to make sure there was no 
difference in the meaning of the terminology.
    Do you expect, Mr. Lange, the recent stock market prices in 
Asia to affect China's ability to make economic reforms or its 
willingness to modernize its banking and financial system to 
keep pace with WTO accession negotiations?
    Mr. Lange. So far, Mr. Chairman, China has not been notably 
affected by the financial volatility in the rest of Asia, but 
of course it is becoming increasingly involved and integrated 
into the Asian economy. So over time, it will become more 
affected by such volatility, but at this time--certainly as far 
as I know--nothing we have heard from the leadership of China 
suggests that they are slowing down in their intention to 
continue with economic reforms in China.
    Chairman Crane. At last week's summit, President Clinton 
indicated that he will certify China as being in compliance 
with the 1985 agreement on United States-China nuclear 
cooperation. What opportunities do you see this providing for 
small businesses and investors here in the United States vis-a-
vis China?
    Mr. Lange. Well, once the 1985 agreement is in fact 
implemented, United States companies will of course have the 
opportunity to bid in a very large market for developing 
nuclear power facilities in China.
    I don't know about the structure of the nuclear power 
industry in the United States in detail, but I presume that the 
large contractors are served by a large network of small 
businesses and small contractors as well.
    Chairman Crane. Thank you.
    Mr. Thomas.
    Mr. Thomas of California. Thank you very much, Mr. 
Chairman. I thank both of you for your comments.
    Ms. Esserman, the USTR today sounded a little more like 
State than usual. I don't have my State Department translating 
dictionary. Frank and indepth discussions made progress 
``commercially meaningful,'' which the Chairman commented on; 
apparently it means the same as viable. Could I ask you to 
engage, if you are willing, in something that most of us would 
understand? That is, on a scale of 1 to 10, where was China at 
the beginning of the year and where are they now?
    Ms. Esserman. Well, Mr. Thomas, I hadn't intended to use 
State Department parlance, but as to your question----
    Mr. Thomas of California. It worries me because you were so 
good at it.
    Ms. Esserman. Let me just say that we think the summit did 
provide momentum on the WTO accession issue for a number of 
reasons. First of all, China made two important announcements: 
The announcement of their intention to join the ITA is an 
important advance, as is committing to further substantial 
tariff cuts. Also, President Jiang has recognized that China 
must join the WTO on a commercially meaningful basis, and the 
two Presidents agreed to intensify our efforts to deal with the 
full range of issues necessary to join the WTO.
    Mr. Thomas of California. I understand that; that was in 
your testimony and that was your response to the Chairman. I 
don't want to put you on the spot. But does it appear, if 5 is 
halfway between 1 and 10, that we are on the other side of 5? 
Are we still on the short side of 5? Did we cross 5 based upon 
this summit? Is there any way to give us some progress report 
in a way that most people would understand? I mean, I am only 
familiar with the terms you are using in my area of 
involvement, education in terms of pass-fail courses. Can we 
assign some kind of a grade, if you don't like using 1 to 10? 
Where are we?
    Ms. Esserman. Mr. Thomas, I really don't--I am not able to 
assign a grade or a number, but I do think it's genuine 
momentum, that we really ought to work hard to take advantage 
of. In other words, it provides us a basis for moving more 
positively. These are two very important steps to provide 
genuine access. I think it's hard to provide a grade or a 
number to the situation.
    Mr. Thomas of California. I understand. I appreciate it. 
I'll see euphemisms under State Department and we'll come up 
with that.
    Another question, back to what the Chairman said: I'm 
concerned about this because Hong Kong is a member of the WTO 
and it has reverted back to being a Province of China, mainland 
China. Are we monitoring the criteria that were essential in 
allowing Hong Kong to be a member of the WTO? Where is the 
Government's position on any backsliding that may occur if, in 
fact, it does occur on those criteria which enabled Hong Kong 
to be a member of the WTO initially? Do we have any ongoing 
monitoring of Hong Kong and its structure vis-a-vis where it 
was prior to its incorporation back into mainland China today 
or tomorrow or the day after?
    Mr. Lange. May I answer that, Mr. Thomas? Under the Hong 
Kong Policy Act, we are required to monitor Hong Kong and its 
autonomy as a trading entity. This involves many aspects of 
Hong Kong's behavior. But we are very conscious of this 
requirement; we follow it very closely. I am sure that our 
trade representatives in Geneva as well as here in Washington 
also follow this very carefully and monitor it. We will be very 
vigilant for signs that they are not acting independently.
    Mr. Thomas of California. And the intent of the Hong Kong 
Act is that if, in fact, there has been major backsliding, it 
could include denial of continued membership in WTO, or at 
least our active opposition to continued membership? I am 
taking an extreme position, but I am just wondering what 
leverage you have. I have often found when you go to the 
extreme position, you have a better understanding of what 
leverage you have.
    Mr. Lange. I confess that I don't recall the precise 
requirements of the Hong Kong Policy Act, and whether it 
specifies that step.
    Mr. Thomas of California. My concern is that we could 
monitor and then we could fall back into a series of euphemisms 
like ``a view with concern,'' you know; there's a whole series 
of words we could use which would not indicate any clear 
punishment in the area of backsliding, which I am very 
concerned about.
    To conclude, it seems to me that the criteria we used on 
Hong Kong ought to be used on Taiwan. And that if, in fact, 
substantive behavioral criteria are met, there should be no 
interest in timing of admission to WTO. What is the 
administration's policy on that?
    Ms. Esserman. Mr. Thomas, if I could just address the 
question about the WTO directly, there is a mechanism in the 
WTO for review of a country's practices. I would be happy to 
provide further information to you. I don't know the precise 
date of the review for Hong Kong.
    The context of that review provides us another mechanism 
for determining whether there is backsliding. Ultimately, the 
United States does have authority to not apply the WTO rules to 
Hong Kong.
    Mr. Thomas of California. Thank you very much. The Taiwan 
question remains open, but it just seems to me that if they 
were to meet the test, there should be no linkage in terms of 
timing. I think that would be the best possible message we 
could send mainland China. Fit this behavioral parameter and 
you will be accepted, just as Hong Kong was accepted and just 
as Taiwan would be accepted. The goal, of course, would be to 
get China to understand that before Taiwan reaches a level of 
acceptance. But I believe we are going to reach that point, 
that is, Taiwan meeting the criteria. If we were to then 
withhold admission to Taiwan, I believe that would have severe 
ramifications.
    Ms. Esserman. As Ambassador Barshefsky has said, we do look 
at each of these situations based on the merits. Based on the 
merits, Taiwan is not yet ready to join. There are still a 
number of important outstanding issues in the area of 
agriculture, where imports of agriculture products are blocked. 
There are some important issues relating to financial services 
and tariff staging. So at this point, Taiwan is not yet in a 
position to join.
    Mr. Thomas of California. Obviously, I am as interested as 
anyone and probably pushed a number of those agricultural 
issues.
    I have a series of questions, Mr. Chairman, that I would 
like to submit for the record to have the USTR answer. It has 
to do with to a certain extent agricultural products with the 
Republic of China and the issue that was mentioned earlier, the 
phytosanitary restrictions, and a number of other issues. I 
thank you very much for your vigilance. My goal and your goal, 
I hope, is to make sure Taiwan understands that as it joins the 
democratic community of nations and pursues WTO membership if, 
in fact, they do measure up, they would not be unnecessarily 
delayed by political considerations. Thank you, Mr. Chairman.
    Mr. Lange. If I may comment?
    Chairman Crane. Mr. Lange.
    Mr. Lange. If I could just comment briefly on the Taiwan 
angle: I believe, as a matter of principle, it is treated as a 
customs territory similar to Hong Kong, the difference being 
that Hong Kong is already in the WTO and has met the 
requirements. So, as Ms. Esserman suggests, the question is 
really on meeting the requirements for entry, it's not one of 
principal.
    Mr. Thomas of California. Mr. Chairman, our goal is to make 
sure that that is, in fact, presented to you as a dilemma as 
soon as possible.
    Chairman Crane. Mr. Jefferson.
    Mr. Jefferson. Thank you, Mr. Chairman.
    Ms. Esserman, I guess I am asking you this question: How 
does the administration plan to approach the issue of whether 
China enters the WTO as a developed or developing country? And 
what are the areas of the WTO where this status makes a 
difference in respect to the kind of commitment we can expect 
from China in the WTO?
    Ms. Esserman. The U.S. Government has determined that it is 
best to scrap the terms ``developed'' and ``developing'' 
nations, as applied to China's WTO accession. In fact, we think 
it best to take a practical approach and address each issue 
based on the merits in a way that would secure genuine market 
access and compliance to WTO rules, in light of the particular 
situation presented by China.
    Mr. Jefferson. The question comes up because, unless this 
is wrong, the United States accepts 30 percent of China's 
exports, while China only buys 2 percent of United States 
exports. Is that figure right as far as you know? Does that 
sound about right?
    Ms. Esserman. Mr. Jefferson, I'm sorry. I couldn't hear 
you.
    Mr. Jefferson. I was saying that the United States accepts 
30 percent of China's exports, while China only accepts 2 
percent of United States exports. I was asking whether you 
agreed with that. Is that figure right, do you know?
    Ms. Esserman. I don't know whether that precise figure is 
true. There is unquestionably a deficit problem with China. We 
are concerned about it. We think the most important----
    Mr. Jefferson. I guess my question really is, even if you 
can't agree with those numbers, there is a huge disparity. To 
what do you attribute it?
    Ms. Esserman. There is a serious disparity that causes us 
concern. It's due to a variety of factors. One factor really is 
the fact that our exports are not given full access to the 
Chinese market. We think the most important way to address 
those issues is to push ahead in a systematic way, to break 
down barriers, particularly through the WTO accession 
negotiations and through strong bilateral initiatives.
    Mr. Jefferson. In response to Mr. Thomas's question, I 
believe you made reference to the Information Technology 
Agreement.
    Ms. Esserman. Yes.
    Mr. Jefferson. As an important accomplishment of the 
summit, China said that it would seek to become a part of that, 
to join the agreement. What is the expected timetable for China 
to join and does it have any connection with WTO accession?
    Ms. Esserman. We would expect the timetable to be between 
approximately 2 and 6 months. That's the time it has taken 
other countries to join. There are a number of technical issues 
that need to be reviewed with all of the countries that have 
joined the WTO. Further, to answer your question, a country 
does not need to be a member of the WTO to join the Information 
Technology Agreement. Other countries have joined--I believe 
Estonia is an example--when they are not yet members of the 
WTO.
    Mr. Jefferson. But in the case of China specifically, there 
is no connection being made between these two issues, WTO 
accession and joining the ITA?
    Ms. Esserman. What I meant is they could join before they 
actually accede to the WTO, which is very good and important. 
It is a part of their overall accession package because it 
reflects a significant lowering of tariffs on very important 
products to the United States.
    Mr. Jefferson. We have had various agreements with China 
here recently: one on intellectual property, one on prison 
labor exports, and various market access agreements. Where are 
we now with the status of those various agreements? Is China 
complying with these agreements or not? How well is it 
complying with them or not?
    Ms. Esserman. In the intellectual property area, I think 
that there has been a lot of action taken to comply with the 
Intellectual Property Agreement. You may recall the agreement 
was I believe negotiated 2 years ago. A year later the U.S. 
Government felt that China had not taken strong action and they 
threatened sanctions--stiff sanctions. China undertook, and has 
continued to undertake, significant measures to crack down on 
piracy, closing a number of production lines--I believe 58 
production lines, instituting a real infrastructure to deal 
with piracy; instituting raids and a number of initiatives to 
deal with the piracy issue overall.
    So in the copyright area, there have been important gains, 
although certainly problems remain. This is why it is very 
important for us not only to negotiate the agreement, but to 
continue monitoring the agreement diligently at every step. 
We're continuing to do that. We are concerned about China's 
record in regard to business and game software. We are also 
concerned about market access in this area as well. So we're 
continuing to monitor. A team recently went to China to take 
further steps. We'll be following up on that trip.
    Mr. Jefferson. Is the prison labor agreement being lived up 
to, antiprison labor agreement?
    Mr. Lange. We find that there are some shortcomings in 
Chinese compliance with the Prison Labor Agreement. They do not 
always respond to our requests for inspections of facilities. 
Recently we have experienced some improvement in Chinese 
performance, but it is an area that we are continuing to 
emphasize and try to get better compliance on China's part.
    Mr. Jefferson. This has been a very difficult area, the 
prison labor area, hasn't it?
    Mr. Lange. Yes, it has.
    Mr. Jefferson. One last thing, Mr. Chairman, if I might. On 
Bereuter-Ewing H.R. 1712, this so-called carrot-and-stick 
approach: We have a permanent MFN and some opportunities to go 
to snapback, to pre-Uruguay round tariffs if compliance isn't 
met. How does the administration view this bill? Is there 
support for the Bereuter approach?
    Ms. Esserman. First and foremost, we very much appreciate 
the spirit in which this legislation is offered. We appreciate 
the objective of Congressman Bereuter to try to facilitate 
rapid progress on China WTO accession. However, we think that 
progress has been made over the last year and particularly 
recently with the summit. So we think it is premature to take a 
position on the bill.

Questions Received from Hon. Bill Thomas and Subsequent Responses from 
Ms. Esserman

    Question. The PRC has used phytosantiary restrictions 
lacking scientific justification to prevent imports of U.S. 
citrus and other produce. In some cases, such as China's 
assertion that the U.S. has medfly infestations, the 
restrictions appear unjustified since other countries such as 
Japan, Korea and Australia accept our methods of quarantine, 
isolation and eradication of this pest. How does your office 
intend to get China to follow the WTO requirement for a 
scientific basis for sanitary and phytosanitary restrictions as 
a condition of accession to the WTO?
    Answer. Compliance by the Chinese Government with its 
commitments under the 1992 Market Access MOU has been a top 
priority for USTR. China has thus far opened up its market to 
U.S. live cattle; bovine embryos; cherries from Washington; 
delicious variety apples from Washington; and most recently 
grapes from California. However, China still does not allow 
imports of our citrus, other varieties of apples, tobacco, 
wheat and stonefruit.
    At recent technical meetings in San Francisco, China 
offered to accept a protocol and work plan for importing citrus 
from Texas and Arizona, but maintained its position that the 
recent incidence of medfly in California and Florida prevented 
them from agreeing to a similar arrangement for those states. 
We were very disappointed. The issue has been raised at the 
highest levels, including by the President, USTR Barshefsky and 
Ambassador Peter Scher. We are now reviewing our options in 
close consultation with U.S. citrus exporters.
    We are working hard to reduce China's tariffs and VAT 
rates, as well as any unscientific phytosanitary barriers in 
the context of China's accession. China's adherence to the 
Agreement on the Application of Sanitary and Phytosanitary 
Measures is certainly a condition of its accession to the WTO. 
We will also continue to raise our concerns bilaterally at the 
highest policy levels in China.
    Question. The PRC tariffs and taxes are extremely high on 
some U.S. products. For example, the tariff on fresh garlic is 
22 percent and there is a 13 percent VAT on top of that. What 
is your office doing to reduce China's import tariffs on garlic 
and agricultural products?
    Answer. In our WTO accession negotiations with China we 
have been pressing the Chinese to lower their tariffs, 
eliminate non-tariff trade barriers and abide by the rules and 
general principles of the WTO. China has taken some actions to 
reduce barriers. As of October 1, China's applied tariff rate 
for garlic was reduced to 13 percent. In our ongoing WTO market 
access talks, we will continue to seek lower rates and 
reductions in the VAT for garlic. The Administration is making 
it clear to the Chinese that significant market access for U.S. 
agricultural exports is a condition for China's accession to 
the WTO.
    Question. In the past, the U.S. has treated nations such as 
Poland, Romania and Hungary as non-market economies in dumping 
cases once they agreed to join the World Trade Organization's 
predecessor organization, the General Agreement on Tariffs and 
Trade. I understand that the People's Republic of China has so 
far asked that it be treated as a market economy in dumping 
cases. That would be inappropriate. What, given China's 
restrictive market access, is your office doing to ensure that 
China is treated as a non-market economy for the purposes of 
our unfair trade laws?
    Answer. We agree that we must ensure that the United States 
is able to continue to apply its non-market economy (NME) 
methodology in antidumping investigations of imports from 
China. While this issue is as yet unresolved, U.S. negotiators 
have made it clear to China that its accession protocol must 
include language that permits continued use of NME methodology. 
Other WTO members that have used antidumping laws on China's 
exports in the past support the U.S. position on this matter.
      

                                


    Chairman Crane. Well, we thank you very much for your 
testimony. I now want to notify everyone that the Subcommittee 
will stand in recess until 1:15.
    [Recess.]
    Chairman Crane. The Subcommittee will now reconvene. Our 
next witness is Julius Katz, president of Hills & Co. Please 
proceed, Mr. Katz.
    Mr. Katz. Thank you, Mr. Chairman. Let me say that Bill 
Frenzel, who was to be here with me, couldn't return this 
afternoon and asked me to give his regrets. He also wished to 
be associated with my statement. He has his own statement for 
the record.
    Chairman Crane. His statement will be included as well. 
Thank you.
    [The prepared statement of Mr. Frenzel follows:]
      
    [GRAPHIC] [TIFF OMITTED] T2839.021
    
    [GRAPHIC] [TIFF OMITTED] T2839.022
    
      

                                


      STATEMENT OF JULIUS L. KATZ, PRESIDENT, HILLS & CO.

    Mr. Katz. Thank you, Mr. Chairman. Thank you for inviting 
me to appear before the Subcommittee to discuss H.R. 1712, a 
bill to encourage China to join the World Trade Organization, 
to remove China from the provisions of the Jackson-Vanik Act, 
and to provide a more effective remedy to the problem of 
inadequate market access in China.
    There is much in this bill to commend. First, by 
encouraging the entry of China into the World Trade 
Organization, it recognizes the growing importance of China as 
a major trading nation. As such, it should be a full member of 
the WTO, as soon as it is able to commit itself to the 
obligations required of WTO members.
    Second, the bill recognizes the importance of assuring 
China that as a WTO member, it will be accorded permanent most-
favored-nation treatment. This would relieve United States 
negotiators of the inconsistent position they find themselves 
in: Insisting that China commit itself to the obligations of 
the WTO--the first principle of which is nondiscrimination, as 
embodied in article I of the GATT--while at the same time 
insisting that under current United States law, the United 
States could not commit itself to apply these same WTO 
obligations to China. By removing the MFN issue from the 
accession negotiations with China, the credibility of the 
United States is significantly enhanced and its bargaining 
position improved.
    Another important advantage of extending permanent MFN 
treatment is that it will end the annual spring threat to deny 
such treatment to China. Some view this annual event as a 
charade, since the threat has so far turned out to be empty. 
Empty threats are poor policy tools. But we should not assume 
that the exercise is without cost. It puts U.S. firms at a 
competitive disadvantage and casts the United States as a less 
than dependable trading partner; as such, it acts as an 
obstacle to U.S. exports.
    The third major feature of the bill, the snapback 
provision, seeks to provide a more credible instrument than the 
nuclear-like MFN weapon to assure the ability of United States 
firms to compete on an equitable basis in the Chinese market. 
Unlike the threat to deny MFN treatment, which is usually aimed 
at a number of nontrade issues with China, the snapback 
provision is directly related to our trade interests. Sensibly, 
this provision can be activated only if China is not a member 
of the WTO. As a member of the WTO, China would be subject to 
the dispute settlement mechanism, which has proven to be a 
highly effective instrument for enforcing obligations of member 
countries.
    In short, Mr. Chairman, I believe that the basic thrust of 
the bill is desirable and worthy of support. I would, however, 
call attention to several provisions which warrant particular 
consideration. These relate to the time restraints and certain 
operative provisions of the bill.
    Under section III of the bill, the President is required to 
determine within 180 days of its enactment whether China is 
taking adequate steps or making significant proposals to become 
a WTO member and, if not, whether it is according adequate 
trade benefits to the United States. Failing an affirmative 
determination, the President is required to proclaim an 
increase in the duty rate on one or more products imported from 
China up to the rate that applied on December 31, 1994, that 
is, the date on which reductions of duty resulting from the 
Uruguay round began to take effect.
    As I noted at the beginning of my statement, China should 
be in the WTO. There would be important advantages to having 
China in the WTO, subject to the rules and disciplines of the 
world trading system. It would benefit our relations with China 
in general and our trade interests in particular to be able to 
bring any trade disputes to the multilateral forum of the WTO.
    Negotiations to bring China into the WTO have been underway 
for several years now, and while considerable progress has been 
achieved in persuading China to bring down its tariffs 
dramatically--to 10 percent according to a very recent report--
a number of very important unresolved issues remain. These 
include such subjects as nontariff barriers, services, and the 
critical issue of ``national treatment,'' which would assure 
that United States firms are treated the same in the Chinese 
market as Chinese firms.
    The failure to resolve these issues thus far is not, in my 
view, the result of a lack of effort or of unreasonableness on 
the part of either China or the United States and other WTO 
members. Neither is the problem altogether ideological. The 
problem, I believe, is the complexity of trying to make the 
Chinese economic system--now dominated by bloated, inefficient 
state-owned enterprises--compatible with the requirements of 
the WTO.
    To put a time constraint on the negotiations could have the 
unfortunate result of putting as much pressure to achieve 
agreement on the United States negotiators as on the Chinese. 
It is more important, I believe, to get the agreement right 
than to compromise important principles in order to conclude an 
agreement by a date certain.
    Another provision that needs careful examination is the 
requirement that the President determine whether ``China is 
according adequate trade benefits to the United States, 
including equal competitive opportunities.'' I am concerned 
that, on the one hand, if taken literally, the threshold is so 
high as to be incapable of being met. If, on the other hand, 
the phrase ``equal competitive opportunities'' is interpreted 
somewhat loosely, it may have little effective meaning.
    In conclusion, Mr. Chairman, let me say that the sponsors 
of the bill have put forward a thoughtful and constructive 
approach to the issue of trade with China. Thank you, Mr. 
Chairman.
    [The prepared statement follows:]

Statement of Julius L. Katz, President, Hills & Co.

    Mr. Chairman: Thank you for inviting me to appear before 
the Committee to discuss H.R. 1712, a bill to encourage China 
to join the World Trade Organization, to remove China from the 
provisions of the Jackson-Vanik Act, and to provide a more 
effective remedy to address the problem of inadequate market 
access in China.
    There is much in this bill to commend. First, by seeking to 
encourage the entry of China into the World Trade Organization, 
it recognizes the growing importance of China as a major 
trading nation. As such, it should be a full member of the WTO, 
as soon as it is able to commit itself to the obligations 
required of members of the organization.
    Second, the bill recognizes the importance of assuring that 
as a WTO member, China should expect that it will be accorded 
permanent most-favored-nation treatment. This would relieve 
U.S. negotiators of the inconsistent position they find 
themselves in of insisting that China commit itself to the 
obligations of the WTO, the first principle of which is non-
discrimination, embodied in Article I of the GATT, while at the 
same time insisting that under current U.S. law, the United 
States could not commit itself to apply these same WTO 
obligations to China. By removing the MFN issue from the 
accession negotiations with China, the credibility of the 
United States is significantly enhanced and its bargaining 
position improved.
    Another important advantage of extending permanent MFN 
treatment is that it will end the annual Spring rite of the 
threat to deny such treatment to China. Some view this annual 
event as a charade, since the threat has, so far, always turned 
out to be empty. Empty threats are poor policy tools. But, we 
should not assume that the exercise is without cost. It puts 
U.S. firms at a competitive disadvantage and casts the United 
States as a less-than-dependable trading partner. As such, it 
acts as an obstacle to U.S. exports.
    The third major feature of the bill, the snap-back 
provision, seeks to provide a more credible instrument than the 
nuclear-like MFN weapon to assure the ability of U.S. firms to 
compete on an equitable basis in the Chinese market. Unlike the 
threat to deny MFN treatment, which is usually aimed at a 
number of non-trade issues with China, the snap-back provision 
is directly related to our trade interests. Sensibly, this 
provision can be activated only if China is not a member of the 
WTO. As a member of the WTO, China would be subject to the 
dispute settlement mechanism, which has proven to be a highly 
effective instrument for the enforcement of member-country 
obligations.
    In short, Mr. Chairman, I believe that the basic thrust of 
the bill is desirable and worthy of support. I would, however, 
call attention to several provisions which warrant particular 
consideration. These relate to the time restraints and certain 
operative provisions of the bill.
    Under section 3 of the bill, the President is required to 
determine, within 180 days of its enactment whether China is 
taking adequate steps or making significant proposals to become 
a WTO member, and, if not, whether it is according adequate 
trade benefits to the United States. Failing an affirmative 
determination, the President is required to proclaim an 
increase in the rate of duty on one or more products imported 
from China, up to the rate that applied on December 31, 1994, 
that is, the date on which reductions of duty resulting from 
the Uruguay Round began to take effect.
    As I noted at the beginning of my statement, China should 
be in the WTO. There would be important advantages to having 
China in the WTO, where it would be subject to the rules and 
disciplines of the world trading system. There would be 
benefits to our relations with China generally and our trade 
interests in particular to be able to bring any trade disputes 
to the multilateral forum of the WTO.
    Negotiations to bring China into the WTO have been underway 
for several years now, and while considerable progress has been 
achieved in persuading China to bring down its tariffs 
dramatically, to 10 percent according to a very recent report, 
there remain a number of very important unresolved issues. 
These issues include such subjects as non-tariff barriers, 
services, and the critical issue of ``national treatment,'' 
which would assure that U.S. firms are treated the same in the 
Chinese market as Chinese firms.
    The failure to resolve these issues thus far is not, in my 
view, the result of lack of effort or of unreasonableness on 
the part of either China or of the United States and other WTO 
members. Neither is the problem altogether ideological. The 
problem, I believe, is the complexity for political, social, 
and economic reasons of trying to make the Chinese economic 
system, dominated by bloated, inefficient state-owned 
enterprises, compatible with the requirements of the WTO.
    To put a time constraint on the negotiations could have the 
unfortunate result of putting as much pressure on the U.S. 
negotiators as on the Chinese to compromise important 
principles to achieve agreement. It is more important, I 
believe, to get the agreement T3right than to conclude an 
agreement by a date certain.
    Another provision that needs careful examination is the 
requirement that the President determine whether ``China is 
according adequate trade benefits to the United States, 
including equal competitive opportunities.'' I am concerned 
that, on the one hand, the threshold, if taken literally, is so 
high as to be incapable of being met. If, on the other hand, 
the phrase ``equal competitive opportunities'' is interpreted 
somewhat loosely, it may have little effective meaning.
    In conclusion, Mr. Chairman, let me say that the sponsors 
of the bill have put forward a thoughtful and constructive 
approach to the issue of trade with China.
      

                                


    Chairman Crane. Thank you, Mr. Katz.
    Mr. Katz, would membership in the WTO provide China with 
gains and incentives sufficient to justify incurring the costs 
of domestic restructuring that would be required if it removed 
its trade barriers?
    Mr. Katz. Well, I think it would, although it is an 
arguable question in China apparently. I think there are some 
comrades who take the opposite position that it's not worth 
doing. But overall, I think it would be important to those in 
China who want to reform the economy. It would provide an 
anchor to those reforms. It would also give them an assurance 
of benefits in the United States and other markets of the 
world. So I think the advantages certainly outweigh the 
disadvantages for China.
    Chairman Crane. This is a repetitive question, but since 
the Province of Hong Kong has a free trade relationship with 
the rest of mainland China now, and since Hong Kong is a member 
of WTO, isn't China, effectively speaking, a member of the WTO?
    Mr. Katz. I don't think so. Hong Kong has a special customs 
status. It is a special customs territory and is a member of 
the WTO in that capacity. It has been since the beginning of 
the GATT. Countries may have free trade arrangements with other 
countries, but that doesn't give the partner country any 
rights. So I don't think that having Hong Kong be a member 
solves China's problem.
    Chairman Crane. Well, except to the extent that as I said, 
in effect they have a free trade relationship with all the 
other Provinces. Can't they simply route goods back and forth 
through Hong Kong?
    Mr. Katz. Well, they have a free trade relationship, but 
they don't have a common market. There is no common market 
between Hong Kong and China. It's a somewhat special situation.
    Chairman Crane. Why is it in the best interest of the 
United States to have China in the WTO in your estimation?
    Mr. Katz. I'm sorry?
    Chairman Crane. Why is it in the best interest of the 
United States to have China become a member of the WTO?
    Mr. Katz. Well, as I said in my statement, because it would 
subject China to the norms, the rules, the obligations of the 
world trading system. I think it would be desirable for that 
reason. China is a very large trading country and should be 
subject to the disciplines of the WTO. For somewhat similar 
reasons to the answer I gave a moment ago as to what China's 
interests would be. It would also be in our interest to have 
whatever reforms have taken place in China anchored in an 
international agreement, particularly a multilateral 
instrument.
    Chairman Crane. Why is it in China's interest to join the 
WTO?
    Mr. Katz. Well, again, because I think they get the 
assurances of consistent and permanent treatment in the markets 
of the member countries, the United States included. For 
internal political reasons, I think it is a way of reinforcing 
the pressure to reform their economy, which I think ultimately 
they are going to have to do.
    Chairman Crane. But would you not agree that there could be 
some staggering restructuring costs within China?
    Mr. Katz. Absolutely. That is the greatest obstacle I see 
at the moment. The Chinese economy is still dominated by these 
very large, inefficient state-owned enterprises into which the 
social safety net of the country is embedded. They are being 
supported by a banking system which is also inefficient and 
probably largely insolvent. I mean the firms are insolvent and 
they are being bailed out by a banking system which, under 
normal circumstances, would be insolvent. I think the Chinese 
leadership understands and is determined to reform that system 
but how to do it, and over what period of time, is the 
question.
    Chairman Crane. That time question is a valid one because 
I'm sure that restructuring costs would have to be absorbed by 
the National Government over there. It would be for their long-
term benefit, after going through that initial transition, but 
there would be some political consequences of that. In your 
estimation, do you think the people in power in China right now 
are prepared to make that kind of a painful transition?
    Mr. Katz. I think in principle they are. I think as a 
matter of policy they have pretty much made that decision. But 
precisely how to carry it out, what the transition should be, 
and how they deal with the interim problems that would arise in 
terms of surplus labor, employment, housing, medical care, 
education, Social Security--all of those elements are embedded 
in these huge enterprises. How to unwind that system is a 
formidable task, but I think they are committed to doing it.
    Chairman Crane. Do you have any views on the possible 
consequences of permitting Taiwan WTO accession before the 
mainland if the mainland continues to drag its feet?
    Mr. Katz. Well, I think--obviously, the mainland Chinese 
would be very upset about that. But what they would do as a 
practical matter I don't know. I assume it's something they 
would get over after a while. I don't see them as the problem 
so much as I think other WTO members would probably be 
reluctant to take on that risk. I mean, I think the People's 
Republic would get over it after a while. I think the People's 
Republic of China is moving inexorably to do what they have to 
do to become a member of the WTO, but I wouldn't care to put 
that in a timeframe of months. So I think both of these 
entities should be and will ultimately be in the WTO.
    Chairman Crane. I want to express appreciation to you and 
apologize to you, Mr. Katz, for our interruption. But we had a 
bill over on the floor; our Subcommittee brought up on CBI, the 
Caribbean Basin Initiative, parity and that's why we had to 
break. I am sorry we missed Bill Frenzel's testimony, but it 
will be a part of the record, as will yours. Thank you so much 
for coming today.
    Mr. Katz. Thank you, Mr. Chairman.
    Chairman Crane. We will now move onto the next panel which 
will begin with Wingate Lloyd, director of international 
relations for ITT Industries, here on behalf of the U.S. 
Chamber of Commerce. Then James Whittaker, manager of 
international public policy for Hewlett-Packard on behalf of 
the American Electronics Association; George Scalise, president 
of the Semiconductor Industry Association; and Cal Cohen, 
president of the Emergency Committee for American Trade.
    If you will please now proceed in the order that I called 
you.

STATEMENT OF WINGATE LLOYD, DIRECTOR, INTERNATIONAL RELATIONS, 
     ITT INDUSTRIES; ON BEHALF OF U.S. CHAMBER OF COMMERCE

    Mr. Lloyd. Thank you, Mr. Chairman, for allowing me to 
testify before your Subcommittee today. I am Wingate Lloyd, 
director of International Relations for ITT Industries, a 
global diversified technology and manufacturing company.
    Today I am appearing on behalf of the U.S. Chamber of 
Commerce. I am an active member of the Chamber's International 
Policy Committee and also serve as the chairman of the WTO 
Working Group. The Chamber is the world's largest business 
federation, with an underlying membership of more than 3 
million businesses and organizations. I appreciate this 
opportunity to present the Chamber's views on trade relations 
with China and on China's accession to the WTO.
    The U.S. Chamber of Commerce is committed to building 
support for full normalization of the United States-China 
commercial relationship. The U.S. Chamber supports permanent 
and unconditional extension of MFN trading status for China, 
China's entry into the WTO under commercially viable terms, and 
the removal of unilateral economic sanctions. It is the U.S. 
Chamber's policy to build a solid commercial foundation for our 
relationship with China which will encourage cooperation in the 
full range of issues impacting our bilateral relationship, from 
security and nonproliferation to human rights.
    Healthy United States-China trade relations are highly 
important to our national interest. Looking ahead, the World 
Bank estimates that China will have $750 billion in 
infrastructure needs over the next decade. United States 
companies are very competitive in this area of high priority 
for China.
    The U.S. Chamber believes a good World Trade Organization 
accession deal with China is critical. What are the components 
of a good deal? China must show commitment to WTO principles 
and offer measures that will ensure United States access to 
China's growing market in agriculture, goods, and services. 
Only after China takes these steps should the United States 
support China's accession to the WTO.
    China's bid to join the WTO represents an important 
opportunity. The commitments made by China in the accession 
negotiations will demonstrate China's willingness to integrate 
itself into the world trading system.
    Mr. Chairman, China is a source of great potential for many 
United States firms, including my own. All three elements of 
ITT Industries operate in China: Our Fluid Technology Co. 
produces pumps. Our defense and electronics unit makes 
connectors for mobile telephones and other purposes. Our 
automotive joint ventures in the Shanghai area produce brake 
systems, wiper systems, and other devices. We and our joint 
venture partners have invested over $100 million in China in 
the last 5 years, and expect to expand our presence.
    Last June, the Chamber of Commerce released the results of 
a nationwide survey of small business trade and investment with 
China. The survey showed that small business has a major stake 
in United States-China trade, and that United States companies 
of all sizes struggle with inconsistent rules and regulations; 
a lack of transparency; unclear division of authority between 
National, Provincial, and local officials; and difficulties in 
enforcing contracts. Both small and large business would 
benefit from a commercially viable WTO Agreement.
    However, China must make commitments. China's market should 
be open to foreign goods and services. Currently, foreign 
companies that have not invested in China are not allowed to 
import, export, distribute, or sell directly into the Chinese 
market. Beyond providing basic trading rights, China should 
continue to make progress on tariff reduction and intellectual 
property protection.
    There are critically important commitments that China must 
undertake before the U.S. Chamber can support its accession to 
the WTO. China should bring its trading regime into conformance 
with WTO Agreements and disciplines. China should extend 
national treatment to foreign companies that invest in China. 
It should extend MFN trade status to all WTO signatories who 
extend such treatment to China.
    The ongoing China WTO negotiations have quickened over the 
past year. But as can be clearly seen, more needs to be done. 
In conclusion, we believe that China will require some latitude 
from making the transition to a market economy, but USTR must 
insist that China adhere to basic WTO obligations. We should 
recognize that expanding our commercial ties with China is 
vital to America's future and that the terms of China's WTO 
accession must expand market access for United States 
companies, strengthen China's commitment to the rule of law, 
and require China to play by the rules of international trade 
and investment. Accepting less would mean lost opportunities 
for United States firms for decades to come. Thank you.
    [The prepared statement follows:]

Statement of Wingate Lloyd, Director, International Relations, ITT 
Industries; on Behalf of U.S. Chamber of Commerce

    Thank you, Mr. Chairman, for allowing me to testify before 
this Subcommittee on Trade. I am Wingate Lloyd, Director of 
International Relations for ITT Industries, a global 
diversified technology and manufacturing company. We employ 
about 60,000 people worldwide, with sales of $8.4 billion. 
Today I am appearing on behalf of the U.S. Chamber of Commerce. 
I am an active member of the U.S. Chamber's International 
Policy Committee and its Asia Task Force, and also serve as 
Chairman of its WTO Working Group. The U.S. Chamber is the 
world's largest business federation with an underlying 
membership of more than three million businesses and 
organizations of every size, sector, and region. I appreciate 
this opportunity to present the U.S. Chamber's views on trade 
relations with China and on the issue of China's accession to 
the World Trade Organization (WTO).
    The U.S. Chamber of Commerce is committed to building 
support for full normalization of the U.S.-China commercial 
relationship. The U.S. Chamber supports permanent and 
unconditional extension of Most Favored Nation (MFN) trading 
status for China, China's entry into the World Trade 
Organization under commercially viable terms, and the removal 
of unilateral economic sanctions on China. It is the U.S. 
Chamber's policy to build a solid commercial foundation for our 
relationship with China, which will encourage cooperation on 
the full range of issues impacting our bilateral relationship, 
from security and nonproliferation to human rights.
    Healthy U.S.-China trade relations are highly important to 
our national interest. China has the world's third largest 
economy. In 1996, the United States exported approximately $12 
billion in goods and services to China. These exports support 
tens of thousands of high-wage American jobs. China is the 
sixth largest market for American agricultural products. 
Looking ahead, the World Bank estimates that China will have 
$750 billion in infrastructure needs over the next decade. U.S. 
companies are very competitive in this area of high priority to 
China. China will increase in importance for those members of 
the U.S. Chamber that export high technology equipment, such as 
aerospace, telecommunications, and petroleum technology, as 
well as agricultural products and consumer goods.
      

              WTO Accession for China: Must Be a Good Deal

    If we are to capitalize fully on China's enormous market 
opportunities, the U.S. Chamber believes a good World Trade 
Organization accession deal with China is critical. What are 
the components of a good deal? China must show a commitment to 
core WTO principles, including national treatment, non-
discrimination, reciprocal market access, transparency, 
protection of intellectual property rights, binding dispute 
settlement, trading rights, judicial review, and adherence to 
state-trading and subsidy disciplines. China must also offer 
measures that will ensure U.S. access to China's growing market 
in agriculture, goods, and services. Only after China takes 
these steps should the U.S. support China's accession to the 
WTO.
    Just last week, Chinese President Jiang Zemin visited the 
United States for the first summit with a U.S. President in 
more than a decade. It was a historic opportunity to move our 
bilateral relationship forward. Strengthening commercial ties 
was highlighted. Both Chinese and U.S. leaders recognize that 
China's entry into the WTO will be critical to improving our 
trade relations. Achieving that end, however, requires action 
by China.
    China's bid to join the WTO represents an important 
opportunity to apply internationally accepted multilateral 
disciplines to one of the world's fastest growing economies. 
The commitments made by China in the WTO accession negotiations 
will demonstrate China's willingness to integrate itself into 
the world's trading system, and to open its markets to foreign 
goods and services.
    Mr. Chairman, China is a source of great potential for many 
U.S. firms, including my own. All three elements of ITT 
Industries, one of the companies created by the division of the 
old ITT Corporation in 1995, operate in China. Our Fluid 
Technology company produces pumps both in Shenyang and in Luhe 
near Nanjing. Our Defense and Electronics unit makes connectors 
for mobile telephones and other purposes in Zhenjiang near 
Nanjing. Two of our Automotive joint ventures in the Shanghai 
area produce brake systems, wiper systems, electrical switches, 
small motors and other devices for automobiles manufactured in 
China. We and our joint venture partners have invested over 
$100 million in China in the last five years, and expect to 
expand our presence. We look forward to working with our 
Chinese partners, customers, suppliers, and employees in joint 
efforts towards growth and prosperity in the years ahead.
    It is not only large U.S. companies like ITT Industries 
that will benefit from a more open approach by China to 
international trade and investment. When the U.S. Chamber 
testified before this subcommittee in June, we released the 
results of a nationwide survey of small business trade and 
investment with China. That survey showed that small business 
has a major stake in U.S.-China trade, and that trade with 
China is not the exclusive province of large multinational 
companies. Currently, U.S. companies of all sizes struggle in 
China with inconsistent rules and regulations, a lack of 
transparency, unclear divisions of authority among national, 
provincial, and local officials, and difficulties in enforcing 
contracts. High tariffs and various import restrictions and 
licensing requirements are also significant barriers for 
businesses. Clearly both small and larger businesses would 
benefit from a commercially viable WTO agreement.
    American companies must be given the chance to compete and 
win in China. We cannot afford to miss out on the great 
potential represented by the enormous China market. That is why 
the U.S. Chamber fully supports China's accession to the WTO, 
but only in a manner consistent with its status as a major 
trading power and with full adherence to the market principles 
assumed of all WTO signatories.

 A Good China WTO Deal Would Help Address the U.S.-China Trade Deficit

    China's trade surplus with the U.S. is second only to that 
of Japan and is growing at a faster rate. There are a number of 
reasons for the trade imbalance. First, many of the products we 
used to import from Southeast Asian countries now come instead 
from China, as manufacturing facilities have moved into 
southern China to take advantage of lower costs. Second, a 
strong U.S. economy is drawing in more imports of Chinese 
goods. Third, certain U.S. government policies have prevented 
U.S. firms from competing effectively in the Chinese market. 
The Overseas Private Investment Corporation and the U.S. Trade 
and Development Agency, for example, cannot do business in 
China. Other policies prohibit U.S. firms from exporting 
certain high technology products to China, including civilian 
nuclear reactors. At last week's summit, President Clinton said 
he planned to certify that China has met the congressional 
conditions set in the 1985 agreement on U.S.-China nuclear 
cooperation. That could pave the way for U.S. firms to gain 
access to China's vast power market.
      

                      Commitments China Must Make

    Yet while there are steps the U.S. can take, there are also 
actions that China can and should take to address the trade 
imbalance. China's markets should be open to foreign goods and 
services. Currently, foreign companies that have not invested 
in China are not allowed to import, export, distribute, or sell 
directly into the Chinese market. They must trade through 
authorized trading companies. Beyond providing basic trading 
rights, China should continue to make progress on tariff 
reduction and intellectual property protection. In addition to 
these measures, there are a number of critically important 
commitments China must make before the U.S. Chamber can support 
China's accession into the WTO. These include China's 
commitment to:
     bring its trading regime into conformance with WTO 
Agreements and Disciplines;
     extend national treatment on all goods and 
services to foreign companies that want to invest in China;
     extend MFN trade status to all WTO signatories who 
extend such treatment to China;
     sign the WTO Government Procurement Code;
     provide market access for textiles and 
agricultural products, putting aside standards and 
certification requirements as barriers to trade;
     reduce export subsidies;
     liberalize access to its foreign exchange system 
for foreign exporters and investors; and
     apply the provisions of the WTO uniformly 
throughout China.
    The ongoing China WTO negotiations have quickened over the 
last year. China's leadership has indicated a willingness to 
take steps to open its markets. Effective October 1, China cut 
import tariffs from 23 percent to an average of 17 percent on 
nearly three-quarters of the goods on which tariffs are 
imposed. China has also offered to shorten the period for 
phasing out quotas and licensing arrangements for some 
industrial products. However, more concrete steps are necessary 
to build confidence that a WTO deal is within reach.
    China will require some latitude in making the transition 
to a market economy, but USTR must insist that China adhere to 
basic WTO obligations. We are concerned that China has shown a 
reluctance to engage in serious negotiations on fundamental 
issues such as transparency and uniform application of trade 
rules. Trade and industrial policies, certification, 
registration, and licensing procedures should be published so 
U.S. firms can make informed business decisions. We strongly 
believe that China must make these commitments prior to 
receiving membership in the WTO.
    The integrity of the WTO system is at stake. Final WTO 
accession terms for China will doubtless be used as a benchmark 
for accession negotiations for Russia, Vietnam and other 
economies that are still in difficult transitions from 
centrally planned to market economies. Each of these countries, 
including China, will be tempted to reverse market reforms in 
the face of political or economic uncertainties that are 
virtually certain to occur in the process of market transition. 
As a consequence, we believe that the terms of WTO accession 
should be defined carefully to ensure that reforms in 
international trade policies are secure from threats to the 
reform process.

                               Conclusion

    In conclusion, Mr. Chairman, we should recognize that 
expansion of our commercial ties with China is vital to 
America's future. The terms of China's WTO accession must 
expand market access for U.S. companies, strengthen China's 
commitment to the rule of law, and require China to play by the 
rules of international trade and investment. Accepting less 
would mean lost opportunities for U.S. firms for decades to 
come. Mr. Chairman, I would be pleased to respond to any 
questions.
      

                                


    Chairman Crane. Thank you, Mr. Lloyd. Let me remind you 
that your written statements will all be made a part of the 
permanent record.
    With that, our next witness is Mr. Whittaker.

STATEMENT OF JAMES F. WHITTAKER, MANAGER, INTERNATIONAL PUBLIC 
POLICY, HEWLETT-PACKARD CO.; ON BEHALF OF AMERICAN ELECTRONICS 
         ASSOCIATION AND CHINA WTO HIGH-TECH COALITION

    Mr. Whittaker. Thank you, Mr. Chairman. I am pleased to be 
here on behalf of the American Electronics Association, and the 
China WTO High-Tech Coalition to present our views on China's 
accession to the World Trade Organization. The AEA, American 
Electronics Association, represents more than 3,000 member 
companies across the spectrum of electronics and information 
companies, from semiconductors and software to computers and 
telecommunications systems. In addition to the AEA, the High-
Tech Coalition includes the Business Software Alliance, the 
Electronic Industries Association, the Information Technology 
Industry Council, the Semiconductor Industry Association, 
Software Publishers Association, Telecommunications Industry 
Association, and the United States Information Technology 
Office.
    Before I turn to the WTO negotiations, allow me to put the 
American high technology industry in perspective. The United 
States high-tech industry is the single largest manufacturing 
industry in the United States, with 1.9 million workers. When 
computer and communication services are included, the industry 
employs 4.2 million workers. These are high skill, high-wage 
jobs with average wages 73 percent higher than the average 
private sector wage. The industry represents 6.2 percent of the 
U.S. GDP, gross domestic product, with $150 billion in exports.
    Now allow me to quickly frame the Chinese market and its 
enormous growth potential. While today it's only one-tenth the 
size of the U.S. market, in the future the picture will change 
dramatically. The IT, information technology, sector's 
estimated growth rate will range from 20 to 40 percent annually 
over the next 15 years. The computer market is currently 
estimated at nearly $7 billion, growing to $22.5 billion by the 
year 2000. The telecommunications market is estimated to be 
$7.5 billion with the Ministry of Post and Telecommunications 
to invest $42 billion between now and the year 2000. Obviously 
China's electronics market provides United States producers 
with significant opportunities.
    There are several fundamental principles which guide AEA's 
trade policy toward China. We believe that a strong United 
States-China relationship is vital to the future of the global 
trading system. We believe that China's accession to the WTO is 
critical, but it must be done on viable commercial terms, which 
I will discuss in a moment. Finally, United States economic 
leadership and job creation will depend on continued expansion 
of our trade with Asia in general, and with China in particular 
since China plays an increasingly important role in the Asian-
Pacific region.
    Let me now turn to what AEA and the coalition mean by 
commercially viable terms. The terms referred to are a package 
of market access commitments and WTO core obligations that 
China must undertake to ensure meaningful integration into the 
global trading system I would like to review several of the key 
issues.
    During President Jiang's visit last week, he announced that 
China would join the ITA, Information Technology Agreement. In 
our view, this represents a significant move on the part of 
China, and indicates that China is serious about negotiations 
to enter the WTO. Further, it represents China's own 
recognition of the value to its own economy from participating 
in the ITA. Currently, China's average tariff rate is roughly 
23 percent. In the IT sector, tariffs range between 6 and 35 
percent. Clearly, eliminating the tariffs will increase United 
States exports and prompt further competitive development of 
China's IT and electronics market. We would urge China to adopt 
a rapid schedule to phase out its duties as close to the year 
2000 as possible.
    China's decision to join the ITA, while a significant and 
welcomed step, is just one part of a package of needed market 
access commitments. A key element to this package is adoption 
of the WTO core obligations, including national treatment, 
transparency, and consistent uniform enforcement. These 
obligations are fundamental to membership in the WTO, and it is 
essential that China adopt them not only in letter, but in 
spirit. As basic elements of WTO membership, AEA and the 
coalition believe these obligations should take effect 
immediately upon accession.
    Regarding distribution rights, these provide companies with 
the ability to distribute their imports freely throughout 
China. These rights are essential but different from trading 
rights, which allow firms the right to import and export. China 
has agreed to grant trading rights to foreign firms, but has 
not yet agreed to grant distribution rights. Consequently, 
trading rights must be linked to distribution rights to achieve 
meaningful market access.
    Regarding tariffs, there are other high-tech goods not 
currently covered by the ITA agreement that require dramatic 
reduction or elimination of duties. For example, tariff rates 
on medical electronics and scientific equipment are as high as 
28 percent. We would encourage China to join the WTO Agreement 
on zero-for-zero tariffs on medical equipment.
    Regarding industrial policies and technology transfer, the 
Chinese Government has targeted the electronics industry as a 
so-called pillar industry, which means that it views the 
development of this industry is key to its national economic 
development. One way that China can pursue this objective is to 
insist that foreign firms invest in China and share that 
technology through joint ventures. The implied message is that 
such transfers are required to gain market access to China's 
rapidly growing markets.
    While such technology transfers are not spelled out in 
Chinese law, the Government's practice is to persuade foreign 
firms to transfer technology for market share. The approval 
authorities generally look for some technology transfer in 
training commitments before approving a company's request. The 
USTR is aware of this important issue; we encourage them to 
continue to pursue all available options in the WTO to 
discourage the practices.
    On telecommunications and information infrastructure, China 
currently restricts full participation in competition and basic 
telecommunications services. In this era of global 
communications, it is essential that China adopt a competitive 
model in telecommunications by adopting the terms and 
procompetitive regulatory principles of the General Agreement 
on Basic Telecommunications within the WTO.
    On intellectual property protection, China should adhere to 
and enforce all WTO intellectual property rules. While progress 
has been made under the United States-China bilateral IPR, 
intellectual property rights, agreements and China has moved to 
adopt the TRIPs, trade related intellectual property agreement, 
China must continue to enforce its rules and those of the WTO.
    With respect to state-owned enterprises, we point out that 
they currently represent almost 40 percent of China's GDP. 
Consequently, they control a significant share of domestic and 
international trade in electronics goods in China.
    The Government has made the difficult but essential 
decision to allow nonprofitable firms to either be purchased by 
profitmaking ones or to go out of business. Importantly, China 
has targeted 39 electronic state-owned enterprises as the best 
companies and key partners for foreign investors. It is 
necessary that the WTO negotiations include affirmative 
obligations to ensure that China's state-owned enterprises make 
purchases and sales on the basis of commercial considerations 
and under competitive processes.
    Mr. Chairman, the high-tech industry is working closely 
with the U.S. Trade Representative, who we believe will do an 
excellent job in a tough, complex, and critical set of 
negotiations to ensure that China's membership is obtained with 
the necessary reforms and obligations. We look forward to 
continuing our work with the USTR and with this Subcommittee to 
ensure this outcome. Thank you, Mr. Chairman.
    [The prepared statement and attachments follow:]

Statement of James F. Whittaker, Manager, International Public Policy, 
Hewlett-Packard Co.; on Behalf of American Electronics Association and 
the China WTO High-Tech Coalition

    Thank you, Mr. Chairman. I am pleased to be here on behalf 
of the American Electronics Association and the China WTO High-
Tech Coalition to present our views on China's Accession to the 
World Trade Organization.
    The American Electronics Association represents more than 
3,000 member companies across the spectrum of electronics and 
information companies--from semiconductors and software to 
computers and telecommunication systems. As the largest high-
tech trade association in the U.S., AEA represents American 
high-tech companies nationally through 17 council offices and 
globally through our offices in Tokyo, Brussels and Beijing.
    In addition to AEA, the High-tech Coalition includes the:
     Business Software Alliance (BSA);
     Electronics Industries Association (EIA);
     Information Technology Industry Council (ITI);
     Semiconductor Industry Association (SIA);
     Software Publishers Association (SPA);
     Telecommunications Industry Association (TIA); 
and,
     United States Information Technology Office 
(USITO), the Beijing representative office of AEA, SIA, SPA and 
TIA.
    Before I turn to the WTO negotiations, allow me to put the 
American high tech industry in perspective. The U.S. high-tech 
industry is the single largest manufacturing industry in the 
U.S., with 1.9 million workers. When computer and 
communications services are included, the industry employs 4.2 
million workers. These are high-skill, high-wage jobs, wigh-
tech wage of $49,586, which is 73% higher than the average 
private sector wage of $28,582. This industry represents 6.2 
percent of the U.S. GDP, with total sales of $866 billion and 
$150 billion in exports, making high-tech the single largest 
merchandise export industry.
    Now allow me to frame the Chinese electronics market 
enormous growth potential. While today it is only one-tenth the 
size of the U.S. electronics market, this picture will change 
dramatically over the next 15 years. The Information Technology 
(IT) sectors' estimated growth rates range from 20% to 40% 
annually over the next 15 years. The computer market is 
currently estimated to be $6.8 billion, growing to $22.5 
billion by the year 2000. The telecommunications market is 
estimated to be $7.5 billion, with the Ministry of Posts and 
Telecommunications (MPT) investing $42 billion between now and 
the year 2000. As the data indicate, China's electronics market 
provides U.S. producers with significant opportunity.
    There are several fundamental principles which guide AEA's 
trade policy toward China. We believe that:
     A strong U.S.-China relationship is vital to the 
future of the global trading system;
     China's accession to the World Trade Organization 
is critical, but it must be done on viable commercial terms, 
which I will discuss in just a moment; and finally,
     U.S. economic leadership and job creation will 
depend on continued expansion of trade with Asia in general and 
with China, in particular, since China plays an increasingly 
important role in the Asia-Pacific regional economy.
    Let me now turn to what AEA and the Coalition mean by 
commercially viable terms. The terms referred to are simply a 
package of market access commitments and core obligations that 
China must undertake to ensure meaningful integration into the 
global trading system. I will review eight of the key issues.

                  The Information Technology Agreement

    During President Jiang's visit last week he announced that 
China would join the Informationement (ITA). The ITA is a WTO 
agreement among 42 countries to eliminate all duties on 
information technology equipment. In our view this represents a 
significant commitment on the part of China and indicates that 
China is serious about negotiations to enter the WTO. Further, 
it represents China's recognition of the value to its own 
economy when participating in international agreements. 
Currently, China's average tariff rate is roughly 23 percent. 
In the IT sector, tariffs range between 6 to 35 percent. 
Clearly, the elimination of these tariffs will increase U.S. 
exports and prompt further competitive development of China's 
IT and electronics market. We now urge China to adopt a rapid 
schedule to phase out its duties as close to the year 2000 as 
possible. This will ensure the greatest economic benefit from 
the agreement. China's decision to join the ITA, while a 
significant and welcome step, is just one part of a package of 
needed market access commitments.

                            Core Obligations

    The first component of the WTO accession talks are the core 
obligations. These obligations include national treatment, 
transparency and consistent uniform enforcement. These are 
fundamental to membership in the WTO and it is essential that 
China adopt them not only in letter but spirit. As fundamental 
elements of WTO membership, AEA and the Coalition believe these 
obligations should have limited, if any, transition periods.

                          Distribution Rights

    Distribution rights provide companies with the ability to 
distribute their imports freely throughout China. These rights 
are essential but different from trading rights which allow 
firms the right to import and export. China has agreed to grant 
trading rights to foreign firms, but has not yet agreed to 
grant distribution rights. Consequently, trading rights must be 
linked to distribution rights to achieve meaningful market 
access. The U.S. high-tech industry views this as a key element 
of market access measures to be undertaken by the Chinese.

                           Tariff Reductions

    In addition to adopting the ITA and phasing out tariffs on 
these products, there are other high-tech goods not currently 
covered by the ITA that require dramatic reduction or 
elimination of duties. For example, tariff rates on medical 
electronics and scientific equipment are as high as 28 percent. 
In fact, we would encourage China to join the WTO agreement on 
zero-for-zero tariffs on medical equipment agreed to during the 
Uruguay Round. These and other rates should also be 
dramatically reduced or eliminated in order to increase U.S. 
exports and enhance the competitive growth of China's market.

   Development of Industrial Policies and Forced Technology Transfer

    The Chinese government has targeted the electronics 
industry as a so-called Pillar industry, which means that it 
views the development of this industry as key to its national 
economic development. One way that China can do this is to 
insist that foreign firms invest in China and share their 
technology through joint ventures. The implied message is that 
such transfers are required to gain increased access to China's 
rapidly growing markets. Many AEA companies have expressed 
concern about what is commonly referred to as, ``market share 
for technology transfer.'' While such technology transfer 
requirements are not spelled out in Chinese law, the 
government's practice is to persuade foreign firm to transfer 
technology for market share. The approval authorities--
government agencies that must approve foreign investment, 
including joint ventures and partnership--generally look for 
some technology transfer and training commitments before 
approving a company's request. The USTR is aware of this 
important issue and we encourage them to continue to pursue all 
available options in the WTO include the Trade-Related 
Investment Measures (TRIMs) and other investment related 
negotiations in order to discourage these practices.

           Telecommunications and Information Infrastructure

    As Henry Schacht, CEO, Lucent Technologies, said last week 
to China's President Jiang, ``weed communication can go a long 
way toward improving the lives of people throughout the 
world.'' China currently restricts full participation and 
competition in basic telecommunications services. Further, 
China maintains severe limits on content and transmission of 
data over the Internet. In this era of global communications, 
it is essential that China adopt a competitive model in 
telecommunications by adopting the terms and pro-competitive 
regulatory principles of the General Agreement on Basic 
Telecommunications within the WTO. Competition in the 
communications sector will serve many mutual goals of both the 
U.S. and China.

                 Intellectual Property Protection (IPR)

    China should adhere to and enforce all WTO intellectual 
property rules. As China's own industries develop and the 
market becomes more competitive, it will be increasingly 
important to them to protect their intellectual property 
rights. While progress has been made under the 1995 U.S.-China 
IPR agreement, China must continue to enforce its rules and 
those of the WTO. Further, a strong intellectual property 
regime is essential to encourage foreign trade and investment.

                         State-Owned Enterprise

    State-owned enterprises currently represent almost 40 
percent of China's GDP. Consequently, these enterprises control 
a significant share of domestic and international trade in 
electronics goods in China. China is in the process of 
reforming this sector by privatizing these firms. The 
government has made a difficult but, in its view, essential 
decision to allow non-profitable firms to either be purchased 
by profit-making firms or to go out of business. Importantly, 
China has targeted 39 electronics state-owned enterprises as 
the best companies and key partners for foreign investors. It 
is necessary that the WTO negotiations include affirmative 
obligations to ensure that China's state-owned enterprises 
(including partially state-owned and recently privatized 
enterprises) make purchases and sales on the basis of 
commercial considerations ative processes.
    Mr. Chairman, the high-tech industry is working closely 
with the United States Trade Representative. USTR is doing an 
excellent job in what will be a tough, complex and critical set 
of negotiations as they work to ensure that China's membership 
is obtained following the necessary reforms and obligations. We 
look forward to continuing our work with USTR and this 
committee to ensure this outcome.
    Attached for the record is China market information from 
the soon-to-be-released AEA publication CyberNation, the 
position paper of the China WTO High-Tech Coalition and a list 
of the 39 state-owned enterprises China has targeted for the 
High-Tech industry.
    Thank you.
      

                                


      
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    Chairman Crane. Thank you, Mr. Whittaker.
    Mr. Scalise.

STATEMENT OF GEORGE SCALISE, PRESIDENT, SEMICONDUCTOR INDUSTRY 
                          ASSOCIATION

    Mr. Scalise. Thank you, Mr. Chairman. I want to thank you 
for the opportunity to present the SIA's, Semiconductor 
Industry Association, views on China's accession to the WTO. We 
do support China's accession to the organization but, as has 
been said so many times, only on a commercial basis. I would 
like to set out the conditions that we think would be 
appropriate to satisfy that requirement.
    First, let me talk just a little bit about the 
semiconductor industry. It employs about 260,000 Americans. It 
is the underlying enabling technology for the $400 billion 
electronics industry. As Mr. Whittaker said, that industry 
employs about 4.2 million Americans. Roughly half of our sales 
are exported. Worldwide, it's a $139 billion industry today. By 
the year 2000, it will be about a $230 billion industry, 
growing at 17 percent compounded. Fortunately, the U.S. segment 
of that industry has about a 50 percent market share today. We 
want to maintain that. Therefore, open markets are critical to 
maintaining that 50 percent market share.
    The Chinese semiconductor market today is estimated to be 
about $8 million. About 20 percent of that demand is being 
satisfied from domestic Chinese production. The rest of the 
market is being met by imports from companies from around the 
world, in particular, the United States. We believe that the 
Chinese market could be the second largest segment of the world 
market by the year 2010. Therefore, it is important that we 
become a major player in that market as time goes on.
    Last week China announced that it would join the 
Information Technology Agreement. That was a major step forward 
as far as we are concerned; we are pleased to see that. Chinese 
tariffs on semiconductors are currently in the 6- to 12-percent 
range. On the equipment that is used to make semiconductors, 
tariffs are about 35 percent. Elimination of these duties will 
certainly increase United States exports and promote the 
development of a competitive electronics market in China, and 
will obviously enhance consumer opportunities in China as well. 
So a critical next step is to reach an agreement on the 
phaseout schedule of these tariffs that remain. The quicker the 
phaseout, the better.
    Beyond tariffs, there are five key issues that must be 
resolved in order for China to join the WTO on a commercially 
sound basis. First, foreign firms must be granted distribution 
rights, as Mr. Whittaker talked about just a few minutes ago, 
and on the conditions that he has outlined.
    Second, Chinese state-invested enterprises must be 
obligated to purchase solely on commercial terms. While China 
is in the process of reforming its state sector by privatizing 
many of its firms, it's also building up a select group of 
national champions in the electronics sector. These state firms 
include both semiconductor producers and users. To ensure that 
the other market access commitments made by China are not 
undermined, the Chinese Government should commit not to 
pressure its state-owned enterprises or its state-invested 
enterprises to favor Chinese-made goods over foreign goods.
    Third, with respect to forced technology transfer, the 
Chinese Government is seeking to develop its domestic chip 
industry by persuading foreign firms to invest in China and 
share their technology with Chinese firms through joint 
ventures and other partnership arrangements. In return, it is 
suggested that increased market access will be available to 
those firms willing to provide this technology transfer. 
Discouraging such practices must be a primary objective of our 
negotiators. The reality is that China will obtain more 
advanced technology, and its industry will develop more 
quickly, if foreign firms are allowed to transfer technology 
through the development of regular business relationships 
rather than as a result of Government pressure.
    Fourth, with regard to intellectual property protection, it 
is essential that China not only agree to all WTO intellectual 
property rules, but that it actively enforce these rules. 
Again, the point that should be made is that it is in China's 
interest to ensure full and effective protection of 
intellectual property rights, as this will encourage the high-
tech foreign investment it seeks to develop its economy.
    Finally, with respect to trade remedies, the SIA, 
Semiconductor Industry Association, believes it is important 
that China's accession to the WTO in no way undermine the 
ability of the United States to enforce its antidumping law 
against Chinese goods. China's protocol of accession should 
reaffirm the ability of the U.S. Government to apply nonmarket 
economy rules in antidumping cases involving China.
    Mr. Chairman, USTR is working very hard to ensure that 
China obtain membership in the WTO, but only after making these 
essential reforms. We support continuing that approach. Thank 
you.
    [The prepared statement follows:]

Statement of George Scalise, President, Semiconductor Industry 
Association

    I appreciate the opportunity to appear before the 
Subcommittee on Trade of the Committee on Ways and Means to 
present the views of the Semiconductor Industry Association 
(SIA) on the future of U.S.-China relations and the accession 
of China to the World Trade Organization (WTO).
    Before discussing the SIA's position on these important 
issues, I would like to take a minute to give some background 
on the U.S. semiconductor industry.

                    The U.S. Semiconductor Industry

    Semiconductors are an increasingly pervasive aspect of 
everyday life, enabling the creation of the information 
superhighway and the functioning of everything from automobiles 
to modern defense systems.
    U.S. semiconductor makers employ 260,000 people nationwide. 
The presence of the industry is widespread--17 states have 
1,000 or more chip workers within their borders. Semiconductor 
products are the enabling technology behind the nearly $400 
billion U.S. electronics industry, which provides employment 
for 2.5 million Americans.
    The U.S. semiconductor industry is currently the world 
market share leader, with 1996 world sales reaching $60 
billion, representing almost 46 percent of the $132 billion 
world market. Moreover, the world semiconductor market is 
expected to increase by over 75 percent in the next three 
years, with projected sales totaling over $232 billion by the 
year 2000.
    U.S. semiconductor producers are highly committed to 
maintaining their lead in both semiconductor manufacturing and 
technology. The U.S. semiconductor industry devotes on average 
20 percent of its revenues to capital spending and another 11 
percent to research and development--among the highest of any 
U.S. industry.
    While investing heavily in the industry's future 
competitiveness and technological capabilities, SIA members 
also have always actively sought to secure foreign market 
access for U.S. products. Because the semiconductor industry is 
so global in nature--roughly half of the U.S. industry's 
revenues are derived from overseas sales--the SIA has been 
dedicated since its inception to promoting free trade and 
opening world markets.
    For example, the U.S. industry has been in the forefront of 
efforts to eliminate tariffs on semiconductors and related 
products worldwide. At SIA's urging, the United States, Japan 
and Canada eliminated their semiconductor tariffs in the mid-
1980s. Earlier this year, another 39 countries agreed to 
eliminate their semiconductor tariffs through the proposed 
Information Technology Agreement (ITA), and just last week, at 
the Clinton-Jiang summit, China agreed to also join the ITA.
    Given China's potential to become the largest single market 
for semiconductors in the world within a few decades, the SIA 
believes it is essential that the United States ensure that 
China accede to the WTO on a commercially sound basis.

                        Semiconductors in China

    U.S. semiconductor firms are making substantial commitments 
to expand their market presence in the People's Republic of 
China. At the same time, China is seeking to foster its own 
electronics industry, with a particular emphasis on 
microelectronics, and is rapidly moving to integrate its 
economy more fully into the world trading system. As part of 
this process, the Chinese Government and its electronics 
industry are inviting closer contacts with the U.S. 
semiconductor industry, and significant opportunities and 
challenges have already become evident. In response to these 
developments, the SIA determined several years ago that an 
examination was needed of the issues confronting the U.S. 
semiconductor industry as a result of its growing presence in 
China and China's emergence as a major trading power with a 
rapidly emerging electronics sector.
    The result was an SIA study on China released in February 
1995 entitled ``Semiconductors in China: Defining American 
Interests.'' SIA intended the study to be a contribution to the 
information base necessary to support a constructive dialogue 
on issues of mutual interest and concern as commercial and 
technological ties grow between the U.S. and Chinese 
industries. SIA has updated this information through a series 
of annual trips, which have allowed the industry both to foster 
a better understanding of the Chinese market and to explain to 
Chinese officials U.S. semiconductor concerns regarding China's 
trade and economic regime. The following information is based 
on our most recent visit to China in September 1997.
    While statistical data on Chinese semiconductor demand and 
output are limited, the market currently is estimated to be 
over $8 billion and it is growing at a rapid rate. Since 1985, 
the average growth rate in semiconductor demand in China has 
been about 24 percent per year. A number of observers believe 
that in light of China's growing domestic demand for 
electronics products, China will become the world's second 
largest semiconductor market by 2010.
    Presently local production can only supply about 20 percent 
of China's semiconductor needs, and these represent primarily 
low-end devices used in consumer electronics products like 
refrigerators, washing machines, radios, and televisions. 
Virtually all sophisticated semiconductors needed by Chinese 
electronics firms must be imported, a pattern that will not 
change significantly over the short run. This continuing 
shortfall creates a major commercial opportunity for U.S. 
producers.
    At the same time, the Chinese Government, through its 
Ministry of Electronics Industry, is undertaking a significant 
effort to develop a competitive domestic Chinese semiconductor 
industry. While most semiconductor technology in China is 
currently at the 1-2 micron level, the Chinese Government is 
undertaking a number of projects designed to obtain cutting 
edge manufacturing technology at the 0.35-0.50 micron level, 
which would allow the Chinese industry to compete with the U.S. 
industry and other key world semiconductor producers.
    The focus of this Chinese Government plan to develop its 
own industry is an effort to persuade foreign firms to invest 
in China and share their technology with Chinese firms through 
joint ventures and other partnership arrangements. In return, 
suggestions are made that increased market access may be made 
available to those firms willing to transfer technology. Reform 
of such practices must be at the heart of any agreement to 
admit China to the WTO.

                  The Information Technology Agreement

    SIA commends the announcement last week by China that it 
would join the ITA as soon as possible and thereby eliminate 
its tariffs on semiconductors, semiconductor manufacturing 
equipment and related information technology products. This 
announcement is a critical step forward toward China's 
accession to the WTO on commercially viable terms.
    China currently imposes tariffs of 6-12 percent on 
semiconductors. Chinese tariffs tend to be higher on low-end 
semiconductors which China can make domestically, and lower on 
complex devices which must be imported. Elimination of these 
tariffs will spur development of a competitive microelectronics 
industry in China, as it has in other nations. It will allow 
U.S. producers to sell advanced semiconductors to their Chinese 
customers at the lowest possible price, thereby both increasing 
U.S. exports and strengthening the developing Chinese 
electronics industry.
    A related benefit of China signing onto the ITA will be the 
elimination of the very high tariffs--up to 35 percent--
recently reimposed by China on semiconductor manufacturing 
equipment and other capital equipment imported into China. At 
the end of December 1995, China's State Council announced that 
as part of a series of major reforms in its import tax regime 
it would eliminate previously existing tariff and value added 
tax (VAT) exemptions for imports of capital equipment for 
foreign enterprises, effective April 1, 1996. Until this 
change, foreign-owned companies in China and Sino-foreign joint 
ventures did not have to pay a VAT or duty on capital equipment 
imports. Currently these companies must pay an import duty plus 
a VAT of 17 percent assessed on the value of the equipment plus 
the customs duty. Given that tariffs on capital equipment 
continue to be relatively high, this combination had 
significantly raised the cost of capital imports into China.

         Policy Issues Relating to China's Accession to the WTO

    The SIA supports China's bid to join the WTO, but only if 
that accession is accomplished on a commercially sound basis. 
In this regard, the SIA has a number of concerns with regard to 
trade and investment in China, including: (1) China's trade 
regime, especially its limitations on trading and distribution 
rights; (2) purchasing practices of China's state-invested 
enterprises; (3) investment restrictions in China, including 
those related to government pressure to transfer technology; 
(4) intellectual property protection; (5) Chinese targeting of 
particular sectors, including microelectronics in general and 
the semiconductor industry in particular; and (6) the U.S. 
ability to apply the non-market economy provisions of U.S. 
antidumping law to China. These particular concerns are 
described in detail below.

1. China's trade regime needs restructuring and does not 
currently conform to WTO requirements.

    China's foreign trade regime is a complex system with many 
anomalies which restrict the operations of U.S. firms in China:
     Trading rights. ``Trading rights'' (e.g., the 
ability to import and export from China), are limited to 
certain designated enterprises, including certain foreign-
invested firms, which can trade products they manufacture in 
China. U.S. firms doing business in China that lack such rights 
must conduct their business through firms that hold such 
privileges. Moreover, a foreign company generally cannot 
directly sell or service end products, spare parts or 
components not made in China. These limitations are significant 
impediments to U.S. semiconductor firms' ability to access the 
Chinese market, and, if not eliminated, may undermine the 
benefit of other trade liberalization measures agreed to by 
China. SIA is encouraged by reports that China has committed in 
the WTO accession negotiations to provide trading rights to all 
Chinese firms within 3 years of its accession to the WTO, and 
urges that it move as quickly as possible to provide such 
trading rights to all firms, without discrimination on the 
basis of nationality.
     Distribution rights. Equally important as the 
right to import is the right to distribute goods within China. 
The current system forces U.S. producers to sell through 
Chinese distributors, adding at least an additional 10 percent 
in costs and adversely affecting service, inventory, and 
delivery. This critical issue remains to be negotiated in the 
context of China's commitments to provide market access and 
national treatment for foreign service providers.T
     Transparency. China's trade regime continues to 
lack transparency. Rules and procedures are not consistently 
published, and are subject to varying ``interpretations'' by 
individual officials. China should commit to publishing fully 
all relevant laws, regulations and decisions relating to trade 
and investment. SIA also believes that China should move to a 
system of advance notice and publication for comment of all 
laws and regulations affecting trade and investment, as well as 
to establish a system to obtain official interpretations of 
legislation once it is published (through judicial decisions 
that are published and authoritative administrative 
statements).

2. China's accession to the WTO must include a guarantee that 
state-invested enterprises will make purchases based on 
commercial considerations.

     Enterprises wholly or partially owned by the Chinese 
central, provincial or local governments (state-invested 
enterprises) continue to make up a significant portion of the 
Chinese economy. However, many of these enterprises are 
inefficient and burdened with costly social responsibilities 
unrelated to their core businesses. As a result, the state-
sector of the Chinese economy is under increasing pressure. 
Half of China's state industrial enterprises incurred net 
losses last year, and profits of state-sector companies have 
fallen from 6 percent of GDP in the early 1980s to less than 1 
percent in 1996.
    Reform of the state sector is therefore at the top of the 
agenda for China's leaders. President Jiang Zemin has put 
forward a plan to ``manage the large and let go the small,'' 
pursuant to which the state would retain shareholdings only in 
the largest 1,000 state-invested industrial firms, allowing 
approximately 117,000 smaller remaining firms to be merged, 
taken over by private investors, or dissolved.
    This proposed reform plan has significant implications for 
the electronics sector, given its designation as one of four 
``pillar industries''--industries the Chinese Government has 
targeted as essential to the nation's economic future. State-
invested enterprises already control a significant share of the 
trade in electronics goods into and out of China. For example, 
the Ministry of Electronics Industry (MEI) controls the China 
Electronics Corporation (CEC), which in turn owns or controls a 
significant share of China's electronics industry, including 
major consumers of semiconductors for consumer electronics and 
computer production. In addition, MEI last spring announced the 
formation of Project 909, a joint venture between Shanghai Hua 
Hong Microelectronics and Japan's NEC to produce state-of-the-
art semiconductors in the Pudong New Area outside Shanghai. Hua 
Hong is a MEI-owned company, and its chairman is Hu Qili, the 
Minister of MEI.
    As a result of the continuing active government role in the 
electronics sector, there is a significant risk that as Chinese 
semiconductor production increases both in volume and quality, 
other state-invested enterprises will be encouraged by Chinese 
officials to purchase from domestic suppliers. Such 
discrimination could significantly burden or restrict U.S. 
semiconductor sales in China in the future.
    These risks have been increased by recent reports that, as 
the Chinese Government moves out of many sectors, it will 
actually focus more attention on building up a select group of 
national champions in the electronics industry. Given the 
development of a potentially strong state-invested electronics 
sector in China, containing both semiconductor producers and 
consumers, it is essential that Chinese state-invested 
enterprises make purchases and sales only on the basis of 
commercial considerations. Unfortunately, current WTO rules do 
not effectively cover the purchasing decisions of state-
invested commercial enterprises. For example, such enterprises 
are not covered by the GATT Government Procurement Code because 
the purchases of the enterprises are for the purpose of 
manufacturing commercial goods, not for government use.
    Given the inadequacy of current WTO rules on this subject 
and the potential long-term significance of state-invested 
enterprises in the Chinese electronics sector, the SIA urges 
that China's protocol of accession to the WTO include 
affirmative obligations on the part of the Chinese Government 
to:
    (1) ensure that its state-invested enterprises (including 
partially state-invested and recently privatized enterprises 
that were formerly state-invested) make purchases on the basis 
of commercial considerations; and
    (2) afford the enterprises of other WTO Members adequate 
opportunity, in accordance with customary business practices in 
market economies, to compete for sales to state-invested 
enterprises.
    SIA also believes that the protocol should require the 
Chinese Government to refrain from taking any measure, 
including administrative guidance, to influence or direct 
state-invested enterprises as to the quantity, value, or 
country of origin of goods purchased or sold, or otherwise 
impair the purchase or sale of goods. In addition, the WTO 
should review on a regular basis whether China's state-invested 
enterprises are in fact making purchases on the basis of 
commercial considerations. Where a WTO member country believes 
that the Chinese state-invested enterprises in a particular 
sector are acting in a manner inconsistent with the above-
recommended obligations, it should be able to initiate 
consultations through the Working Party with China. This 
special Working Party should remain in place until the Working 
Party has determined that state-invested enterprises no longer 
control a significant portion of the Chinese economy or any 
significant sector.

3. Investment restrictions in China limit U.S. market 
opportunities and may force U.S. firms to transfer technology 
to Chinese firms.

    While Chinese officials, especially at the local and 
provincial level, are quite interested in promoting foreign 
direct investment in China, a number of complex requirements 
exist for foreign-owned ventures. These rules place a number of 
restrictions on foreign investment:
     Ownership restrictions. 100 percent foreign 
ownership of manufacturing facilities is permitted in China, 
but it appears that, under an unpublished policy applicable to 
the electronics industry, 100 percent of such a facility's 
output must normally be exported. A 70/30 foreign majority-
owned joint venture is generally required under the same policy 
to export 70 percent of its production, but there are no 
uniform rules; each arrangement is negotiated on a project-
specific basis. For instance, in one case Chinese authorities 
reportedly removed the export requirement from a contract, 
provided the U.S. firm agreed instead to reinvest all profits 
earned from domestic sales.
     Export targets. Despite the absence of any 
explicit legal obligations to meet specific export percentages 
(except for purposes of obtaining preferential tax treatment or 
qualifying to establish a wholly foreign-owned enterprise) many 
U.S. companies have been pressed by the Chinese approval 
authorities to agree to export targets. While such rules are 
not always enforced, a company can legally be held accountable 
for non-compliance at a future date.
     Local content requirements. There are localization 
requirements for parts and materials for products made in China 
which are not technically legal requirements, yet firms must 
file localization plans with their foreign investment 
application. The Chinese Government also audits foreign firms 
to determine local content. What constitutes local content can 
be subject to many definitions. For example, importation via a 
Chinese distributor can qualify a part as ``local.'' Chinese 
sectoral industrial policies also contain local content 
requirements.
     Pressure to transfer technology. Ownership 
restrictions, export targets and local content requirements may 
be imposed not only as strict legal obligations, but also as 
quid-pro-quos for decisions by government officials at both the 
national and sub-national level. Regardless of their form, 
these measures are often used as levers to obtain transfer of 
technology from foreign firms.
    Existing WTO rules on Trade-Related Investment Measures 
(TRIMs) do not adequately discipline these measures. Yet these 
measures can have a real and significant competitive impact on 
U.S. electronics firms, as advanced technology is often the key 
to competitive success. To the extent that China can maintain 
such measures, U.S. exports in the electronics sector, such as 
semiconductors, may be restricted. Moreover, such investment 
restrictions have a negative effect on China, as they 
discourage the investment necessary to develop a local Chinese 
electronics industry on a commercially sound basis.
    China's protocol of accession to the WTO should therefore 
include an explicit provision requiring China to refrain from 
taking any measure which requires a foreign enterprise to 
invest, enter into any form of joint venture arrangement with a 
domestic entity or to transfer any technology or intellectual 
property to a domestic entity, except in accordance with WTO 
rules. Such a provision must prohibit any measures that force 
technology transfer--including any which are mandatory or 
enforceable under domestic law or under administrative rulings, 
or compliance with which is necessary to obtain any approval or 
advantage.

4. Intellectual property protection is inadequate.

    China has enacted patent, copyright, and trademark laws, 
but their credibility requires strengthened enforcement. While 
there has been no piracy of semiconductor intellectual property 
to date, China's level of technological development does not 
yet permit it to manufacture advanced U.S. products or 
misappropriate U.S. chip designs. However, China's capabilities 
in the semiconductor sector are rapidly advancing. Therefore, 
the SIA remains very interested in issues relating to 
intellectual property protection in China and strongly supports 
the U.S. Trade Representative's efforts over the last few years 
to negotiate agreements with China to ensure increased 
enforcement of Chinese patent, copyright and trademark laws.
    Of particular concern is the fact that compulsory licensing 
remains authorized under Chinese patent law whenever 
``necessitated by the public interest.'' The WTO Agreement on 
Trade-Related Aspects of Intellectual Property Rights (TRIPs) 
prohibits the compulsory licensing of semiconductor technology 
except in certain limited circumstances. China should revise 
this law to bring it into conformity with the TRIPs Agreement 
as part of its WTO accession.
    Accession to the WTO would also require China to enact 
specific legislation extending intellectual property protection 
to semiconductor layout designs (maskworks). During last year's 
SIA China trip, the SIA was told that a draft semiconductor 
layout design protection law had been prepared by the Ministry 
of Electronics Industry and was under review by the Chinese 
Patent Office. This is a positive development and every effort 
should be made to encourage the Chinese Government to continue 
to move forward on this front as expeditiously as possible. The 
SIA would like the opportunity to review and comment on the 
draft legislation prior to its enactment and would be willing 
to assist the U.S. and Chinese Governments in a cooperative 
effort designed to ensure that this legislation is fully 
consistent with all TRIPs obligations.
    The SIA believes that China's protocol of accession to the 
WTO should commit China to abide by the obligations of the 
TRIPs Agreement as a developed country, without any transition 
period before the obligations are enforceable. This is in 
China's interest, as it will encourage the high technology 
foreign investment it seeks to promote the development of its 
economy.
    Earlier this year, China reportedly did agree in the WTO 
accession negotiations to observe all obligations of the TRIPs 
Agreement upon its accession to the WTO. This is a welcome 
development for which the Chinese Government deserves credit. 
However, it is equally important that China begin taking 
concrete steps to bring its laws into full conformity with 
these TRIPs obligations and to ensure full and effective 
enforcement of these laws throughout China.

5. Targeting of the electronics sector may restrict U.S. market 
opportunities.

    The Chinese Government has designated four ``pillar'' 
industries for targeting as essential to the nation's economic 
future: automobiles, electronics, machinery and petroleum/
petrochemicals. Within electronics, emphasis has been put on 
microelectronics.
    There have been repeated reports that China's Ministry of 
Electronics Industry and its State Planning Commission have 
drafted an electronics industrial policy to promote development 
of its domestic industry. However, this policy plan has not 
been issued publicly. Obtaining information on the current 
status of the proposed electronics industrial policy remains an 
SIA priority objective.
    While no details are currently available, earlier reports 
indicated that the electronics industrial policy could 
proscribe foreign majority ownership of semiconductor firms, 
establish export performance requirements for Sino-foreign 
joint ventures, and provide the basis for eventual displacement 
of foreign semiconductors in China by domestically-made 
devices. The recent establishment of Project 909, in which a 
foreign company (NEC of Japan) has been granted a 28.6 percent 
share in a Sino-foreign joint venture in return for supplying 
the advanced technology for the venture suggests a continuing 
Chinese Government focus on development of a domestic 
semiconductor production capability. MEI has said that this 
joint venture is just the first step for Project 909, which 
ultimately envisages the establishment of four or five advanced 
semiconductor producers in China, with a dozen specialized 
plants around the country and around 20 design, development and 
research institutes. The production bases now appearing in 
China are centered in Beijing, Shanghai, Shenzhen and Wuxi.
    Of particular concern to the U.S. semiconductor industry 
are policies to pressure foreign firms to transfer advanced 
technology. If such policies were adopted, either explicitly or 
as a matter of practice in connection with government approval 
of specific foreign investment projects, the SIA believes that 
they would restrict market opportunities for U.S. semiconductor 
firms. They would also prove counterproductive over the long 
run to China's interests because they would discourage the 
foreign investment necessary to promote China's technological, 
economic and market development.
    The 1992 U.S.-China Memorandum of Understanding (MOU) on 
Market Access provides that China will eliminate the use of 
import substitution policies and measures. A number of the 
elements outlined above are arguably inconsistent with this 
commitment. WTO rules also limit China's ability to establish 
local content requirements. The SIA believes that any future 
policies governing China's economic development should adhere 
to the provisions of the 1992 MOU and WTO rules.
    In this regard and consistent with the transparency 
obligations of the WTO, China should also commit to publish any 
internal policies or administrative guidance relating to its 
officially published industrial policies. The negotiation of 
China's accession to the WTO provides the appropriate forum for 
obtaining commitments by China to make the necessary reforms 
with respect to its electronics industry policy.

6. The United States must maintain the ability to apply the 
non-market economy provisions of U.S. antidumping law to 
Chinese exports.

     Chinese trade officials have cited the use of the U.S. 
antidumping law against Chinese exports as a ``trade barrier'' 
they wish to see removed in the WTO accession negotiations. In 
particular, Chinese officials are seeking to eliminate 
application of the non-market economy (NME) provisions of the 
U.S. antidumping law to Chinese exports, on the grounds that 
China is now a market economy.
    U.S. antidumping law currently provides that, in the case 
of exports to the United States from a non-market economy such 
as China, the Department of Commerce is to determine the 
``normal value'' of the product under investigation by valuing 
the non-market economy producer's factors of production in a 
surrogate market economy country which is a significant 
producer of comparable merchandise and which is at a level of 
economic development comparable to the non-market economy. 
These NME provisions are critical to ensuring a fair comparison 
of the normal value of goods produced in China with the export 
price of those goods in the United States. Without such 
provisions, the Department of Commerce would have to rely on 
the price charged for the goods in question in China, which, 
due to the substantial state control in many Chinese 
electronics firms, may bear little relationship to true market 
prices or the actual cost of production of semiconductors and 
other electronics components in China. Without the NME 
provisions of the antidumping law in effect, Chinese state-
invested enterprises could in the future make significant 
below-cost sales of semiconductors in international trade, 
adversely affecting both the foreign trade and the domestic 
economy of the United States.
    A provision therefore should be included in China's WTO 
protocol of accession to permit the United States to continue 
to apply the NME provisions of the antidumping law to China. 
The current draft protocol includes proposed text to this 
effect, but it has not yet been agreed upon.

                               Conclusion

    China's semiconductor market represents a major opportunity 
for the U.S. industry, but there are significant risks and 
hurdles to be addressed as well, especially with regard to the 
rapidly growing Chinese market.
    In microelectronics, China could become one of the world's 
leading producers, and, as such, it warrants continued 
monitoring to ensure that China's trade and investment regime 
does not discriminate against foreign producers. Ongoing 
bilateral and multilateral negotiations with China over the 
terms of its full integration into the world trading system can 
be utilized to address those aspects of the Chinese system 
which are problematic from the perspective of the U.S. 
semiconductor industry.
    The U.S. Government is actively pursuing resolution of U.S. 
industry concerns in negotiations over China's accession to the 
WTO. SIA strongly supports the efforts of USTR and other U.S. 
Government agencies in this regard. Meanwhile, in meetings with 
SIA, officials of the Chinese Government and its electronics 
industry have demonstrated receptivity to many of the U.S. 
industry issues of concern outlined above. The SIA believes 
that the potential exits for a productive joint effort to 
address these issues in the context of China's accession to the 
WTO.
      

                                


    Chairman Crane. Thank you, Mr. Scalise.
    Mr. Cohen.

 STATEMENT OF CALMAN J. COHEN, PRESIDENT, EMERGENCY COMMITTEE 
                       FOR AMERICAN TRADE

    Mr. Cohen. Thank you, Mr. Chairman. I am Calman Cohen, 
president of the Emergency Committee for American Trade, ECAT. 
ECAT represents the heads of U.S. international business 
enterprises consisting of all principal sectors of the U.S. 
economy. Annual sales of ECAT member companies total over $1 
trillion, and our companies employ approximately 4 million 
persons.
    ECAT member companies believe that achieving a strong and 
stable bilateral relationship with China must remain a priority 
of United States trade policy into the 21st century. Securing 
China's entry on the basis of a commercially acceptable 
protocol is an essential part of strengthening our bilateral 
relationship. In the 21st century, China may well become the 
largest economy in the world. The tremendous size of the 
economy will have a major impact not only on the global 
economy, but also on individual economies such as that of the 
United States.
    Due to the vast size and influence of China's economy 
alone, it is in our interest to have China become integrated 
into the world trading system and subject to its rules. It is 
particularly in our interest to have China become subject to 
the rules of the system that we in the United States help 
shape. China's markets will not generally be open to United 
States goods and services until first it is subject to World 
Trade Organization rules requiring the provision of national 
treatment and nondiscriminatory tariff treatment. Second, any 
lack of enforcement of these obligations can be challenged 
under the WTO dispute settlement procedures.
    In particular, ECAT believes that a commercially acceptable 
protocol should include commitments by China in the following 
seven areas. First, a substantial reduction in binding of 
tariffs on 2,300 priority items. Second, a commitment should be 
obtained to phase out substitution and local content 
requirements and eliminate discriminatory taxes and 
restrictions on trading rights that violate the national 
treatment provisions of GATT article III and GATS, General 
Agreement on Trade and Services, article III. With regard to 
trading rights, the United States should refuse to accept an 
extended phaseout period.
    Third, the full implementation of the United States-China 
bilateral intellectual property rights agreements of 1992 and 
1995. Fourth, the elimination of restrictions investment. 
Fifth, the provision of nondiscriminatory market access to 
United States service providers. Sixth, the modification of 
industrial policies which are inconsistent with the WTO. 
Seventh, the elimination of barriers to United States 
agricultural exports.
    While outstanding bilateral issues remain unresolved after 
the summit, it did provide a first positive step toward a 
further strengthening trade and security ties. The lifting of 
the unilateral United States embargo on the sales of nuclear 
power equipment to China in exchange for China's commitment to 
end its nuclear cooperation and missile sales to Iran is a 
significant achievement and important evidence that the United 
States policy of engagement is producing concrete results.
    The Chinese also made two other commitments during the 
summit which will serve as meaningful downpayments toward 
eventual admission to the WTO. The reported Chinese commitment 
to lower its average tariffs to 10 percent by the year 2005 
appears to be a significant response to the United States 
request for a major tariff reduction. Of course, we all need to 
review the specifics of their offer. China also agreed, as we 
have just heard, to join the ITA, which will require 
eliminating its tariffs on computer and telecommunications 
equipment.
    In moving forward with China's WTO negotiations, the 
administration should continue to consult with Congress and the 
private sector on the progress and substance of the 
negotiations. ECAT believes that any legislation requiring 
specific congressional approval for China's WTO accession could 
prove however to be counterproductive. Such a requirement could 
further entangle trade and nontrade related issues concerning 
China. It would effectively tie the President's hands with 
respect to accession, as well as set an inappropriate precedent 
requiring congressional approval of the accession of 27 other 
countries, including Russia, Vietnam, and Saudi Arabia, that 
have applied for WTO membership.
    At a time when the United States and China have just agreed 
to work toward a constructive strategic partnership, it is more 
important than ever that United States policy toward China 
integrate trade, security, and major bilateral concerns. 
Handling major issues such as human rights, religious 
persecution, nuclear proliferation, and Taiwan in a piecemeal 
fashion will only undermine the chances for further progress in 
these areas under this new relationship. We would urge Members 
of Congress to resist such an approach.
    We note the efforts of Congressmen Bereuter and Ewing to 
work with the administration and this Subcommittee toward 
China's admission to the WTO on the basis of a commercially 
reasonable protocol of accession, and to look to the terms upon 
which the United States could extend permanent MFN treatment to 
China. Such positive efforts will improve the chances for 
securing China's admission and will promote a constructive 
strategic partnership between the United States and China. 
Indeed, ECAT believes that upon China's accession to the WTO, 
the United States should provide permanent MFN trading status 
to China.
    We also commend you, Mr. Chairman, and your colleagues who 
continue to seek constructive ways to strengthen our bilateral 
relationship with China by changing the term ``most-favored-
nation tariff treatment'' to ``normal trade status.'' There is 
no question that the term has been misinterpreted as indicating 
that the United States is giving China special treatment. This 
is totally unwarranted, as the term ``MFN'' simply means, as we 
here all well know, that an important country will not 
discriminate against another country's goods in favor of a 
third.
    In conclusion, I want to say thank you for this opportunity 
to testify. I would be happy to answer any questions.
    [The prepared statement follows:]

Statement of Calman J. Cohen, President, Emergency Committee for 
American Trade

                            I. Introduction

    I am Calman J.Cohen, President of the Emergency Committee 
for American Trade (ECAT) and am pleased to appear before the 
Trade Subcommittee to present ECAT's testimony on the possible 
accession of China to the World Trade Organization(WTO). ECAT 
represents the heads of major U.S. international business 
enterprises consisting of all principal sectors of the U.S. 
economy. The annual sales of ECAT member companies total over 
$1 trillion, and the companies employ approximately 4 million 
persons.
    ECAT member companies believe that achieving a strong and 
stable bilateral relationship with China must remain a priority 
of U.S. trade policy into the twenty-first century. Securing 
China's entry into the WTO on the basis of a commercially 
acceptable protocol of accession is an essential part of 
strengthening our bilateral relationship.
    In the twenty-first century China will become the largest 
economy in the world. The tremendous size of China's economy 
will have a major impact not only on the global economy but 
also on the individual economies of the United States and other 
major developed nations. Therefore, due to the vast size and 
influence of China's economy alone it is in our interest to 
have China become integrated into the world trading system and 
subject to its rules.
    It is particularly in our interest to have China become 
subject to the rules of the multilateral trading system that we 
helped shape. China's markets will not be genuinely open to 
U.S. goods and services until first, it is subject to WTO rules 
requiring the provision of national treatment and non-
discriminatory tariff treatment and second, any lack of 
enforcement of these obligations can be challenged under WTO 
dispute settlement procedures. I would like to comment briefly 
on those areas in which ECAT believes that China should make 
significant commitments in negotiating a protocol of accession, 
noting the prospects for progress in the WTO following the 
recent summit, and discuss the need for an integrated China 
policy.

                           II. WTO Accession

    China's accession to the WTO offers a unique opportunity to 
restructure U.S.-China trade in a direction that leads to a 
more stable and prosperous commercial relationship. It offers a 
means for the United States to move from having to enforce a 
series of bilateral agreements to a comprehensive approach to 
U.S. market access objectives for goods, services and 
investment. WTO rules and dispute settlement procedures would 
also provide a more effective means to enforce China's market 
access commitments and adherence to WTO obligations. China's 
accession to the WTO must be based, however, on a commercially 
acceptable protocol that improves U.S. market access and 
implements WTO rules and obligations.
    ECAT supports U.S. efforts to negotiate a strong protocol 
of accession. In particular, ECAT believes that a commercially 
acceptable protocol of accession should include commitments to 
provide the following:
     A substantial reduction and binding of tariffs on 
2,300 priority items identified by the United States and a 
commitment to phase out residual quotas and import licensing 
restrictions.
     National treatment with respect to the treatment 
of foreign goods, services, and investment. In this regard, a 
commitment should be obtained to phase out substitution and 
local content requirements and eliminate discriminatory taxes 
and restrictions on trading rights that violate the national 
treatment provisions of GATT Article III and GATS Article III. 
With regard to trading rights, the United States should refuse 
to accept an extended phase-out period.
     The full implementation of the U.S.-China 
bilateral intellectual property rights agreements of 1992 and 
1995.
     The elimination of restrictions on investment such 
as the imposition of requirements regarding export performance, 
import substitution, foreign exchange balancing, and technology 
transfer.
     The provision of non-discriminatory market access 
and the liberalization of existing geographic and licensing 
limitations to U.S. service providers, including financial 
services and telecommunications.
     The modification of industrial policies which are 
inconsistent with the WTO.
     The elimination of barriers to U.S. agricultural 
exports which are inconsistent with the WTO, including sanitary 
and phytosanitary measures, that operate as disguised 
restrictions on trade.
    Of these elements, ECAT member companies have been 
particularly concerned with gaining significant commitments on 
market access, trading rights, services, and investment.
    To date, there has been some progress in accession 
negotiations, including China's commitment to provide a 
standstill against introducing new trade barriers. The Chinese 
have begun to discuss further reforms in their economic regime, 
including greater privatization of state-owned enterprises.
    While outstanding bilateral issues remain unresolved after 
the summit meetings between President Clinton and Chinese 
President Jiang Zemin, it did provide the first step toward 
strengthening trade and security ties. The lifting of the 
unilateral U.S. embargo on the sales of nuclear power equipment 
to China in exchange for China's commitment to end its nuclear 
cooperation and missile sales to Iran is a significant 
achievement and important evidence that the U.S. policy of 
engagement is producing concrete results.
    The Chinese also made two other commitments during the 
summit meetings which should serve as meaningful 
``downpayments'' toward eventual admission to the WTO. The 
reported Chinese commitment to lower its average tariffs to 10 
percent by 2005 appears to be a significant response to the 
U.S. request for a major tariff reduction as part of China's 
WTO market access commitments. Of course, we all need to review 
the specifics of their offer. China also agreed to join the 
Information Technology Agreement which will require it to 
eliminate its tariffs on computer and telecommunications 
equipment.
    These new Chinese commitments in terms of tariff reductions 
will result in major benefits to U.S. exporters. They also 
suggest what the benefits to the U.S. would be if similar 
``downpayments'' were made in other key areas such as trading 
rights, barriers to investment, market access for services, and 
removal of agricultural market access barriers.
    In moving forward with China's WTO negotiations, the 
Administration should continue to consult with Congress on the 
progress and substance of the negotiations. ECAT believes, 
however, that any legislation requiring specific congressional 
approval for China's WTO accession could prove to be counter-
productive. Such a requirement could further entangle trade and 
non-trade related issues concerning China. It would effectively 
tie the President's hands, with respect to securing China's 
accession, as well as set an inappropriate precedent for 
requiring congressional approval of the accession of 27 other 
countries, including Russia, Vietnam, and Saudi Arabia, that 
have applied for WTO membership.

                III. Need for an Integrated China Policy

    At a time when the United States and China have just agreed 
to a ``constructive strategic partnership'' it is more 
important than ever that U.S. policy toward China integrate 
trade, security, and other major bilateral concerns. Handling 
major issues such as human rights, religious persecution, 
nuclear proliferation and Taiwan in a piecemeal fashion will 
only undermine the chances for further progress in these areas 
under this new relationship, and we would urge members of 
Congress to resist such an approach.
    We note the efforts of Congressmen Bereuter and Ewing to 
work with the Administration toward China's admission to the 
WTO on the basis of a commercially reasonable protocol of 
accession and to look to the terms upon which the United States 
could extend permanent MFN treatment to China. Such positive 
efforts will improve the chances for securing China's admission 
to the WTO and will promote a constructive strategic 
partnership between the United States and China.
    We also commend the efforts of Chairman Crane and others in 
the Congress who continue to seek constructive ways to 
strengthen our bilateral relationship with China by changing 
the term most-favored-nation tariff treatment to ``normal trade 
status.'' There is no question that the term MFN, despite its 
well-established meaning, has been interpreted by some as 
indicating that the United States is giving China special 
treatment. This is totally unwarranted as the term MFN simply 
means that an importing country will not discriminate against 
another country's goods in favor of a third.
    The MFN principle has long been embodied in international 
commercial law under treaties of friendship, commerce, and 
navigation and is a core principle of the original GATT rules. 
The United States grants MFN treatment to virtually all of its 
trading partners, with the exception of a few countries such as 
Afghanistan, Laos, Korea, and Vietnam. Therefore in extending 
MFN treatment to China, we are only extending what is normal 
trading status for the majority of U.S. trading partners. 
Furthermore, we are not conferring normal trading status for 
free. In order to receive it, China must give us MFN treatment.
    Finally, in terms of an integrated China policy we believe 
that the one-China policy must be maintained as part of the 
commitments that the U.S. has made to China. Consistent with 
this policy, Taiwan in our view should not be admitted to the 
WTO prior to China. Taiwan's accession should immediately 
follow China's.
    I appreciate the opportunity to appear before the Trade 
Subcommittee and would be happy to answer any questions.
      

                                


    Chairman Crane. Thank you, Mr. Cohen. I thank all of you.
    I have a question for all of you in the dias. What United 
States industries do you believe would most negatively be 
affected if China enters the WTO as a developing instead of a 
developed country with stricter obligations?
    Mr. Lloyd. It would seem to me that virtually every United 
States firm interested in dealing with China would be adversely 
impacted through the longer transition period that would be 
allowable to China, and it would simply postpone the day when 
China must play by the rules.
    Mr. Cohen. I would agree and add that, in particular, I 
would site industries in the manufacturing sector as well as in 
the services sector. The reason why is that typically 
developing countries have tried to have a very long phase-in 
period for obligations under the WTO in the manufacturing 
sector. One area where China in particular is woefully 
inadequate in offering market access is in the services sector, 
which they may try to postpone.
    Mr. Scalise. Speaking briefly on behalf of the 
semiconductor industry, there's no question in our view that 
with the rate of change that takes place in technology and the 
ability for technology to flow across borders, it is important 
that China come in as a developed country as opposed to a 
developing country. Otherwise, the advantage that accrues to 
China is well beyond what would be reasonable.
    Mr. Whittaker. I would concur with Mr. Scalise. I think it 
probably reflects the view of all of the high technology 
manufacturing industries.
    Chairman Crane. Could you provide the Subcommittee with 
examples of how the presence of United States companies in 
China helps to promote fundamental human rights for rank-and-
file Chinese? In general, are United States business practices 
superior to those of other foreign investors in China?
    Mr. Cohen. I would simply say on that particular issue that 
it has never been a choice between trade and human rights or, I 
should say, trade or human rights. It has always been, in my 
view, a question of trade and human rights going hand in hand.
    Some examples of what I mean are best given by the type of 
involvement of American companies in China today. When it comes 
to our facilities in China, we are demonstrating an open way of 
doing business. Our activities in China are ones in which we do 
not discriminate; we have open employment. We demonstrate to 
the Chinese our democratic way of life. When it comes to 
offering them exposure to new ideas, giving them the 
opportunity of new employment, we feel very strongly that we 
are increasing the choices of individual Chinese. That indeed 
is what human rights is all about.
    Mr. Lloyd. I think, speaking from my own company, ITT 
Industries, we adhere to the same environmental rules in China 
that we do in the United States. Effluent standards are the 
same. Water purification plants are put in in China just as 
they would be here. I think that we also see, to some degree, 
the task of the American firm abroad as one of demonstrating 
American values.
    Mr. Scalise. For the semiconductor industry, we have three 
basic pillars that we focus on. One is technology. One is 
trade. The other is environmental health and safety. The 
environmental health and safety group makes certain that the 
principles that we adhere to here in the United States are also 
the ones used throughout the world. In fact, the semiconductor 
environmental conference that is held in a different city 
around the world each year--next year it's in Korea--draws 
about 500 folks from all over the world including China, Japan, 
and all the other countries you can think of. So I think that 
we are doing all of the things necessary to not only be good 
producers, but also be good citizens in the broadest sense of 
that word.
    Mr. Whittaker. Mr. Chairman, I can only speak on behalf of 
Hewlett-Packard Co., my one experience. But I do know that with 
Hewlett-Packard, our Chinese employees benefit from the exact 
same personnel policies, management styles, training, 
education, and so on, as do our employees in Palo Alto, CA. 
That also applies to our environmental, health, and safety 
programs as well.
    It is interesting going to China and visiting a Hewlett-
Packard facility. You almost instantly bond with the employees 
there who share the same experiences as you do: a lot of the 
same training courses, the same philosophies about 
entrepreneurship, ownership of a business project, and so on.
    Chairman Crane. I have the corporate headquarters of 
Motorola in my district. They told me when they opened up a big 
plant over there that they had to maintain clean working 
conditions, pay for overtime, and provide health care for their 
employees. I asked if they brought all that from over here and 
they said, No, that was Chinese law, but that it apparently 
only applies to foreign companies coming in, not to domestics.
    I thought about that a long time. And I thought, Gee, an 
American presence or any foreign presence over there under 
those guidelines has got to be setting a very powerful good 
example. If, at the end of a long day's labor--say I work for 
Motorola and you work for some grungy Chinese factory, and 
we're having our Tsing Taos together at the end of the day--you 
are moaning to me about your working conditions, wouldn't it be 
logical for me to say, Hey, come look at Motorola; why don't 
you work for Motorola? As I have mentioned many times, Ben 
Franklin said a good example is the best sermon. The presence 
of American companies over there is the best sermon.
    To the best of your knowledge, are other foreign countries 
that are doing business over in China operating under those 
same guidelines? Does that apply to all of them?
    Mr. Cohen. I think there is a wide disparity among 
countries. Certainly, companies that are based in the 
industrial democracies have the best and, I would say, 
exemplary records, such as the ones you have described. But 
there are instances of investments by companies from other 
countries that are not at that high standard.
    Chairman Crane. Mr. Lloyd, you indicated in your testimony 
elements that you believe should be core components of an 
acceptable WTO accession, including reciprocal market access, 
trading rights, and adherence to state trading and subsidy 
disciplines. Where would you say China's offer is most 
deficient at the moment?
    Mr. Lloyd. Where China's offer is?
    Chairman Crane. Where is its offer most deficient at the 
moment?
    Mr. Lloyd. Well, I think certainly it is in the state 
trading area, although we learned for the first time this 
morning that it's China's intention to remedy the problem in 3 
years. The requirement that exporters move goods through state 
trading enterprises and that investments be made through state 
trading enterprises has been an onerous burden for foreign 
industry coming into China.
    Chairman Crane. Mr. Whittaker and Mr. Scalise, please 
discuss the problem of state-owned enterprises in China and how 
their unfair trade practices can best be addressed by WTO 
accession.
    Mr. Whittaker. I think to the extent that the WTO 
obligations will obligate the Chinese Government to follow WTO 
rules and so on, it will go some ways toward addressing that 
problem. For example, if, in the telecommunications area, the 
global telecommunications agreement were adhered to and some of 
its policies and terms were adhered to, this would also address 
a number of the issues.
    Mr. Scalise. The process of privatization is going to drive 
that solution almost automatically because you move from what 
is largely a bureaucratic driven set of enterprises that are 
government invested--not necessarily totally government-owned--
to ones that are driven and run by entrepreneurs. Entrepreneurs 
have a very different set of objectives. Their objectives are 
to grow the business, to make money, to compete, to be 
successful. By the very nature of that process, it is likely 
that they will function on a commercial basis because that's 
what is in their best interest.
    Chairman Crane. Finally, Mr. Cohen, what can we do to get 
China to purchase more products from United States companies?
    Mr. Cohen. I think one of the most successful ways of 
accomplishing that would be to have China a member of the World 
Trade Organization. So many of the problems that we have in the 
relationship have to do with barriers, whether it's in the 
manufacturing, services, or other sectors. If we try to 
negotiate each one of them on a bilateral basis seriatim, the 
time that it would take is immense. But if, in one fell swoop 
so to speak, all barriers are negotiated with the Chinese in 
order for China to be admitted to the WTO, the net result would 
be increased market access for the United States.
    I would just indicate, as I mentioned a moment ago, one of 
the areas in which the Chinese offers have been woefully 
inadequate is in the service sector. Typically, when a services 
company enters China, the company is restricted to a specific 
city or area, and it's not on a basis of access to the total 
China market. That is something that indeed does need to be 
addressed.
    Chairman Crane. I thank you all for your insightful 
testimony.
    We'll now move to our final panel of witnesses for the day. 
We'll begin with Terry Stewart, managing partner of Stewart and 
Stewart; and then proceed with Nicholas Giordano, assistant 
vice president of international trade for the National Pork 
Producers Council. Then Michael Wootton, director of Federal 
Government affairs for Sunkist Growers; and we'll conclude with 
Robert Aronson, chairman of Ross Manufacturing.
    If you will please proceed in the order in which I 
introduced you.

STATEMENT OF TERENCE P. STEWART, MANAGING PARTNER, STEWART AND 
                            STEWART

    Mr. Stewart. Good afternoon, Mr. Chairman. My name is Terry 
Stewart. I am managing partner of Stewart and Stewart. I agree 
with many of the comments made by the prior panel with regard 
to the importance of WTO accession. I would note that, in 
response to one of your questions, the concept of a developing 
or developed country in an international organization like the 
World Trade Organization is a self-selecting issue. And to some 
extent, we have a red herring in the discussion as to what 
China needs to do.
    The United States remedy really is to insist on short 
transition periods or no transition periods; but at the end of 
the day, our trading partners basically insist on the right to 
decide for themselves whether they constitute a developed or 
developing country.
    In my prepared statement, Mr. Chairman, I make basically 
five points. The first point is that WTO accession is important 
for China and for the trading system, but can and should be 
done on commercial terms. What ``commercial terms'' are--I 
understand that has been an issue of some discussion today, and 
I will not try to go back through all of that. But clearly, 
areas such as State trading, market access, service 
commitments, reduction of a whole host of nontariff barriers 
need to be addressed. The only way that can be done is by being 
willing to take the time to make it happen. The United States 
to date has been willing to take the time and, because of that, 
we are making progress and moving closer and closer to 
something that would be deemed to be a commercial deal.
    Second, to the extent that China needs time to adopt all 
WTO obligations, existing WTO members should maintain 
transitional rights which will, in fact, permit a maintenance 
of balance of rights and obligations. That is not true in the 
draft protocol. What that basically does is put pressure on the 
United States, European Union, and other members to require 
immediate compliance with WTO obligations upon accession. The 
tradeoff that has always existed is if China needs more time to 
fully adopt the obligations of the WTO, its trading partners 
need supplemental rights that do not otherwise exist. Those 
have basically been neutered in terms of the draft text.
    Third, the United States should not make China's MFN status 
permanent unless and until reasonable market access is 
established. In that regard, I would say, Mr. Chairman, that 
you need more than WTO accession to have a balanced trade 
relationship with China. Some of the issues that are needed 
beyond WTO accession, in my view, include an examination of 
China's currency valuation. At the present time, China's prices 
to the United States typically undersell all other producers in 
the world by roughly 40 percent. That suggests that you have a 
systemic problem in terms of currency undervaluation.
    Similarly, if you take a look at the World Bank statistics 
in terms of purchasing power parity, China's purchasing power 
parity on a per capita basis runs four to five times its per 
capita to GNP, also suggestive of a serious currency 
undervaluation. If you do not address the currency imbalance 
under the existing statutory authority that the Secretary of 
the Treasury has, you will always have a trade imbalance and a 
trading relationship imbalance.
    Second, in that regard, investment measures will not be 
addressed under the WTO, at least not for the foreseeable 
future. While there is something called a TRIMs Agreement, 
Trade-Related Investment Measures, which deals with trade 
related investment measures, one of the big problems U.S. 
companies have is the restriction of investment on terms that 
we would consider to be normal in particular areas, such as 
automotive and electronics. That will not be addressed, and 
should be addressed bilaterally, before we provide permanent 
MFN treatment to China.
    Third, there are important plurilateral agreements that are 
critical to certain strategic U.S. sectors, such as civil 
aircraft and those parts of our economy that service government 
procurement, that will not be addressed under the WTO because 
those plurilateral agreements are voluntary and not mandatory. 
There should be some means for the United States to engage in 
bilateral discussions to get movement in those areas.
    Finally, accession creates obligations, but the United 
States and our trading partners need to provide technical 
assistance as we have done in the intellectual property area if 
we expect China to be able to fulfill its obligations in the 
near term.
    Thank you very much, Mr. Chairman.
    [The prepared statement follows:]

Statement of Terence P. Stewart, Managing Partner, Stewart and Stewart

    Mr. Chairman and members of the Subcommittee: My name is 
Terence Stewart. I am the managing partner of Stewart and 
Stewart, a law firm here in Washington which focuses on 
international trade issues. Over the years, I have monitored 
developments on China's efforts to accede to the World Trade 
Organization. I also have written extensively on WTO issues and 
provide technical assistance to the Government of Ukraine in 
its efforts to accede to the WTO. My comments today reflect my 
personal views and do not necessarily reflect the views of 
either my firm's clients or of my colleagues at the firm.
    I am pleased to appear this morning to provide comments on 
U.S.-China trade relations and on the prospects for China's 
accession to the WTO. Certainly, China's size, economic growth 
in the last decade and potential has long captured the 
imagination of U.S. business. Statistics provided in the press 
as to level of foreign investment in recent years (second only 
to that in the U.S.), size of development projects and 
projected demand in the future for energy and other products 
should create important opportunities for U.S. companies and 
U.S. workers. China has proven capable of expanding its export 
trade rapidly and appears to have the capacity to expand its 
imports dramatically as well.
    At the same time, the major differences in economic systems 
that continue to exist, the large trade deficit the U.S. has 
with China which is rapidly expanding, the continued lack of 
transparency of much of the Chinese system, the high tariffs, 
major non-tariff barriers, continued lack of trading rights for 
many, extent of state trading, the relatively poor record of 
implementation of existing bilateral agreements with the United 
States, continued heavy subsidization of many industries, to 
say nothing of the problems that were addressed by many members 
of the Congress and by the Administration in last week's 
meetings with President Jiang on political and religious 
liberties and human rights pose major challenges to the 
bilateral relationship.
    I will limit my remarks to the trade and economic issues 
today, the area of my background and expertise. I would urge 
the Trade Subcommittee and the Administration as we move 
forward with our bilateral trade relationship with China to 
focus on certain fundamentals:
    (l) WTO accession is important for China and for the 
trading system but can and should be done on commercial terms.
    (2) Should China need time for adopting all WTO 
obligations, existing WTO members should maintain transitional 
rights which will in fact permit a maintenance of balance of 
rights and obligations.
    (3) The U.S. should not make China's MFN-status permanent 
unless and until reasonable market access (i.e., accession on 
commercial terms) is established.
    (4) WTO accession, even on commercial terms, will address 
only some of the existing impediments to U.S. trade flows:
    (a) China's currency valuation is suspect and should be 
addressed bilaterally under existing statutory authority.
    (b) Investment restrictions and China's strategic industry 
initiatives seriously impede U.S. trade and investment flows; 
most such problems will not be resolved by WTO accession.
    (c) Plurilateral agreements in the WTO (Government 
Procurement and Civil Aircraft) are not mandatory for WTO 
members. China to date has been unwilling to join these 
agreements. Both are important for U.S. industries. Bilateral 
approaches are needed in the absence of Chinese movement to 
accede to these agreements.
    (d) Accession creates obligations but does not necessarily 
provide the tools for complying with obligations undertaken. 
Infrastructure building for complying with WTO obligations 
(notifications; administrative and judicial review rights; 
etc.) has been a problem for many existing WTO members. Indeed, 
at the first Ministerial last December in Singapore, roughly 
one half of WTO members had not provided notifications in the 
vast majority of the areas of WTO obligations. The U.S. has 
provided significant assistance in areas such as Customs and 
intellectual property rights enforcement. The U.S., Canada, EU 
and other WTO members need to significantly expand technical 
assistance to China to permit adequate institution building 
(this assumes that China will accept the assistance).
    (5) Even in areas where WTO accession will create rights 
and obligations, existing U.S. trade problems suggest the need 
for additional bilateral efforts, whether through the creation 
of bilateral Commissions or otherwise, to facilitate rapid 
resolution. The myriad sanitary and phytosanitary problems 
faced by U.S. agricultural exporters and the substantial part 
of agricultural trade controlled by state trading enterprises 
in China would be two examples.
    Let me take up a few of the issues reviewed above in turn.

                 I. Burgeoning Trade Deficit with China

    The press has duly noted the ballooning trade deficit with 
China. In recent months, the deficit with China has been larger 
than the deficit with Japan. Of greater concern is the fact 
that the deficit as a percent of total trade between the U.S. 
and China is far greater than with any other major trading 
nation including Japan. In 1996, the figure was roughly $4 of 
imports from China for every $1 of exports to China. In 1997, 
the ratio is even worse, roughly 5-to-1. Japan, by contrast, 
has been running a little under 2-to-1 with the U.S. for many 
years. In 1996, the U.S. trade deficit with China was $39.520 
billion on total trade (imports and exports) of $63.505 
billion. In contrast, the U.S. trade deficit with Japan was 
$47.580 billion on total trade of $182.793 billion.
    While it is a truism that a country need not be concerned 
about running a trade deficit with any one country, it is 
equally true that the deficit with China does not reflect 
underlying competitiveness of the two countries. High tariffs 
and high non-tariff barriers in China, a seriously undervalued 
currency in China, investment restrictions and other issues 
identified above contribute to the trade imbalance. Let me just 
discuss a few of these problems.
    China has substantially higher tariffs on most products 
than the U.S. Indeed, many of China's current tariffs are 
prohibitive of trade. In the 1997 National Trade Estimate 
report (``NTE'') from USTR (page 44), China's average tariffs 
in 1996 were identified as being 23% with MFN rates as high as 
120%. This average tariff is roughly five times as high as the 
U.S. weighted average tariff.\1\
---------------------------------------------------------------------------
    \1\ U.S. average tariffs are below 5%; the WTO Trade Policy Review 
of the United States in 1996 identified the ``simple average of 
duties'' in the U.S. as being 6.4% (page 44 of WT/TPR/S/16).
---------------------------------------------------------------------------
    A host of non-tariff barriers have been identified by China 
as part of its accession negotiations and continue to 
significantly restrict trade. Qutoas, licenses, import 
tendering are just three identified as applying to many 
products. Proposed phase outs of such barriers remain quite 
extended for some products of significant interest to the U.S., 
such as 15 years for autos and trucks. See also 1997 NTE at 46.
    Substantial amounts of trade into and out of China are 
controlled by state owned enterprises which may not act on 
commercial considerations. For example, China continues to 
insist that it will maintain state trading on a wide range of 
items of potential interest to the U.S. including grain, 
vegetable oil, sugar, tobacco, chemical fertilizers and cotton.
    There are also significant investment restrictions in 
important sectors which adversely affects trade flows from U.S. 
parent organizations. Similarly, technology transfer 
requirements reduce investment and trade.
    At the same time, many industries in China are heavily 
subsidized which keeps inefficient Chinese businesses in 
operation and reduce import flows from the U.S.
    Finally, while improvements have been made in Chinese 
enforcement of intellectual property rights, China's 
performance in the past has cost U.S. companies tremendous 
amounts. China remains subject to monitoring under Section 306 
of the Tariff Act of 1974 (See USTR Press Release 97-37, April 
30, 1997, ``USTR Announces Results of Special 301 Annual Review 
at 4.''
    Using the rule of thumb that every $1 billion in U.S. 
export trade is equal to 20,000 jobs,\2\ the $40 billion trade 
deficit with China, if it could be eliminated through expanded 
exports would mean an additional 800,000 U.S. jobs.
---------------------------------------------------------------------------
    \2\ See Statement of Ambassador Barshefsky on ``The future of U.S.-
Japan Trade Relations'' at 2 presented at Georgetown University Law 
Center Symposium on U.S. Trade Policy in Transition, January 21, 1994.
---------------------------------------------------------------------------
    I should note that China has been arguing for some time 
that trade imbalance figures overstate two way trade, although 
even under China's calculus the trade imbalance shows exports 
substantially more than 2-to-1, meaning that the problem and 
direction of the problem remain but the magnitude may be 
smaller.\3\
---------------------------------------------------------------------------
    \3\ See Work Report of the Trade Statistics Subgroup of the Trade 
and Investment Working Group of the Sino-U.S. Joint Commission on 
Commerce and Trade reprinted in article appearing in Beijing Xinhua, 21 
March 1997 (translated in FBIS/CHI-97-056). ``First, the U.S. import 
statistics has ignored entrepot trade and value added from entrepot 
trade to over-estimate its imports from China.'' Second, ``the U.S. 
statistics of its exports to China have been underestimated by 
neglecting reexports.''

       Estimated Exports, Imports, and Balance of Goods--China, Japan, and Total, All Countries, 1993-1997
                                          [In millions of U.S. dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                                       1997
                   Exports                        1993         1994         1995         1996       (estimated)
----------------------------------------------------------------------------------------------------------------
Exports
    Total, all countries....................    465,091.0    512,626.5    584,742.0    625,075.0       687,720.0
        Change from prior year..............           4%          10%          14%           7%             10%
    China...................................      8,762.8      9,281.8     11,753.6     11,992.6        12,574.5
        Change from prior year..............          18%           6%          27%           2%              5%
    Japan...................................     47,891.5     53,487.7     64,342.6     67,606.8        65,845.2
        Change from prior year..............           0%          12%          20%           5%             -3%
    China--percentage of Total, all                    2%           2%           2%           2%              2%
     countries..............................
Imports
    Total, all countries....................    580,659.4    663,255.7    743,445.0    795,289.3       869,300.8
        Change from prior year..............           9%          14%          12%           7%              9%
    China...................................     31,539.9     38,786.7     45,543.2     51,512.6        63,141.0
        Change from prior year..............          23%          23%          17%          13%             23%
    Japan...................................    107,246.4    119,155.7    123,479.1    115,187.0       121,081.0
        Change from prior year..............          10%          11%           4%          -7%              5%
    China--percentage of Total, all                    5%           6%           6%           6%              7%
     countries..............................
Balance
    Total, all countries....................   -115,568.4   -150,629.2   -158,703.0   -170,214.3      -181,393.6
        Change from prior year..............          37%          30%           5%           7%              7%
    China...................................    -22,777.1    -29,504.9    -33,789.6    -39,520.0       -50,590.2
        Change from prior year..............          24%          30%          15%          17%             28%
    Japan...................................    -59,354.9    -65,668.0    -59,138.5    -47,580.2       -55,552.4
        Change from prior year..............          20%          11%         -10%         -20%             17%
    China--percentage of Total, all                   20%          20%          21%          23%             28%
     countries..............................
----------------------------------------------------------------------------------------------------------------
 AImports on Customs Value basis; Exports on f.a.s. basis; and Total, all countries on Census basis.
 ASource: Bureau of Census foreign trade data.


II. WTO Accession Is Important for China and for the Trading System but 
               Can and Should Be Done on Commercial Terms

    The position of this and prior Administrations has been 
that the U.S. wants China in the GATT and now WTO but on 
commercial terms. A fews weeks ago, the U.S. identified the 
average tariff levels it was seeking from China as being 8%. 
Both the U.S. and the EU have been encouraging China to join 
the Information Technology Agreement. President Jiang's 
acceptance of that obligation during last week's summit here in 
Washington was obviously an important step forward on the 
market access commitments, as it will reduce duties on 
computers, semiconductors and telecommunications equipment to 
zero within an as yet undisclosed period of time. Indeed, press 
reports indicate that the market access offer made by China 
last week while not addressing certain important tariff peaks 
(e.g., autos), would reduce tariffs on 4000 tariff items to an 
average of 10-12%.
    While China is anxious to join the WTO and to have the U.S. 
make ``MFN'' treatment permanent, the U.S. should continue its 
approach of working hard to help China gain access but only on 
commercially viable terms. The remaining tariff and non-tariff 
barriers in China are serious impediments to a balanced trade 
relationship with China. While some of the economic reforms and 
political decisions needed within China are obviously difficult 
and time consuming, premature accession would only lock in a 
trade imbalance that would be difficult to address in the 
future. It is in both countries' interest to be sure that WTO 
accession will be sustainable for both countries. As a number 
of U.S. Administrations have indicated to the Chinese 
government, accession to the WTO is first and foremost in the 
hands of the Chinese government. We will have a better ongoing 
economic relationship if we have confidence that the trading 
relationship is balanced from the beginning. This does not 
require parity of rights and obligations, but it does require 
addressing the major barriers which continue to exist in China.
    Steps to intensify the bilateral negotiations between the 
U.S. and China on China's accession announced during the summit 
last week are welcome and will hopefully permit the accession 
process to successfully conclude in the not too distant future. 
Major issues continue to exist, however, in terms of market 
access for our service industries, tariff and non-tariff 
barriers for our goods, standards including sanitary and 
phytosanitary measures, and agriculture. There also continue to 
be a handful of important protocol issues that have not been 
resolved. It is critical that this Subcommittee support the 
U.S. insisting on commercially viable solutions to all areas 
before the accession process concludes. The Administration was 
correct in not setting a date for concluding negotiations. Let 
us hope that the pace of progress will continue and increase in 
the weeks and months ahead.

III. Should China Need Time for Adopting All WTO Obligations, Existing 
  WTO Members Should Maintain Transitional Rights Which Will in Fact 
       Permit a Maintenance of Balance of Rights and Obligations

    Because of the tremendous changes in the economic system of 
China that accession to the WTO entails, it is not surprising 
that China has continued to seek transition periods to bring 
itself into compliance. One of the obvious trade offs for 
Members of the WTO in terms of examining China's accession is 
speed of entry versus balance of rights and obligations. From 
the beginning, one option to speed the accession process was 
the possibility of creating a transitional period in which 
China assumed less than full obligations and, as a result, 
obtained less than full rights vis-a-vis existing Members. 
While such an approach has significant intellectual appeal and 
could have been a basis for an expedited accession, China has 
been reluctant to accept significantly different rights 
regardless of the transition periods needed to bring itself 
into compliance with WTO obligations. While early drafts of the 
Protocol of Accession would have given significant rights to 
existing WTO members to address trade problems during the 
transition period before China accepted full obligations, such 
an approach has been unacceptable to China. The current draft 
protocol has largely made the transitional rules unworkable for 
existing members as any action by an existing Member will 
require compensation to China. While this development may 
please the Chinese government, it places greater importance for 
the U.S. and other members to be sure that the obligations 
undertaken by China are commensurate with its position as a 
trading nation at the present time and that transition periods 
are minimized.
    This Subcommittee should encourage the Administration to 
revisit the transitional rules in the draft protocol to 
safeguard U.S. rights if transition periods to the assumption 
of WTO obligations are significant for China.

 IV. The U.S. Should Not Make China's MFN-Status Permanent Unless and 
             Until Reasonable Market Access Is Established

    Much of the U.S. business community is very anxious to have 
greater certainty in their business dealings with China. The 
annual MFN renewal is both time consuming for business and 
creates significant commercial uncertainty as to the nature of 
the relationship that will exist month to month. From a 
strictly commercial perspective, the establishment of permanent 
MFN status obviously makes the lives of U.S. companies who 
export or invest in China much easier. Of course, the 
provisional MFN status flows from Title IV of the Trade Act of 
1974 which was added both to permit improved trade relations 
with Communist controlled countries and to qualify such 
improvement upon improved freedom of emigration and other non-
commercial issues.
    Without speaking to the propriety/desirability/problem of 
non-trade considerations controlling whether MFN status is 
provided to countries which continue to be subject to Title IV, 
from a purely commercial perspective, it would appear 
appropriate to pass legislation that promises unconditional MFN 
upon accession of China to the WTO as long as the 
Administration certifies that the accession is on commercial 
terms and that the major impediments to a balanced trade 
relationship (WTO and non-WTO related) have been addressed.
    H.R. 1712 would address part of this commercial concern, 
although it is limited to the WTO-related issues. The snap-back 
to December 31, 1994 MFN rates (i.e., before the WTO came into 
existence) raises some practical questions because of the 
generally low level of U.S. tariffs that were in effect at the 
end of 1994 and hence the potential loss of leverage with China 
to get forward movement. Nonetheless, the bill addresses the 
underlying commercial issue and could form the basis for 
forward movement if Congress were to determine that commercial 
concerns should control or that non-commercial concerns can be 
better addressed through other means.

 V. WTO Accession, Even on Commercial Terms, Will Address Only Some of 
              the Existing Impediments to U.S. Trade Flows

    The Subcommittee should keep in mind that addressing the 
WTO accession issue is very important but is not the only issue 
critical to a balanced and rational trade relationship with 
China. I review below just a few of the other issues that must 
be addressed.

(a) China's currency valuation is suspect and should be 
addressed bilaterally under existing statutory authority

    The Chinese currency is believed to be seriously 
undervalued which both encourages exportation at very low 
prices typically causing significant market disruption and also 
retards imports into China by understating purchasing power.
    In the last ten years, Chinese exporters have probably 
found themselves subject to more antidumping actions than any 
other country in the world. The reason for this is simple: 
across a huge array of products, prices from China are far, far 
below any other country in the world. As I mentioned to private 
sector visitors from China a few weeks ago, in light of the 
explosive export drive from China at prices which are often 40-
70% below any other supplier in the world, it is not surprising 
that there have been trade cases. What is surprising is that 
there have not been far more.
    Let me review some U.S. import statistics for 1996 to give 
a sense of the magnitude of the underpricing phenomenon. In 
1996, there were a total of 8,281 10-digit harmonized tariff 
schedule categories for which there was import data for 
products from China. Customs value on all imports from China 
for the year were $51.512 billion. We calculated average price 
per unit or average price per weight for imports from China and 
for imports from all other countries. What we found was that 
for the vast majority of categories, import prices from China 
were lower than import prices from all other countries, with 
thousands of categories being 30%-70% below. For all products, 
the average extent of underselling would appear to be slightly 
above 40%. Such figures strongly suggest that the Chinese 
currency is seriously undervalued.
    Similarly, the World Bank publishes annually information on 
per capita GNP (expressed in U.S. dollars) and something called 
the purchasing power parity on a per capita basis (in 
``international'' dollars). In the World Bank Atlas for 1997, 
China's purchasing power parity per capita was nearly five (5) 
times its per capita GNP, again supporting a finding that the 
currency is seriously undervalued.

        Comparison of Per Capita GNP and Purchasing Power Parity
                          GNP per capita, 1995
------------------------------------------------------------------------
                                                       PPP,       Ratio
                                           US $   international   of PPP
                                                        $        to US $
------------------------------------------------------------------------
China..................................      620       2,920        4.71
United States..........................   26,980      26,980        1.00
Japan..................................   39,640      22,110        0.56
Italy..................................   19,020      19,870        1.04
France.................................   24,990      21,030        0.84
Germany................................   27,510      20,070        0.73
Canada.................................   19,380      21,130        1.09
Thailand...............................    2,740       7,540        2.75
India..................................      340       1,400        4.12
Mexico.................................    3,320       6,400        1.93
Brazil.................................    3,640       5,400        1.48
Indonesia..............................      980       3,800        3.88
Poland.................................    2,790       5,400        1.94
------------------------------------------------------------------------
 ASource: World Bank Atlas 1997. The World Bank at 36-37.
 ANote: GNP per capita in international dollars is converted at
  purchasing power party (PPP) rates. PPP is defined as the number of
  units of a country's currency required to buy the same amount of goods
  and services in the domestic market as US$1 would buy in the United
  States. See Id at 45.


    As the Subcommittee is aware, U.S. law already permits the 
Secretary of the Treasury to address correction of exchange 
rates where certain conditions are satisfied. See 22 U.S.C. 
5304(b) Because China has a material global current account 
surplus and a significant bilateral trade surplus with the 
United States, Treasury has the authority to initiate 
negotiations with China to get a correction to the exchange 
rate of the Chinese currency.

                                    China's Current Account and Trade Surplus
                                          [In millions of U.S. dollars]
----------------------------------------------------------------------------------------------------------------
                                           1990      1991      1992        1993       1994      1995      1996
----------------------------------------------------------------------------------------------------------------
Current account........................    11,997    13,272     6,401      -11,609     6,908     1,618     7,243
Trade balance..........................     9,165     8,743     5,183      -10,654     7,290    18,050    19,535
Balance on goods and services..........    10,668    11,601     4,998      -11,497     7,611    11,958    17,551

----------------------------------------------------------------------------------------------------------------
 ASource: IMF, International Financial Statistics, October 1997 at 196.


    While Secretary Rubin raised the issue of currency value 
with the Chinese on his recent visit to China, the 
Administration has not used its statutory authority to request 
bilateral consultations on exchange rates with China. Congress 
should be encouraging the Administration to resolve the 
exchange rate problem with China as quickly as possible.

(b) Investment restrictions and China's strategic industry 
initiatives seriously impede U.S. trade and investment flows; 
most such problems will not be resolved by WTO accession

    Studies by the OECD and the World Bank indicate that 
multinational companies handle one third of world trade between 
their own operations. Stated differently, investments abroad 
usually lead to significant exports from the country whose 
company has done the foreign investment. This trade may be 
equipment, raw materials, services or other elements of the 
product being produced in the foreign country.
    The restrictions placed on foreign investment by China both 
involve aspects that are addressable under the WTO (e.g., local 
content, trade balancing and other trade-related investment 
measures) and aspects that are not (e.g., sectors that are off 
limits or where investment will be controlled). While WTO 
membership will obviously permit some investment restrictions 
to be addressed, many of the fundamental concerns of U.S. 
investors, including concerns over strategic industry 
investment restrictions (autos, electronics, etc.) and 
technology transfer requirements will not be addressable within 
the WTO. See October 25, 1997 Washington Post, page C1 and C2, 
``China Plays Rough: `Invest and Transfer Technology, or No 
Market Access'.'' As the Subcommittee is aware, efforts by the 
United States to build into the World Trade Organization a 
broader investment regime during the Uruguay Round were not 
successful. While the U.S. and others have been pursuing a 
Multilateral Agreement on Investments within the OECD and while 
a Working Party has been established within the WTO to examine 
the topic of trade and investment, there is no short or medium-
term prospect for a multilateral vehicle that will include 
China.
    While the U.S. and China have a bilateral agreement on 
investment guarantees, the agreement falls far short of the 
type of agreement needed to provide open access to the Chinese 
market.\4\ The Subcommittee should encourage the Administration 
to make a bilateral agreement on investment with China a 
priority and an important consideration in determining whether 
to provide unconditional MFN treatment.
---------------------------------------------------------------------------
    \4\ See Exchange of Notes Constituting an Agreement Relating to 
Investment Guarantees. Beijing, 30 October 1980. 32 UST 4010; TIAS 
9924; 1267 UNTS 315.

(c) Plurilateral agreements in the WTO (Government Procurement 
and Civil Aircraft) are not mandatory for WTO members. China to 
date has been unwilling to join these agreements. Both are 
important for U.S. industries. Bilateral approaches are needed 
in the absence of Chinese movement to accede to these 
---------------------------------------------------------------------------
agreements.

    Some of the leading export sectors of the U.S. economy 
involve companies that sell civil aircraft or components 
thereof or who are involved in bidding on government 
procurement contracts around the world. The $3 billion order 
for Boeing planes announced by the Chinese during President 
Jiang's visit last week underlines the importance of certain 
sectors to our overall national export performance. 
Unfortunately, two agreements within the WTO that could be of 
great importance to many U.S. companies are not mandatory--the 
Civil Aircraft Agreement and the Government Procurement 
Agreement. Despite efforts by the U.S. and the EU to gain 
agreement by China to join these important agreements as part 
of the WTO accession, China to date has not moved in this 
direction. While the U.S. was successful as part of the 
Singapore Ministerial in getting agreement to establish a 
Working Party to review transparency issues in government 
procurement and to seek agreement on transparency needs, such 
efforts are still in the early stages of development and will 
only partially address the underlying concerns.
    The Subcommittee should encourage the Administration to 
pursue: (1) bilateral agreements on both issues apart from WTO 
accession, (2) duty free status for civil aircraft and parts as 
part of the WTO accession process and (3) a reasonable 
commitment to a time line for China's accession to the 
plurilateral agreements. Such agreements should be part of any 
package needed for permanent MFN status.

(d) Accession creates obligations but does not necessarily 
provide the tools for complying with obligations undertaken. 
The U.S., Canada, EU and other WTO members need to 
significantly expand technical assistance to China to permit 
adequate institution building.

    As I reviewed for the Subcommittee in your February 1997 
hearing on the Singapore Ministerial, many developing and least 
developed countries have had serious problems complying with 
various obligations undertaken as part of the World Trade 
Organization. Indeed, on many agreements, during the first two 
years fewer than half of the Member nations provided 
notifications of laws, regulations or practices as required by 
the Agreement.
    In looking at the history of enforcement of U.S.-China 
bilateral agreements, implementation of rights and obligations 
has often been more difficult than reaching the agreement in 
the first place. In the area of intellectual property, the 
United States found that it needed a very broad based program 
of technical assistance and collaboration if it were to find 
efforts by the Chinese government to approximate obligations 
undertaken.
    The WTO's general experience and our country's specific 
experience with bilateral agreements with China suggest that if 
we want a balanced trade relationship in fact and reasonable 
compliance with obligations undertaken as part of the WTO or as 
part of bilateral agreements, it will be important to assist in 
the institution building that will be central to China's 
compliance. This does not diminish the need for the Chinese 
government to bring the political will and to devote the 
resources necessary to implement international obligations. It 
does, however, recognize the reality that it is in the U.S.'s 
interest to help see that the institution building is 
expedited. Congress and the Administration must see that 
agreements don't stop at the signing ceremony or aren't left 
simply for the dispute resolution process. Technical assistance 
can make implementation a win/win for China and the rest of the 
trading system.

     VI. Even in Areas Where WTO Accession Will Create Rights and 
    Obligations, Existing U.S. Trade Problems Suggest the Need for 
      Additional Bilateral Efforts to Facilitate Rapid Resolution

    Within the Administration's list of priority areas to 
address as part of China's accession effort are non-tariff 
barriers, standards and agriculture. The host of sanitary and 
phytosanitary measures in place that restrict U.S. exports to 
China have been well documented in various USTR documents. As 
reviewed in the 1997 National Trade Estimate:
    China committed in the 1992 Market Access MOU to base its 
agricultural import standards on ``sound science.'' Since 1992, 
China has made some progress on agricultural sanitary and 
phytosanitary issues, signing bilateral protocols for several 
agricultural items, including live horses (September 1994); 
apples from Washington, Oregon and Idaho (April 1995); 
ostriches, bovine embryos, swine and cattle (June 1995); and 
cherries (March 1996). However, China's sanitary and 
phytosanitary measures still prohibit imports of U.S. citrus, 
plums, grapes, tobacco, and Pacific Northwest wheat. In 1996, 
China's sanitary requirements for poultry and poultry meat 
became a major issue. Imports from the U.S. were abruptly 
stopped on several occasions for reasons inconsistent with 
international standards.
    Many of the statements filed with USTR as part of the 
effort earlier this year to obtain public input on China's WTO 
accession process identified problems with SPS issues, as well 
as state trading, high tariffs and various other non-tariff 
barriers, as restricting exports to China. See, e.g., letter of 
2/28/97 from Indian River Citrus League, letter of 1/14/97 from 
16 members of the Senate Committee on Agriculture, Nutrition 
and Forestry, letter of 3/14/97 from American Farm Bureau 
Federation and associations representing soybeans, wheat, beef, 
corn, cotton, pork and rice.
    While the federal government, the states and individual 
industry groups have been working hard to overcome problems 
that have arisen, the trade effect of many of these issues and 
the lack of clarity of WTO obligations on others (e.g., state 
trading) suggest that the establishment of high level, 
permanent commissions, stepped up exchange of technical 
experts, and other actions may be appropriate to reduce the 
level of misunderstanding, expand the areas of common agreement 
and find solutions that can be implemented quickly.
    Again, the Congress may wish to link permanent MFN status 
to the achievement of working mechanisms on these and the prior 
issues that may go beyond the WTO itself.
    I appreciate the opportunity to testify and would be 
pleased to answer any questions.
      

                                


    Chairman Crane. Thank you.
    Our next witness, Nicholas Giordano.

STATEMENT OF NICHOLAS D. GIORDANO, ASSISTANT VICE PRESIDENT FOR 
             TRADE, NATIONAL PORK PRODUCERS COUNCIL

    Mr. Giordano. Mr. Chairman, on behalf of America's pork 
producers, I very much appreciate this opportunity to appear 
before you today. U.S. agricultural exports remain a bright 
spot in our Nation's trade picture. Last year, the U.S. 
agricultural trade surplus was $27.4 billion, making 
agriculture the largest contributor to a positive balance of 
trade.
    Mr. Chairman, while our agricultural export performance has 
been quite good to date, many barriers prevent us from 
realizing our potential in international markets. The failure 
of China to agree to a meaningful WTO accession protocol that 
will provide increased access for United States agricultural 
exports is a major problem not only for the pork industry, but 
perhaps for all United States agriculture. The pork industry, 
possibly more than any other sector of United States 
agriculture, is disadvantaged because China, the largest pork-
consuming market in the world, has a de facto ban on pork 
imports.
    For the past 10 years, the United States has been 
negotiating with China regarding that country's accession to 
the WTO. While some progress has been made, the two sides 
remain far apart on many matters, including agricultural market 
access. Pork producers believe that enactment of the China 
Market Access and Export Opportunities Act, H.R. 1712, would 
help pave the way for China's accession to the WTO. H.R. 1712 
provides the incentives for China to develop a meaningful 
accession package by pledging to eliminate the annual MFN 
review under Jackson-Vanik. The legislation effectively 
addresses China's concern that it could make all the necessary 
concessions to gain entry to the WTO, only to have the Congress 
balk at granting permanent MFN or other complications.
    However, the legislation provides not only a carrot, but 
also offers a stick to induce China to develop a meaningful 
accession protocol. The legislation provides that within 6 
months from date of enactment, the President must make a one-
time determination as to whether China is ``either denying 
adequate trade benefits to the United States or not taking 
steps to become a full member of the World Trade 
Organization.''
    If the President determines that China is not satisfying 
either of the foregoing criteria, the legislation directs the 
President to raise the duties on imports of one or more 
products from China to levels no higher than the pre-Uruguay 
round levels.
    Pork producers believe that this is a much more sensible 
approach than that offered by Jackson-Vanik which, if 
triggered, would virtually lock out all Chinese exports to the 
United States. The recent stock market swings have underscored 
the interconnectedness of the economies of Asia and the rest of 
the world. If Jackson-Vanik were invoked against China, we 
believe the worldwide economic consequences would be dire.
    H.R. 1712 gives the President a reasonable and appropriate 
tool to use if China is not providing adequate market access or 
is not making significant progress in its WTO bid. To date, 
trade with China largely has been a one-way street, as 
evidenced by the massive trade deficit. Increasing tariffs on 
Chinese products to pre-Uruguay round levels--levels which I 
understand are 4 to 7 percent higher than current tariff 
rates--would be a realistic and fair response to Chinese 
practices. United States pork producers, along with virtually 
all of United States agriculture, believe that China must be 
engaged. The United States cannot, must not turn its back on 
the most populous nation in the world, a nation which in our 
lifetimes will likely have the largest economy in the world.
    At the same time, the United States must not rush China 
into the WTO. China is so far from compliance with WTO 
requirements now that the effectiveness of the WTO would be 
severely compromised if China were admitted to the WTO at the 
present time. Clearly, Russia and Ukraine would demand the same 
lenient treatment extended to China. Moreover, if the United 
States prematurely supports China's WTO accession, the 
ramification for United States exporters will be serious. 
Exporters will be forced to wage a long and arduous campaign to 
open that market, similar to the ongoing struggle with Japan.
    Mr. Chairman, that concludes my comments. Thank you.
    [The prepared statement follows:]

Statement of Nicholas D. Giordano, Assistant Vice President for Trade, 
National Pork Producers Council

    Mr. Chairman and members of the subcommittee: I am Nicholas 
Giordano, Assistant Vice President for Trade with the National 
Pork Producers Council. I appreciate the opportunity to appear 
on behalf of U.S. pork producers to express our views on the 
possible accession of China to the World Trade Organization.
    The National Pork Producers Council is a national 
association representing 44 affiliated states who annually 
generate approximately $11 billion in farm gate sales. 
According to a recent Iowa State study conducted by Otto and 
Lawrence, the U.S. pork industry supports an estimated 600,000 
domestic jobs and generates more than $64 billion annually in 
total economic activity.
    With 10,988,850 litters being fed out annually, 1.065 
billion bushels of corn valued at $2.558 billion are consumed 
by U.S. pork producers. Feed supplements and additives 
represent another $2.522 billion of purchased inputs from U.S. 
suppliers which help support U.S. soybean prices, the U.S. 
soybean processing industry, local elevators and transportation 
services based in rural areas.
    Pork is the world's meat of choice. Pork represents 44 
percent of daily meat protein intake in the world. Even though 
there's been a huge global market for pork and pork products, 
efficient U.S. producers were precluded from exporting 
significant volumes of pork in the pre-Uruguay Round Agreement, 
pre-NAFTA era. A combination of foreign market trade barriers 
and highly subsidized competitors kept a lid on U.S. pork 
exports. U.S. pork producers were ardent proponents of the 
Uruguay Round Agreement and NAFTA. The industry strongly 
supports further trade liberalization measures and, 
consequently one of the organizations leading the charge for 
the renewal of fast track trade negotiating authority. These 
trade agreements permit U.S. pork producers to exploit their 
comparative advantage in international markets.
    Since 1995, when the Uruguay Round Agreement went into 
effect, U.S. pork exports to the world have increased by 
approximately 45 percent in volume terms and 75 percent in 
value terms from 1994 levels. Indeed, the U.S. pork industry 
exported over one billion dollars of pork for the first time in 
1996. Explosive export growth will continue in 1997 and 1998.

                  U.S. Agriculture Is Export Dependent

    U.S. agricultural exports continue to be a bright spot in 
our nation's trade picture. Last year, the U.S. agricultural 
trade surplus was $27.4 billion, making agriculture the largest 
positive contributor to the U.S. balance of trade. We are the 
world's leading exporter of agricultural products with a 21 
percent share of world trade. The agricultural sector is twice 
as reliant on international trade as the total U.S. economy 
with exports accounting for an estimated 30 percent of gross 
cash receipts.
    While our agricultural export performance has been good, 
foreign trade barriers and other factors continue to prevent us 
from realizing our potential in international markets. The 
failure of China to agree to a meaningful World Trade 
Organization (WTO) accession protocol that will provide 
increased access for U.S. agricultural exports is major problem 
for U.S. agriculture. The U.S. pork industry, perhaps more than 
any other sector of U.S. agriculture, is disadvantaged because 
China, the largest pork consuming country in the world, has a 
de facto ban on pork imports.

                China Has a De Facto Ban on Pork Imports

    High tariff rates and a discriminatory value added tax put 
imported pork at a sharp competitive disadvantage to domestic 
pork. Moreover, complicated and non-transparent restrictions on 
imported pork, administered by China's quarantine 
administration (CAPQ), make it virtually port pork. While CAPQ 
officials acknowledge the existence of the restrictions, they 
have been unwilling to date to supply copies of the 
restrictions to U.S. trade negotiators stating that the laws 
are confidential. CAPQ contends that Chinese restaurants and 
hotels can obtain licenses to import pork. Unlike beef, for 
which licenses are available through regional CAPQ offices, 
CAPQ says that it disseminates pork import licenses solely 
through CAPQ headquarters. In reality, very few licenses have 
been granted by CAPQ.
    Recently China lowered tariffs on imported pork from 45 
percent to 23 percent. This development is not significant 
because the 23 percent duty is in addition to the 17 percent 
value added tax which is discriminately applied against 
imports. Thus, even if the many non-tariff barriers applied 
against imported pork were rectified, high tariffs would 
continue to block pork imports.
    Earlier this year, CAPQ provided quotas to 11 
establishments in Australia, Canada, and the United States as 
eligible to export meat and poultry to China for general 
consumption under a one year trial program. While in one sense 
this is a positive development because, as a matter of law, 
these imports are not limited to the hotel and restaurant 
sector, as a matter of fact, high tariffs and other restrictive 
measures will militate against any significant level of 
imports. The identified establishments include a pork facility 
in Australia that received a quota of 2,000 MT, three pork 
facilities in Canada that received a total quota of 68,000 MT, 
and one pork facility in the U.S. that received a quota of 
5,500 MT. The Australian and U.S. exports must be imported 
exclusively by Nanjing Five-Star Hotel Corporation Ltd. and the 
Canadian product must be imported exclusively by Chaoying 
Foodstuff Ltd. While pork is not on the formal list of state 
traded products in China, the appointment of these exclusive 
importers is troubling. Indeed, we understand that CAPQ 
officials are involved with the ownership/manag these 
importers. Canadian pork quotas are much higher than U.S. quota 
levels but must be imported pursuant to the recently executed 
Canada-China pork protocol. We understand from Canadian 
industry officials that they are extremely upset with this 
protocol because onerous and non-scientific restrictions will 
preclude the shipment of any significant amount of pork from 
Canada to China.
    Moderate quantities of pork are flowing indirectly to China 
through Hong Kong importers. The pork, almost all variety meats 
(e.g. hearts, stomachs, intestines), is distributed to the 
general population mostly through local wholesale markets with 
a small amount distributed through supermarkets. Technically 
the importation and distribution of this product is illegal, a 
fact which is generally acknowledged by the Hong Kong importers 
and Chinese distributors.
    The U.S. pork industry urges the following changes in 
China:
    (1) the abolition of the de facto ban on pork importation;
    (2) the establishment of transparent import regulations and 
licensing requirements;
    (3) repeal of the discriminatory value-added tax which is 
applied to meat imports;
    (4) reduction of import duties to minimal levels with no 
TRQs;
    (5) unrestricted entry and participation of non-government 
import entities;
    (6) a protocol governing sanitary issues, which, among 
other things, recognizes the U.S. safety and inspection system 
as equivalent and permits the export of pork from any FSIS 
approved facility;
    (7) the termination of subsidies to the Chinese pork 
industry.
    The United States is uniquely positioned to reap the 
benefits of a liberalized Chinese pork sector. The U.S. 
exported over $1 billion in pork in 1996 and exports continue 
to sky-rocket. While the U.S. currently is the world's second 
largest exporter of pork behind Denmark, the oltural Policy 
Research Institute (FAPRI) report states: ``The U.S. becomes 
the number one pork exporter because it is able to expand 
production without placing strong pressure on domestic 
prices.'' Danish producers currently have higher costs than 
U.S. producers and the gap is increasing. There is virtually no 
room for the expansion of the Danish pork industry. FAPRI 
projects that Chinese pork consumption will increase by over 23 
percent, approximately 8 million metric tons, in the next ten 
years. To put this number in perspective, during 1996, U.S. 
pork exports were less than 500,000 metric tons.
    Recent statistics reveal that China is surpassing Japan as 
the single largest source of the U.S. trade deficit. If China 
liberalized its pork market, the U.S. would be exporting huge 
volumes of pork to that country. The U.S. pork industry alone 
could make a significant dent in the U.S.-China trade 
imbalance.
    While the U.S. pork industry arguably stands to benefit 
more than any other segment of U.S. agriculture from a 
meaningful WTO accession protocol for China, virtually every 
other segment of U.S. agriculture will also benefit.

   NPPC Supports the China Market Access and Export Opportunities Act

    For the past ten years the U.S. has been negotiating with 
China regarding that country's accession to the WTO. While some 
progress has been made, the two sides remain far apart on many 
matters, including agricultural market access. NPPC believes 
that enactment of The China Market Access and Export 
Opportunities Act (H.R. 1712) would help pave the way for 
China's accession to the WTO.
    President Clinton's former chief economic advisor, Laura 
D'Andrea Tyson, wrote in the New York Times during last year's 
annual most-favored-nation (MFN) debate that the U.S. should 
give China more incentive to undertake the steps necessary for 
a meaningful accession protocol. She stated that:

    Instead of threatening to terminate China's MFN status, the 
U.S. should be signaling that we will facilitate China's WTO 
membership provided Bejing meets the necessary conditions. We 
should specifically pledge to grant China permanent MFN status 
in return for such commitments.
    (NY Times, May 28, 1997, at A18) H.R. 1712 provides the 
incentive to China to develop a meaningful accession package by 
pledging to eliminate the annual MFN review under Jackson-
Vanik. The legislation effectively addresses China's concern 
that it could make all the necessary concessions to gain entry 
to the WTO only to have the U.S. Congress balk at granting 
permanent MFN.
    However, the legislation not only provides a carrot but, it 
also offers a stick to induce China to develop a meaningful 
accession protocol. The legislation provides that within six 
months from the date of enactment, the President must make a 
one time determination as to whether: China is ``either denying 
adequate trade benefits to the United States or not taking 
steps to become a full member of the World Trade 
Organization.'' If the President determines that China is not 
satisfying either of the foregoing criteria, the legislation 
directs the President to raise the duties on imports of one or 
more products from China to levels no higher than the pre-
Uruguay Round levels.
    This is a much more sensible approach than that offered by 
the Jackson-Vanik provision which, if triggered, would 
virtually lock out all Chinese exports to the United States. 
The recent stock market swings have underscored the 
interconnectedness of the economies of Asia and the rest of the 
world. If Jackson-Vanik were invoked against China, the 
worldwide economic consequences would be dire.
    H.R. 1712 gives the President a reasonable and appropriate 
tool to use if China is not providing adequate market access or 
is not making significant progress in its WTO bid. To date, 
trade with China largely has been a one way street as evidenced 
by the massive trade deficit. Increasing tariffs on Chinese 
products to pre-Uruguay Round levels--levels which I understand 
are 4 to 7 percen realistic and fair response to Chinese 
practices.
    Should China's position change after pre-Uruguay Round 
level duties are invoked, the legislation provides the 
President with the flexibility to modify the duties upon 
notification to the appropriate congressional committees.
    U.S. pork producers, along with virtually all of U.S. 
agriculture, believe that China must be engaged. The United 
States must not turn its back on the most populous nation in 
the world, a nation which likely will have the largest economy 
in the world not long into the next century. At the same time, 
the U.S. must not rush China into the WTO. If China were 
admitted to the WTO at the present time, the effectiveness of 
the WTO would be severely compromised given that China is so 
far from compliance with WTO requirements. Clearly, Russia and 
Ukraine would demand the same lenient treatment extended to 
China.
    Moreover, if the U.S. prematurely supports China's WTO 
accession, the ramifications for U.S. exporters will be 
serious. We will be forced to wage a long and arduous campaign 
to open that market similar to the ongoing struggle with Japan.
    If enacted, the China Market Access and Export 
Opportunities Act improves the prospects for China's entry into 
the WTO on commercially acceptable terms.
      

                                


    Chairman Crane. Thank you.
    Our next witness is Mr. Aronson.

 STATEMENT OF ROBERT R. ARONSON, CHAIRMAN, ROSS MANUFACTURING 
  CORP., FORT LAUDERDALE, FLORIDA; AND REVPOWER LIMITED, HONG 
                          KONG, CHINA

    Mr. Aronson. Thank you very much, Mr. Chairman. Thanks for 
the opportunity of being here and testifying on this most 
timely topic.
    My name is Robert Aronson. I am chairman of the Ross 
Manufacturing Corp. of Fort Lauderdale, Florida, and Revpower 
Limited, an American-owned company in Hong Kong. I have entered 
my written testimony, so I will just add a few more remarks.
    You may have seen this Business Week article. The date of 
publication was October 6, 1997, and the article is entitled 
``Cheated in China.'' It talks about four companies that have 
been cheated in China: Kimberly Clark, Borg Warner, Asimco, and 
my company, Revpower. I could add a number of other names to 
that list--McDonnell Douglas, Occidental Petroleum, Chrysler, 
Microsoft, Revmaster, and quite a few others--but why are 
American companies being cheated in China?
    The basis for all commercial relations in China is the 
agreement. There has to be a Chinese company and there has to 
be an American company, and there has to be an agreement 
between the two. What we found out is that Chinese can breach 
agreements with impunity because there is really no rule of law 
in China, no protection for American investments in Chinese 
courts. The Chinese courts will not enforce arbitration awards 
in favor of American companies.
    What do we do when we are cheated? What do all the 10,000 
American companies with agreements do--agreements with 
arbitration clauses? Well, an example of what happens follows. 
Senitron Co., an Arizona electronics company, lost an 
arbitration award in Stockholm--over $1 million--and the 
Chinese state-owned entity was able to collect through American 
courts.
    On the other hand, Revpower, my company, has a $9 million 
arbitration award now. Another company in New Jersey, Petro 
Chemical Co., has a $5 million arbitration award. It's totally 
impossible to collect; the Chinese courts just won't enforce. 
Our case is over 4 years old, and we have had just one stall 
after another. In fact, the latest thing--which we just learned 
today at lunchtime--is that SFAIC, Shanghai Far East Aero-
Technology Import and Export Co., the Chinese state-owned 
entity which is a subsidiary of Shanghai Aviation Industries--
the company that does the McDonnell Douglas aircraft--and which 
owes $9 million to Revpower has now declared bankruptcy. We 
learned right after we received the award in Stockholm in 1993 
that the company had been conducting an espionage operation at 
the McDonnell Douglas headquarters in Long Beach.
    They had a liaison office at McDonnell Douglas in 
connection with their agreement with us, so we were really a 
cover for an espionage operation which went bad. The FBI 
arrested five of them. One of them confessed everything and 
renounced his Chinese citizenship and he's now under protective 
custody; the others were sent back home. So this company, 
SFAIC, used us as a cover; they never intended to engage in the 
business that we were in, which was the battery business. After 
having confiscated our battery plant and lost an arbitration 
case in Stockholm, now SFAIC has simply declared bankruptcy. 
This is a State-owned entity, so something really needs to be 
done about those things.
    American companies are running scared in China. Why? 
Because everyone knows--the seasoned negotiators know--that the 
Chinese can breach agreements with impunity, any time they 
want, and get away with it. So we're scared to death of what 
might happen.
    We have another company in China, operating in Xiamen, that 
makes fiberglass products. This project started 4 or 5 years 
ago, and it's been running along fine, increasing in volume 
each year. But we are really afraid that, at any moment, there 
could be a major breach in this agreement. And what would we 
do? We have the standard Swedish arbitration clause in our 
agreement, but should we go to Stockholm and spend $500,000 
over 2 years to arbitrate and receive an award which would then 
be totally uncollectible?
    Another friend of ours has a company called Revmaster 
Aviation. Revmaster deals with the same company that we deal 
with in Xiamen, which is a large Chinese state-owned entity. 
Revmaster began producing crankshafts in Harbin in north China 
in 1985. Its partner, a Chinese state-owned company, produced 
the crankshafts and shipped them to California. They were sold 
all over the country by Revmaster.
    Two years ago, all of a sudden Revmaster learned that its 
sales had drastically declined, to almost nothing. Upon 
investigation, Revmaster discovered that its partner--the 
state-owned company which is also our partner in Xiamen--has 
begun selling those crankshafts directly to Revmaster's 
customers and competitors through an intermediary company in 
Australia. Now what can Revmaster do about that? What could we 
do about it if that particular Chinese state-owned entity does 
the same thing to us?
    Arbitration doesn't seem to be the answer. Yet these 10,000 
agreements that exist in China all contain arbitration clauses. 
They are like time bombs ready to go off. When the Chinese are 
ready to breach an agreement or to confiscate a property or 
whatever they want to do, when they are ready to do it, they do 
it. They know they can get away with it.
    I think the solution is to enact the bill that was 
introduced by Congressmen Bill McCollum, Clay Shaw, and Floyd 
Spence. H.R. 2141 would enable companies like ours to collect 
against Chinese state-owned assets located in the United States 
in the event we're not able to collect in China. So I would 
urge the Subcommittee to do whatever is necessary to get this 
bill through Committee and to the floor for a vote because it's 
something that every American company operating in China really 
needs: a way to really collect and to foreclose all the Chinese 
tricks that they have been playing on us.
    This is a simple amendment to a bill that already exists 
which is called the Foreign Sovereign Immunities Act. Under 
this act, arbitration awards can even today be collected in the 
United States through the Federal district court, but only 
against the offending debtors. If those offending debtors have 
no assets in the United States, why, then it would be 
impossible to collect.
    This amendment would broaden the base for collection 
against any State-owned, foreign State-owned assets in the 
United States. So I would really hope that the Subcommittee and 
others give this consideration.
    Under the 1958 New York Convention on Recognition and 
Enforcement of Arbitral Awards, China is required to do just 
that: recognize and enforce; they do not. China does not 
recognize and enforce arbitral awards under that treaty. So if 
China is not willing to abide by its international obligations 
under the New York Convention, then how could we expect China 
to abide by any promises that would come out of its accession 
to the World Trade Organization?
    So I would say we have got to deal with first things first. 
That concludes my comments. Thank you.
    [The prepared statement follows:]

Statement of Robert R. Aronson, Chairman, Ross Manufacturing Corp., 
Fort Lauderdale, Florida; and Revpower Limited, Hong Kong, China

    Mr. Chairman and members of the Subcommittee, my name is 
Robert R. Aronson. I am Chairman of Ross Manufacturing 
Corporation (formerly Ross Engineering Corporation) of Fort 
Lauderdale, Florida, and President of Revpower Limited 
(``Revpower''), an American-owned Hong Kong manufacturing 
company. I appreciate the Subcommittee's courtesy in inviting 
me to appear before you and applaud your initiative in holding 
this timely hearing on China Trade Relations and the possible 
accession of China to the World Trade Organization.
    Also, I want to express my thanks to you, Mr. Chairman, and 
to Congressman E. Clay Shaw, Jr. for the help you have given me 
over the years in our attempt to collect an arbitration award 
made to Revpower by the Arbitration institute of the Stockholm 
Chamber of Commerce (``Swedish Arbitration Institute'') on July 
13, 1993. That award now stands at $9 million, including 
accumulated interest. (Exhibit 1)
    On May 23, 1995, 1 testified before this same committee on 
the Revpower case and at that time covered the history of the 
Revpower dispute with a Chinese state-owned entity, Shanghai 
Far East Aero-Technology Import & Export Corporation 
(``SFAIC'') which led to arbitration, and subsequent efforts to 
collect on the award through the Shanghai Intermediate People's 
Court (the ``Shanghai Court''). Since that Statement and all 
those details are already in the record, I will not repeat that 
information here but simply refer you to the record.
    Over four years have passed since we won that arbitration 
award. We expected to receive payment in 1993. SFAIC had ample 
assets with which to pay and was part of the powerful Chinese 
Military-Industrial Complex. (Exhibit 2) According to a Dun & 
Bradstreet report (``D & B Report'') on SFAIC, they had a paid-
in capital of 500,000,000 Yuan. They owned the 4th floor of a 
large office building in downtown Shanghai. They were in the 
process of building a factory in Pudong, across the river from 
Shanghai, for a joint venture with a Fortune-500 company to 
manufacture an electronic check-out apparatus that is found at 
all check-out counters in large U.S. markets. They had property 
in California and Nevada and operations in Hong Kong and other 
parts of the world. In Shanghai, they had a staff of 50 
persons.
    According to the D & B Report, SFAIC is a State-owned 
enterprise which is defined as follows in that report: ``State-
owned Enterprises refers to Corporations, Enterprises, other 
economic entities registered in China either financially 
supported or ultimately controlled by the State, Provinces, 
Municipalities, Autonomous Regions or Chinese Enterprises.''
    SFAIC is a wholly owned subsidiary of Shanghai Aviation 
Industrial Corporation (``SAIC''), the company which assembles 
MD-80 aircraft for McDonnell Douglas. Our original oral 
agreement was with SAIC, made in June of 1985 at the 
headquarters of McDonnell Douglas in Long Beach, California. 
SFAlC did not exist at that time. It was formed by SAIC 
initially to do business with us in February, 1986. The 
relationship between SFAIC and SAIC can be seen in a letter 
from Shanghai Aircraft Manufacturing Factory, a division of 
SAIC, dated July 15, 1994 (Exhibit 3) and addressed to Mr. Du 
Jianping, General Manager of a company which manufactures 
Sheltered Bus Stop Equipment. In that letter, the director of 
Shanghai Aircraft is attempting to explain to Mr. Du that SAIC 
cannot sign documents with foreign companies and that such 
documents must be signed by SFAIC (the company which owes us 
the award). The letter states:
          ...I have explained to you in the past that Shanghai Aviation 
        Industry Corporation (SAIC) has authorized Shanghai Far-East 
        Aero-Technology Import & Export Corporation (SFAIC) as its 
        representative to sign for it all contractual documents 
        directly with foreign parties. SFAIC signs all such documents 
        on behalf of the head office.

    Thus, SFAIC is the alter-ego of SAIC.

                               Collection

    Since Revpower's original understanding was with SAIC which 
later created SFAIC to do business with us, I felt quite secure 
about receiving payment when receiving the arbitration award. 
Both SAIC and SFAIC had ample assets. Moreover, SAIC was a 
subsidiary of the Ministry of Aeronautics and Astronautics (now 
called Aviation Industries of China or ``AVIC''), a part of the 
Military-Industrial Complex of China, backed by billions of 
dollars of Chinese foreign exchange reserves.
    Instead of receiving payment in 1993 as I had expected, I 
was in for a very rude awakening.


First shock

    SFAIC refused to pay the award saying that ``it was 
unfair.''

Second shock

    When we filed the award with the Shanghai Court, the court 
refused to give us a receipt for the award, or a case number, 
and for the next two years refused to even acknowledge that the 
award existed.

Third shock

    Soon after receiving the award, late in 1993, we learned 
that SFAlC was transferring its business and assets to its 
parent, SAIC, and to its grandparent, AVIC.

Fourth shock

    We began learning that China has a policy of Non-
enforcement of arbitral awards in favor of foreigners.
    Matthew D. Bersani, an attorney with Paul, Weiss, Refkind, 
Wharton & Garrison, with offices in New York and Beijing, 
talked of ``the virtual impossibility of enforcing arbitration 
awards in China'' in his article entitled, ENFORCEMENT OF 
ARBITRATION AWARDS IN CHINA, published in The China Business 
Review, May-June 1992. And the April, 1996 article entitled ALL 
CHANGE IN CHINA published in International Commercial 
Litigation April 1996 stated, ``Foreign companies know that the 
rule of law carries less weight. For a start, lawyers say, the 
local courts show hostility to foreigners. `Frankly, going 
there is ill-advised' says one. The system is renowned to be 
slewed against strangers. `You are going to run into a wall 
know as local protectionism. It is present in all cases, to an 
extreme degree, and it is the decisive factor'.''
    One example of local protectionism is the Petro-Chemical 
Case Petro-Chemical U.S.A. Company Incorporated of Fort Lee, 
New Jersey has been unable to collect a $5 million award 
granted in 1995 by the Swedish Arbitration Institute. A copy of 
a letter on this matter from attorney Magnus Andren of Lagerlof 
& Leman, New York City, is attached. (Exhibit 4)

Fifth shock

    Shortly after receiving the award in 1993, I learned that 
SFAlC had been conducting an espionage operation at its Liaison 
Office at the McDonnell Douglas headquarters in Long Beach, 
California. This office was set up just after SFAlC/Revpower 
Letters of Intent were signed in February, 1986 (the month that 
SFAlC was formed by SAIC). The FBI arrested the SFAIC officials 
in June, 1993. One of them defected and confessed what had been 
going on. The others were deported back to Shanghai. This 
confirmed what I had thought all along. SFAIC did not really 
want to be in the battery business. Their liaison office, set 
up ostensibly to monitor business with Revpower and others, was 
really a cover for espionage activities. Officials at McDonnell 
Douglas worked with the FBI to uncover these activities.

Present status

    The Shanghai Court has been sitting on the award for four 
years and has made no effort to enforce collection from SFAIC. 
SFAIC has gone out of business. It is obvious that China has no 
intention of paying this award.

Assistance by U.S. Government agencies

    We have had a great deal of support from the U.S. 
Departments of Commerce, State, Treasury, Office of U.S. Trade 
Representative, U. S. Embassy in Beijing and American Consulate 
General in Shanghai whose officials have brought up the matter 
with their counterparts in Washington, D. C. and in China on 
many occasions, but to no avail. The Chinese ignore the matter. 
We have an office in Shanghai and our staff members report that 
the Chinese laugh at the 1958 New York Convention on 
Recognition and Enforcement of Arbitral Awards. The comment we 
hear most often is, ``The New York Convention has no teeth.''

              Effect on U.S. Companies Operating in China

    Many of these companies are very apprehensive in their 
dealings with their joint venture partners or others with whom 
they have signed agreements. They know that the Chinese can 
breach these agreements with impunity at any time and that 
there is really no recourse. We all have come to learn that 
there is no legal protection for American investments in China. 
I can give you dozens of examples of major breach of contract 
and outright confiscation, as in our case.

                     How To Level the Playing Field

    Most agreements between American companies and the Chinese 
are with Chinese State-owned entities such as SFAIC. If these 
entities knew that they could not get away with major breaches 
of contract and confiscation, the whole relationship between 
American and Chinese business would change for the better and 
would be beneficial to both sides. This year, American 
investment in China is off by 50%, the first time ever. Partly 
responsible for this decline is the growing awareness that 
there is no legal protection for American investment in China.
    From the American business point of view, one of the best 
ways to reverse this one-sided situation would be to have 
enacted the International Arbitration Enforcement Act of 1997, 
H.R. 2141, a Bill introduced by Congressman Bill McCollum and 
co-sponsored by Congressmen E. Clay Shaw, Jr. and Floyd Spence. 
It is my opinion, shared by many other business men with 
operations in China, that H.R. 2141 is, by far, the most 
important business related Bill pending in Congress and would 
do more good for more American companies in China than any 
other pending Bill in Congress.
    H.R. 2141 is basically an amendment to the Foreign 
Sovereign Immunities Act (``Act''). The Act protects foreign 
states from U.S.A. lawsuits, but with an exception. The 
exception is that U.S. persons can collect international 
arbitration awards against foreign states (or foreign State-
owned entities) through the Federal District Court.
    The amendment would rectify this situation in that U.S. 
persons with international arbitration awards could collect 
against any non-diplomatic assets of the foreign state located 
in the U.S.A. China has a great many State-owned companies 
operating in the U.S.A. and most of them have assets in the 
form of property, inventories, cash in banks, etc. It would be 
difficult for all of them to dispose of their assets.
    Passage of H.R. 2141 would be a breath of fresh air for all 
American companies with business in China. It would stop the 
Chinese from playing games with us and our investments in 
China. It would put US-China business relations on a solid 
footing which would be good for both sides. It would stop major 
U.S. companies from backing out of China or freezing present 
China projects. And it would encourage newcomers to test the 
waters in China, with foreknowledge that their investments 
would be legally protected.
    My recommendation to the Subcommittee, therefore, is that 
everyone get behind H.R. 2141 and do whatever is necessary to 
get this Bill enacted as quickly as possible for the sake of 
all of us.

       China's Possible Accession to the World Trade Organization

    I frankly can not see how China can be allowed into this 
organization when China does not honor its obligations under 
the 1958 New York Convention on Recognition and Enforcement of 
Arbitral Awards. China's shameful behavior of allowing one of 
its State-owned entities to transfer its business and assets to 
its parent and grandparent in order to avoid the award, and the 
shameful behavior of the Shanghai Court in ignoring the award 
for 2 years and making no attempt to enforce the award over a 
4-year period is inexcusable.
    And China's disgraceful behavior in using the Revpower 
agreement as a cover for an espionage liaison office at the 
McDonnell Douglas headquarters in Long Beach, California is not 
the behavior of a county mature enough to join the World 
Community of Nations.
    Therefore, at this point in time, I could not recommend 
that China be allowed to become part of the World Trade 
Organization for the above reasons.
    Mr. Chairman, that concludes my remarks. I look forward to 
working with you and the Subcommittee to assist in getting H.R. 
2141, perhaps coupled with several other China related Bills, 
to the floor for a vote. I would be pleased to answer any 
questions you may have and pleased to submit for the record any 
documents or correspondence the Subcommittee requests.
    [Exhibits are being retained in the Committee files.]
      

                                


    Chairman Crane. Thank you, Mr. Aronson.
    Mr. Wootton.

  STATEMENT OF MICHAEL WOOTTON, DIRECTOR, FEDERAL GOVERNMENT 
                    AFFAIRS, SUNKIST GROWERS

    Mr. Wootton. Mr. Chairman, Mr. Shaw, I am Mike Wootton, 
director of Federal Government affairs for Sunkist Growers. We 
are headquartered in Sherman Oaks, CA. We are one of the oldest 
agricultural cooperatives in the United States--104 years old--
and represent 6,500 citrus farmers in California and Arizona in 
bringing their products to market.
    Export markets have become a more and more significant 
source of revenue for Sunkist and other citrus entities in 
California, Arizona, Florida, and Texas. Today, 45 percent of 
our growers, fresh fruit sales annually are derived from export 
sales.
    Since the late seventies, Sunkist has been working 
deliberately to develop relationships and build a foundation 
for market development in the People's Republic of China 
through trade in our processed citrus products. But since World 
War II, we have been denied the opportunity to sell fresh fruit 
in China, as have all of the other citrus producing States in 
the United States.
    In 1992, the United States and the PRC entered into a 
market access memorandum of understanding in which the Chinese 
Government committed itself to open its markets to American 
agricultural products, including fresh citrus fruit. Since that 
time, officials at the Department of Agriculture and the Office 
of the U.S. Trade Representative have been meeting with their 
counterparts in the Chinese Government to address all 
outstanding technical issues. Bilateral agricultural trade 
meetings have been held several times this year--both in China 
and in the United States, as recently as a week before last in 
San Francisco--to negotiate the terms and conditions of 
agricultural trade compatible with obligations of country 
membership in the WTO.
    Unfortunately, these efforts have yet to produce a 
satisfactory resolution. The Chinese Government persists in its 
resistance to protocols that would open its markets to American 
agricultural products, including fresh United States origin 
citrus fruit. China has yet to demonstrate full acceptance and 
implementation of WTO Agreements on the application of sanitary 
and phytosanitary measures, on technical barriers to trade, and 
on import licensing measures.
    In our case, China has maintained a quarantine against our 
fresh fruit under the auspices of concern about exotic pests 
such as Mediterranean fruit fly, which are not indigenous to 
the United States, which find no permanent habitation here, and 
which periodically are brought into this country from abroad. 
China's prohibition against fresh American citrus fruit 
continues, despite proven successful isolation and eradication 
of the pest in the United States following each detection 
incident.
    As I noted, these periodic outbreaks--this year in the 
heavy tourist area of central Florida and more recently in the 
urbanized area of South-Central Los Angeles--are usually caused 
by illegal importation of infested contraband fruit brought in 
by casual international travelers at major ports of entry, and 
also by illegal entrants from countries of Central and South 
America carrying fruit from locations where Med fly and other 
exotic pests have become established.
    Our other major trading partners, notably Japan, Korea, 
Australia, and New Zealand--all citrus producing countries 
themselves--recognize and subscribe to the success of our 
quarantine isolation and eradication program for Med fly. They 
readily accept U.S. Government certification of pest free, 
fresh California and Arizona citrus fruit into their markets 
from pest-free zones in the United States. The standards 
adhered to by WTO and other international organizations demand 
sound science as a foundation for sanitary and phytosanitary 
policies, including quarantines. Regrettably, China has yet to 
demonstrate acceptance of this international standard.
    China is a very significant prospective market for fresh 
American citrus fruit. If the Chinese Government would finally 
allow our fruit to pass over the Great Wall and into the 
Chinese marketplace, we anticipate citrus fruit sales from 
California alone of $300 million annually during the early 
startup years. Building upon that volume, we could do our part 
to help reduce the $50 billion trade deficit that we currently 
suffer in commercial transactions with China.
    However, despite the best efforts of our Government, 
notably the Department of Agriculture and the Office of the 
U.S. Trade Representative, America's fresh citrus fruit 
continues to be excluded from the marketplace in the People's 
Republic of China. We therefore urge Congress to resist 
granting permanent MFN status to China at this time, and to 
oppose also China's accession to the WTO at this time until 
China opens its markets to American products, including citrus 
fruit, lives up to its commitments expressed in bilateral 
agreements, and fully demonstrates adherence to the obligations 
inherent in WTO membership.
    Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Michael Wootton, Director, Federal Government Affairs, 
Sunkist Growers

    Chairman Crane, Members of the Subcommittee, I am Michael 
Wootton, Director of Federal Government Affairs for Sunkist 
Growers, which is headquartered in Sherman Oaks, California. As 
you may know, Sunkist Growers is a non-profit, grower-owned 
marketing cooperative serving 6,500 citrus farmers in Arizona 
and California. For 104 years, Sunkist Growers has successfully 
marketed high quality citrus fruit produced by its grower-
members. Today, Sunkist Growers produce approximately 65 
percent of the oranges, lemons and grapefruit grown in Arizona 
and California. Our cooperative enjoys a long history of 
dedicated effort to create and expand markets around the world 
for our American citrus fruit. Sunkist exports today account 
for about 45 percent of our growers' annual fresh fruit sales.
    Since the late 1970s, Sunkist Growers has been working to 
establish relationships and build a foundation for market 
development through trade in processed citrus products in the 
People's Republic of China.
    In 1992, the United States and the PRC entered into a 
Market Access Memorandum of Understanding in which the Chinese 
government committed itself to open its markets to American 
agricultural products, including fresh citrus fruit. Since that 
time, officials of the U.S. Department of Agriculture and the 
Office of the U.S. Trade Representative have been meeting with 
their counterparts in the Chinese government to address all 
outstanding technical issues. Bilateral agricultural trade 
meetings have been held several times this year both in China 
and in the U.S. to negotiate the terms and conditions of 
agricultural trade compatible with obligations of country 
membership in the World Trade Organization. Unfortunately, 
these efforts have yet to produce a satisfactory resolution. 
The Chinese government persists in its resistance to protocols 
that would open its markets to American agricultural products, 
including fresh U.S.-origin citrus fruit.
    China has yet to demonstrate full acceptance and 
implementation of WTO agreements on the Application of Sanitary 
and Phytosanitary Measures on Technical Barriers to Trade and 
on Import Licensing Measures.
    In the case of our industry, the PRC has maintained a 
quarantine against the importation of fresh citrus fruit from 
the U.S. under the auspices of concern about the Mediterranean 
fruit fly, an exotic pest which is not indigenous to the U.S. 
and which finds no permanent habitation here, but which is 
periodically brought into this country from abroad. China's 
prohibition against fresh American citrus fruit continues 
despite the proven successful isolation and eradication of the 
pest in the U.S. following each detection incident. As I noted, 
these periodic outbreaks--this year in the heavy tourist 
visitation area of central Florida and most recently in an 
urbanized area of South-Central Los Angeles--are usually caused 
by the illegal importation of infested contraband fruit brought 
into the U.S. by casual international travelers at major ports 
of entry and by illegal entrants into the U.S. from countries 
of Central and South America carrying fruit from locations 
where Med fly and other exotic pests have become established.
    Our other major trading partners--notably Japan, Korea, 
Australia, New Zealand--all citrus producing countries 
themselves--recognize and subscribe to the success of our 
quarantine, isolation and eradication program for the Med fly. 
They readily accept U.S. government certification of pest-free, 
fresh California and Arizona citrus fruit into their markets 
from pest-free zones in the United States. The standards 
adhered to by the WTO and other international organizations 
demand sound science as the foundation for sanitary and 
phytosanitary policies, including quarantines. Regrettably, 
China has yet to demonstrate acceptance of this international 
standard.
    Prospectively, China is a very significant market for fresh 
American citrus fruit. If the Chinese government would finally 
allow our fruit to pass over the Great Wall and into the 
Chinese marketplace, we anticipate annual citrus fruit sales 
for California alone of $300 million during the early startup 
years of market development. Building upon that volume, we 
could do our part to help reduce the now $50 billion annual 
trade deficit suffered by the U.S. in commercial trade with 
China.
    However, despite the best efforts of our government--
notably the U.S. Department of Agriculture and the Office of 
the U.S. Trade Representative--America's fresh citrus fruit 
continues to be excluded from the marketplace in the People's 
Republic of China. We, therefore, urge the Congress to resist 
granting permanent MFN status to China and to oppose, at this 
time, China's accession to the WTO until China opens its 
markets to American products, including American citrus fruit, 
lives up to its commitments expressed in bilateral agreements 
earlier referred to and fully demonstrates adherence to 
obligations inherent in WTO Membership.
      

                                


    Chairman Crane. Thank you. Mr. Wootton, what further steps 
does China need to take to demonstrate its intention to accept 
and implement the WTO Agreements on the application of sanitary 
and phytosanitary measures and also on import licensing 
measures?
    Mr. Wootton. Well, in the case of sanitary and 
phytosanitary measures, what we have simply asked them to do is 
do what other trading partners, such as Japan are doing. That 
is, to accept the type of phytosanitary protocols and work 
plans and standards that we are able to devise, along with the 
expertise of the Animal Plant Health Inspection Service at 
USDA, in identifying those areas where we perhaps have a Med 
fly outbreak--as we did recently in Tampa, Florida area--and 
quickly isolate and eradicate the pest, quarantine the fruit 
coming out of that area, and exclude it from the export market.
    Our other trading partners--and certainly Japan is a good 
example of that--are readily willing to accept our protocols 
and our assurance that the fruit that they are getting from us 
is pest-free. We ask China to simply do the same type of thing 
that seems to be the international standard in this area.
    At this point, you know, we have discussed technically with 
the Chinese ad nauseam all of these points. We have had our 
scientific experts in from Gainesville, Florida, California, 
and the other citrus producing States. The industry has 
insisted that China not be given the opportunity to nickel-and-
dime us to the point where they'll let in certain counties but 
not others, certain States but not other States. We have 
insisted on their adherence to the WTO standards and not be 
allowed to selectively choose a particular county or State.
    Chairman Crane. Mr. Giordano, are other WTO partners who 
produce pork, such as Canada and Australia, in agreement with 
our general approach to Chinese accession to the WTO?
    Mr. Giordano. Yes, they would be, Mr. Chairman. In fact, 
this weekend I met in Mexico with representatives from both the 
Canadian and Mexican industries. This was on the agenda; we're 
all in agreement. I believe that they have made their concerns 
known to their governments. Certainly, the European producers, 
who we also frequently meet with--just this month, in fact, in 
Europe--would also agree with that.
    Australia--we don't have much of a relationship with them 
yet. Unfortunately, they also have a ban on our product, which 
is very much a bogus sanitary restriction. But they are not 
much of a significant exporter. I would assume that their 
position also would be that China should open the market, but I 
don't know how much oxygen the issue has gotten in Australia.
    Chairman Crane. Mr. Stewart, you say in your testimony that 
investment restrictions in China's strategic industry 
initiatives seriously impede United States trade and investment 
flows with China, and that these barriers can't be resolved by 
WTO accession.
    Could you elaborate on that concern?
    Mr. Stewart. Yes, Mr. Chairman. The reality is that China 
has a strategic industry program: The automobile sector, the 
electronics sector--as I believe a speaker on the prior panel 
revealed--and one or two others have been identified. 
Basically, in those sectors, foreign investment is either not 
allowed or is tightly controlled.
    The result is that in sectors where the United States is 
highly competitive, our companies are not able to exploit that 
advantage, both from an export point of view and from an 
investment-in-country point of view. The highest tariffs that 
exist on an MFN basis in China at the moment are reserved for 
the auto sector, where I believe the tariffs are 120 percent. 
Obviously, those are prohibitive tariffs in any country. They 
are coupled by a restriction as to the amount of investment 
that can go in and the number of companies that can go in. That 
has obviously presented problems for the Big Three here in the 
United States, and certainly for many of the auto parts 
suppliers.
    Chairman Crane. Mr. Aronson, do you believe the United 
States is making reasonable demands for China's accession to 
the WTO?
    Mr. Aronson. Could you repeat that?
    Chairman Crane. Do you believe that the United States is 
making reasonable demands for China's accession to the WTO?
    Mr. Aronson. Oh, yes. I certainly think so. I think that 
the United States position is that China should be considered a 
developed country rather than a developing country, and should 
have to adhere to the standards of a developed country. But 
again, I think that until China adheres to its obligations 
under other international agreements, such as the New York 
Convention on Recognition and Enforcement of Arbitral Awards, 
that no consideration should even be given to China for 
accession to WTO.
    If China does not adhere to one particular treaty, why 
should it adhere to another? I think we need to go back to the 
basics, you know, and review all the other international 
treaties to which China is a signatory and make sure that China 
has lived up to its commitments on all of those treaties before 
we even think about WTO.
    Chairman Crane. Mr. Shaw.
    Mr. Shaw. Thank you, Mr. Chairman. Mr. Aronson and I talked 
about the problems that he's had over in China over the years. 
I would like to pose a couple of questions. First, how can 
Congress protect American investment in China if they refuse to 
equally apply their own laws to foreigners, as the situation is 
in your case?
    Mr. Aronson. Under the situation we have today, American 
investment in China is really not protected at all. There's no 
protection for our investment there. Why? Because the Chinese 
can confiscate property. They can materially breach contracts 
and completely get away with it because should such actions 
result in disputes that end in arbitration awards in favor of 
Americans, those awards are neither recognized nor enforced by 
Chinese courts. So there's really no protection.
    The only way, in my opinion, that American investment can 
be protected is to take it away from the Chinese court and 
bring it to American courts, to the Federal District Court. The 
bill proposed by you and Congressmen Bill McCollum and Floyd 
Spence, H.R. 2141, would do that. It would enable companies 
with international arbitration awards to collect against 
Chinese state-owned assets in the United States. That would 
level the playingfield. It would cause the Chinese to stop 
playing around with our companies and with our assets over 
there.
    Mr. Shaw. I understand that that might be made an order as 
an amendment on the floor this week, which I think would be 
very helpful. That would give a cause of action in our own--
would that help you in your situation?
    Mr. Aronson. Pardon me?
    Mr. Shaw. Would that help you in your situation?
    Mr. Aronson. Yes, that would help us. Especially if action 
could be taken quickly on it.
    We just learned today--at noon today, while we were having 
lunch--that the company that owes us the $9 million in China, 
the state-owned company, has filed bankruptcy. Amazing. Here's 
a state-owned company that has engaged in espionage activities 
using our contract as a cover, and then, after having lost an 
arbitration award, has filed for bankruptcy. I think H.R. 2141 
could solve that problem.
    Mr. Shaw. Is Chinese bankruptcy something like ours?
    Mr. Aronson. Yes, it is. It is. It's very much like ours.
    Mr. Shaw. So without this, you would be reduced to just 
being one of the claimants?
    Mr. Aronson. Yes.
    Mr. Shaw. But you haven't established the enforceability 
from the subsidiary that you did business with, isn't that 
correct? Under Chinese law, they just sort of ignored it.
    Mr. Aronson. Yes. The subsidiary, Shanghai Far East, 
actually has been acting for its parent, Shanghai Aviation 
Industries. We have hard evidence that one is the alter ego of 
the other. We really have been dealing with Shanghai Aviation 
Industries, which produces the McDonnell Douglas MD-80s, all 
the while.
    The subsidiary was a cover that was set up for espionage 
purposes. They--the officials--were all arrested by the FBI in 
California. Of course, one of them defected and confessed 
everything. The others were sent back to China. Now the 
subsidiary has gone into bankruptcy. But the subsidiary was 
always an alter ego, part and parcel of its parent, and acting 
for and on behalf of the parent. So we believe that under H.R. 
2141, we could hold the parent responsible. The parent does 
have assets in the United States. However, H.R. 2141 would 
enable us to collect against any State-owned assets in the 
United States since we're dealing with State-owned companies 
that owe us money in China.
    Mr. Shaw. Thank you. Thank you very much. I am pleased that 
I was able to be here during most of your testimony.
    Mr. Aronson. I hope that happens tomorrow.
    Mr. Shaw. I welcome you to the Subcommittee as a 
constituent of mine.
    Mr. Wootton, going a little bit beyond the Sunkist 
situation, we are presently going through a situation with 
Mexico regarding the sanitation issue and citrus. How does what 
you refer to with the Chinese differ from the problems that we 
are presently experiencing--and about which I have been advised 
by several people that we have not been successful in exporting 
one single orange to Mexico. They are now claiming the 
sanitation problem with the fruit fly.
    Mr. Wootton. Well, certainly the use of phytosanitary 
arguments has become a new methodology in creating trade 
barriers. We have experienced that as well with Mexico. Only 
recently did Mexico agree to open up its market to Arizona-
produced citrus fruit, arguing all along that they were 
concerned about a Mediterranean fruit fly--which, historically, 
not one Mediterranean fruit fly has ever shown up in Arizona.
    So in the end, I think when the United States worked out 
their concerns about Mexican avocado imports into the United 
States, all of a sudden that phytosanitary concern about 
Arizona disappeared. Some months after they agreed to open up 
the market for Arizona, we are still without any of the 
specific work plans and protocols that they have agreed to in 
place. So, you are right; they do use phytosanitary arguments 
on occasion to create barriers to trade.
    In the case of China, they have taken it to the extreme of 
excluding all United States citrus fruit, including that from 
Florida. I might add that we are working in concert with the 
citrus industry in Florida, Texas, Arizona, and California to 
jointly demand full access for all United States citrus 
producing States, not just one or two.
    Mr. Shaw. Is China a producer of citrus?
    Mr. Wootton. They are a producer of citrus.
    Mr. Shaw. How large are they?
    Mr. Wootton. They are a very large producer in terms of 
acreage. But in terms of production volume, quality, and so on 
they are not competitive with the United States. They are OK 
for small fruit, some juice, some specialized items like 
mandarin oranges, and that type of thing. But, for example, in 
the case of grapefruit, Florida would certainly be the dominant 
producer and provider in the China market for that.
    It all started with China. Then Marco Polo took it to the 
Mediterranean, and from there back to South America, and up the 
coast to the United States. So we just want to complete the 
circle.
    Mr. Shaw. Thank you. Thank you all for your testimony.
    Chairman Crane. Thank you all for your testimony. This 
concludes the Subcommittee hearing on United States-China 
relations and possible accession of China to the World Trade 
Organization.
    The record will remain open until November 18. The 
Subcommittee stands adjourned.
    [Whereupon, at 2:53 p.m., the hearing was adjourned, 
subject to the call of the Chair.]
    [Submissions for the record follow:]

Joint Statement of American Beekeeping Federation, Inc., American Honey 
Producers Association, Inc., and Fresh Garlic Producers Association

    Pursuant to the October 22, 1997 announcement by the 
Subcommittee on Trade of the Committee on Ways and Means, the 
American Beekeeping Federation, Inc. (``ABF''), the American 
Honey Producers Association, Inc. (``AHPA''), and the Fresh 
Garlic Producers Association (``FGPA'') submit the following 
statement for consideration by the Committee and for inclusion 
in the printed record of the November 4, 1997 hearing held by 
the Subcommittee regarding the future of United States-China 
trade relations and the possible accession of China to the 
World Trade Organization (WTO).
    In particular, ABF, AHPA and FGPA submit this statement 
concerning two issues that deserve attention and priority 
commensurate with the United States' other top-priority 
negotiating positions. First, this statement addresses the 
anticipated impact China's WTO membership would have on certain 
U.S. industries that are vulnerable to Chinese imports. China's 
accession may pose considerable danger to the U.S. Commerce 
Department's continued ability to treat China as a non-market 
economy (``NME'') country under U.S. trade law. Second, ABF, 
AHPA and FGPA recommend that China's membership to the WTO also 
be conditioned on China granting significant concessions as to 
its tariff barriers restricting imports of U.S. merchandise. 
With 1.2 billion citizens, China is the world's largest market 
for virtually all merchandise. Nevertheless, China's tariff 
barriers to trade effectively close that market to potential 
U.S. exporters.

    I. The Terms of China's Accession to the WTO Should Ensure the 
Continued Treatment of China as a Non-Market Economy Country Under U.S. 
                               Trade Law

    Briefly summarized, China's accession to the WTO will 
likely affect certain aspects of U.S. antidumping law. 
Specifically, China's admittance to the WTO could threaten the 
continued treatment of China as an NME country in future U.S. 
antidumping investigations and administrative reviews, unless 
China expressly consents to special treatment in its WTO 
Protocol of Accession. The likely outcome of future trade cases 
against China, absent NME treatment, could be either very 
small, or zero percent, dumping margins found in most, if not 
all, cases. Therefore, AHPA, ABF and FGPA urge the United 
States to negotiate for the insertion of specific language in 
China's draft Protocol of Accession that would allow WTO 
Members to continue to make allowances for the special 
difficulties involved in making price comparisons in Chinese 
trade cases. Inclusion of such language may be essential to the 
continued prosperity of AHPA, ABF and FGPA, and many other 
important U.S. domestic industries.

A. Certain U.S. Industries Are Extremely Vulnerable to Imports 
From China

    If China's accession to the WTO is not made conditional 
upon the ability of the United States and other WTO members to 
treat China as a non-market economy country when enforcing 
their trade laws, many U.S. industries that are vulnerable to 
Chinese imports could be threatened. The potential adverse 
impact that such a result could have on the U.S. honey and 
fresh garlic industries is described below.

1. Vulnerability of the U.S. Honey Industry

    In the early 1990s, China exported only a few million 
pounds of honey each year to the United States. During the 
three-year period 1992-94, Chinese annual imports rose to an 
average of about 70 million pounds, which were sold here at 
about half the price U.S. producers needed to recover their 
costs of production. In contrast to China, U.S. producers 
supplied less than 60 million pounds to the U.S. market during 
1992-94. The explosion in Chinese honey imports into the United 
States created a massive oversupply situation, which caused 
U.S. producers' prices to fall well below their costs of 
production.
    In October 1994, the ABF and AHPA formally asked the U.S. 
Government to conduct an antidumping investigation of honey 
imports from China. In November 1994, the U.S. International 
Trade Commission preliminarily determined that the facts it had 
gathered thus far in its investigation demonstrated a 
reasonable indication that the U.S. honey industry was 
materially injured, or threatened with material injury, by 
reason of Chinese honey imports.
    In March 1995, the U.S. Commerce Department issued its 
affirmative preliminary determination that all of the Chinese 
honey exporters were dumping honey into the United States at 
rates at or over 127 percent ad valorem, and imposed 
provisional dumping duties based on its findings.
    In August 1995, Commerce and the Government of China signed 
the first and only suspension agreement with China which 
essentially ``suspended'' the dumping investigation \1\ in 
return for China's commitment to limit its exports to the 
United States over a five-year period to 44 million pounds. 
China also agreed to limit the sales price of Chinese honey 
into the United States to 92 percent of the weighted average 
price of honey imports into the United States from all third 
countries. This suspension agreement, supplemented by the five 
months of provisional dumping duties on Chinese honey imports 
at or above a 127 percent ad valorem rate, saved the U.S. honey 
industry from destruction.
---------------------------------------------------------------------------
    \1\ Under a suspension agreement in an antidumping duty 
investigation, Commerce promises to suspend the dumping investigation 
and not to impose dumping duties of any kind. The foreign industry (or, 
in the case of China, the Chinese Government) promises to take steps 
that in essence will eliminate the injurious effects of the foreign 
imports on the U.S. industry. Commerce reserves the right to terminate 
the suspension agreement and immediately resume the investigation if it 
determines that the foreign parties have not fulfilled their 
commitments under the agreement.

---------------------------------------------------------------------------
2. Vulnerability of the U.S. Fresh Garlic Industry

    The FGPA,\2\ representing the U.S. fresh garlic industry, 
recently faced a similar threat from Chinese imports. Several 
years ago, the U.S. fresh garlic industry was nearly destroyed 
by a tidal wave of dumped fresh garlic imports from China. 
Chinese imports rose from 3.5 million pounds in 1992, to 9.4 
million pounds in 1993, and then to a staggering 63.5 million 
pounds in 1994. That year, Chinese imports were available in 
the United States in huge quantities for a few pennies per 
pound delivered. Only the imposition of significant antidumping 
duties saved the domestic industry from certain collapse.
---------------------------------------------------------------------------
    \2\ The FGPA is an ad hoc trade association that represents the 
country's major producers of fresh garlic. Almost all fresh garlic 
produced in the United States is produced in California by the 13 
members of the FGPA. For the 1996-97 crop year, the FGPA members are 
growing approximately 130 million pounds of fresh garlic, representing 
about $100 million in potential sales.
---------------------------------------------------------------------------
    In January 1994, the FGPA asked the U.S. Commerce 
Department to impose dumping duties against fresh garlic 
imports from China in hopes of neutralizing their damaging 
effect. Commerce ruled that, for purposes for fresh garlic 
production, China was an NME country. Commerce has made the 
same ruling in more than a dozen other dumping cases it has 
conducted against Chinese imports. This NME designation meant 
that, in determining the amount of dumping attributable to the 
Chinese industry, the Commerce Department did not compare 
China's home market prices to the prices of Chinese exports to 
the United States.
    Using its NME factors of production analysis instead,\3\ 
Commerce found in July 1994 that Chinese exporters were selling 
fresh garlic in the U.S. market for as little as $.06/lb.--or 
376 percent below the cost of production for fresh garlic in 
China. The U.S. International Trade Commission also found that 
the Chinese imports were a cause of material injury to the 
domestic industry. As a result, Commerce issued a final dumping 
order in November 1994 that confirmed the 376 percent dumping 
duty on fresh garlic from China found by Commerce in July 
1994.\4\
---------------------------------------------------------------------------
    \3\ In the NME factors of production analysis, Commerce determines 
the actual factors, or elements, that go into making the relevant 
product in the NME country under investigation. Commerce then 
determines the value for each factor based on prices in a market 
economy country that is at the same level of development as the 
relevant NME country. The values are then summed on a weighted basis, 
and the resulting sum is used as normal value in the dumping margin 
calculation. For dumping cases against Chinese exports, Commerce has 
typically used factor values from India or Indonesia.
    \4\ While the dumping order has reduced official Chinese fresh 
garlic imports to a mere 200,000 pounds in 1996, many million pounds of 
Chinese imports continue to be illegally smuggled into the United 
States each year without the payment of any antidumping duties by 
importers. See attached February 24, 1997 press release from the U.S. 
Attorney's Office in Los Angeles on the criminal fraud guilty pleas of 
two dishonest importers regarding their avoidance of over $9 million in 
dumping duties on their smuggled imports of fresh garlic from China.
---------------------------------------------------------------------------
    Today, due largely to the dumping order, the FGPA members 
collectively have over 1,700 employees dedicated to fresh 
garlic production. In addition, the FGPA members each year 
contract with more than 100 independent farmers in California 
to supervise the growth of fresh garlic in relatively small 
plots throughout that state.
    Accordingly, the FGPA--on behalf of domestic garlic 
producers--and the ABF and AHPA--on behalf of the U.S. honey 
industry--urge the United States not to concede to China on the 
issue of continued NME treatment under the WTO/GATT regime. As 
discussed further below, these industries firmly believe that 
their hard-fought victories against dumped Chinese exports 
could be undermined swiftly if Commerce were required to treat 
China as a market economy country. Indeed, such a result could 
lead to their rapid demise.

B. China's Status as an NME Country Can Be Preserved by the 
Inclusion of Appropriate Language in China's Protocol of 
Accession to the WTO

    The U.S. honey and fresh garlic industries' cases against 
imports from China wholly depended on Commerce treating China 
as a NME, as Commerce has done in every other of the two dozen 
dumping cases it has conducted against China over the past ten 
years. Were China to be admitted to the WTO under terms that 
endangered Commerce's ability to treat China as an NME, these 
and other U.S. industries would be destroyed by Chinese imports 
within a few years.
    Under the General Agreement on Tariffs and Trade 
(``GATT''), Article VI is the provision that governs dumping 
investigations initiated among WTO Members. In particular, when 
a Member conducts a dumping investigation, paragraph 1 of 
Article VI provides the relevant administering authority (such 
as the U.S. Commerce Department) with instructions as to the 
method for calculating dumping margins. Pursuant to Article VI, 
the administering authority must compare home market prices in 
the country under investigation (i.e., normal value) to the 
prices of the product as exported by that country to the 
investigating country.
    There is one exception to this requirement. An interpretive 
note to paragraph 1 of Article VI authorizes the relevant 
administering authority to make an exception in dumping cases 
against WTO Members that are non-market economy countries.\5\ 
In those cases, normal value may be determined by using a 
method different from the method required to determine normal 
value in cases against market economy WTO Members.
---------------------------------------------------------------------------
    \5\ Pursuant to Interpretative Note 2 to Article VI, paragraph 1 of 
the GATT, ``contracting parties may find it necessary to take into 
account the possibility that a strict comparison with domestic prices . 
. . may not always be appropriate.'' This exception applies in cases 
involving imports from countries whose governments have ``a complete or 
substantially complete monopoly of [their] trade and where all domestic 
prices are fixed by the state.'' 1994 General Agreement of Tariffs and 
Trade, Interpretative Note 2, art. VI, para. 1. This note was made part 
of the General Agreement in 1955.
---------------------------------------------------------------------------
    Since the GATT entered into force, three countries with 
state or centrally controlled economies have become GATT 
Members, and are now WTO Members: Poland (1967), Romania 
(1971), and Hungary (1973). For each country, the U.S. 
Government successfully negotiated language in their Protocols 
of Accession whereby the countries effectively recognized that 
they fit into the exception of Interpretative Note 2 to GATT 
Article VI, paragraph 1. None of these countries has challenged 
the United States' designation of the country as an NME country 
in antidumping investigations.
    Thus, in light of the current international antidumping 
regime, China must be persuaded to come to an agreement with 
the WTO Members that would enable the Members to treat China as 
within the terms of Interpretative Note 2 to GATT Article VI, 
paragraph 1. Thereby, any WTO Member that initiates an 
antidumping case against Chinese exports would be able to take 
into account the ``special difficulties'' involved in 
determining price comparability between the price of Chinese 
exports and Chinese home market prices.
    With this in mind, the United States in December 1994 
proposed specific language to be inserted in China's Protocol 
of Accession that would make clear that WTO Members would 
retain the ability to treat China as an NME country after 
China's accession to the WTO. Thus, the most recent version of 
China's draft Protocol contains the following section on 
``Price Comparability in Determining Subsidies and Dumping'' 
proposed by the United States:
    [It is recognized that, in the case of imports of Chinese 
origin into a WTO Member, special difficulties may exist in 
determining price comparability in the context of antidumping 
and countervailing duty investigations. In such cases, the 
importing contracting parties may find it necessary to take 
into account the possibility that a strict comparison with 
domestic prices in such a country may not always be 
appropriate.]
    The brackets around this language indicate that the text 
has been proposed for purposes of negotiation, but that it has 
not yet been officially adopted as a final term of accession. 
In fact, from the time the United States proposed this 
provision, China apparently has refused to make any concessions 
on this point.
    As a result, more pressure must be brought to bear upon 
China on this issue. Indeed, the consequences of giving in to 
the Chinese on this issue could be profound. The omission of 
this language from China's final Protocol of Accession might 
create doubts about whether a WTO Member like the United States 
could continue to treat China as within the exception of 
Interpretative Note 2 to GATT Article VI, paragraph 1. These 
doubts may encourage China to challenge at the WTO any decision 
by the United States to continue to treat China as a NME 
country under the U.S. antidumping law. There is a risk that, 
in such an appeal, a WTO dispute resolution panel would rule in 
China's favor if China's final Protocol of Accession is silent 
on this issue.
    Therefore, a clear provision explicitly authorizing the 
continued use of NME treatment should be included in China's 
Protocol of Accession. At minimum, the United States must 
ensure that the provision on ``Price Comparability in 
Determining Subsidies and Dumping'' remains an important part 
of China's final Protocol of Accession. In addition, ABF, AHPA 
and FGPA strongly urge that the current bracketed language in 
the draft Protocol would be significantly improved if it ended 
with this sentence: ``In such cases, the relevant WTO Member 
may use an alternative method for calculating normal value as 
long as that method is appropriate and not unreasonable.''
    For the foregoing reasons, AHPA, ABF and FGPA do not 
support the accession of China to the WTO unless China 
simultaneously agrees to allow other WTO Members to take into 
account for purposes of Article VI of the GATT the ``special 
difficulties'' involved in determining price comparability in 
the Chinese home market. Chinese accession without a negotiated 
agreement in this area would undoubtedly have a severe, adverse 
impact upon the U.S. honey and fresh garlic industries, as well 
as all other U.S. industries vulnerable to massive dumped 
imports from China.

II. The Terms of China's Accession to the WTO Should Require That China 
 Undertake Trade Liberalization Commitments That Are Commensurate With 
                       Those of Other WTO Members

    In light of their strong interests in improving access to 
the Chinese market, ABF, AHPA and FGPA set forth below the U.S. 
honey and the fresh garlic industries' concerns about the 
tariff rates currently in place in China that effectively 
impede access to the Chinese market for U.S. merchandise.

A. China's Huge Tariff and VAT Rates on Honey Imports Have 
Entirely Closed China's Massive Market to Honey Imports from 
WTO Members

    The ABF and AHPA are associations representing domestic 
producers of honey. Their membership accounts for approximately 
75 percent of honey production in this country. ABF is 
comprised of about 1,500 members located in 48 states, most of 
whom manage apiaries for the purpose of honey production. A 
majority of commercial beekeepers are ABF members.
    Likewise, the AHPA represents over 500 honey producers in 
48 states and Puerto Rico, who account for over 50 percent of 
the commercially produced honey in the United States. Both ABF 
and AHPA are recognized in the U.S. beekeeping industry as 
representatives of the interests of commercial honey producers.
    Although China represents the world's largest producer and 
exporter of honey, its potential as a consumer and importer of 
honey has been beyond the reach of U.S. honey producers. China 
is able to both exclusively serve its home market and export 
hundreds of millions of pounds of honey by maintaining an 
extremely high MFN tariff rate--55 percent ad valorem--on honey 
imports. This tariff is supplemented by China's value added tax 
(``VAT'') of 13 percent ad valorem on honey imports, which is 
assessed against the declared value of the import plus the 
import tariff charged. See Exhibit 1. Thus, China's effective 
tariff rate on honey imports is a staggering 75.15 percent.
    Indeed, China's current published tariff and VAT on this 
product is many times higher than the U.S. MFN tariff rate on 
honey imports, which converts to an estimated ad valorem rate 
of 1.4 percent, or only two percent of China's combined tariff 
and VAT on honey imports.\6\ (The United States maintains no 
VAT on these imports.)
---------------------------------------------------------------------------
    \6\ The U.S. tariff on honey imports is $.021/kg., or $.01/lb. The 
total volume of all honey imports (not for retail sale) from all 
foreign countries was 147.12 million pounds, so theoretically, $1.47 
million was collected in regular U.S. import tariffs. The value of U.S. 
honey imports from all countries in 1996 was $105.4 million. Thus, the 
theoretical U.S. ad valorem tariff on honey imports is 1.4 percent.
---------------------------------------------------------------------------
    As a result, no U.S. honey is exported to China, despite 
the fact that the U.S. honey industry exports a significant 
portion of its production to foreign countries other than 
China. Further, other significant WTO producers of honey are 
similarly locked out of the huge Chinese market by its 
insurmountable tariff and VAT rates.
    Were China's tariff as low as the U.S. tariff on honey 
imports, and were China to eliminate its VAT rate on this 
import, major honey producers such as Taiwan, Korea, Russia, 
Mexico, Argentina, Vietnam, and the countries of the European 
Union, would be able to direct more of their exports to China, 
and reduce their exports to the Western Hemisphere and Europe. 
This would create significant export opportunities for the U.S. 
honey industry.
    For this reason, ABF and AHPA strongly urge that China's 
access to the WTO be conditioned upon it meeting the trade 
liberalization commitments that other developed nations have 
undertaken. Until such time when China removes, or reduces, 
these tariff barriers, any potential market that exists in 
China cannot be developed by the U.S. honey industry.

B. China's Import Tariffs and VAT Taxes on Fresh Garlic 
Effectively Close China's Market to Fresh Garlic Imports from 
the United States

    Almost all fresh garlic produced in the United States is 
produced in California by the 12 FGPA members. See enclosed 
membership list at Exhibit 2. For the 1996-97 crop year, the 
FGPA members are growing about 130 million pounds of fresh 
garlic, which represents about $100 million in potential sales.
    Fresh garlic production is an extremely complex, capital-
intensive business. The FGPA members collectively have invested 
over $120 million in their fresh garlic operations, all of 
which are dedicated to fresh garlic production. The FGPA 
members collectively have over 1,700 employees dedicated to 
fresh garlic production. In addition, the FGPA members each 
year contract with more than one hundred independent farmers to 
supervise the growth of fresh garlic in relatively small plots 
throughout California.
    The U.S. fresh garlic industry has struggled to remain 
viable, notwithstanding that China represents the world's 
largest producer and exporter of fresh garlic products 
(principally fresh whole bulbs and fresh peeled cloves). 
Moreover, in light of China's ongoing WTO accession 
negotiations, China now shows significant potential as a 
consumer and importer of fresh garlic. However, until now, this 
potential has been unrealized by U.S. fresh garlic producers, 
because China is able to both exclusively serve its home market 
and export hundreds of millions of pounds of garlic by 
maintaining an extremely high MFN tariff rate.
    China's current published tariff and VAT on this product is 
22 percent ad valorem. Moreover, this tariff is supplemented by 
China's standard value added tax (``VAT'') of 13 percent ad 
valorem on fresh garlic imports. See Exhibit 3. Thus, China's 
combined MFN tariff and VAT on fresh garlic imports is 
approximately 38 percent.
    This effective tariff rate on fresh garlic imports is many 
times higher than the U.S. MFN tariff rate (the United States 
maintains no VAT on these imports), and far exceeds the 
corresponding rates charged for this product by the other major 
WTO fresh garlic producers. Indeed, the effective U.S. ad 
valorem rate is less than 100 times lower than China's combined 
tariff and VAT on fresh garlic imports.\7\
---------------------------------------------------------------------------
    \7\ The U.S. tariff on fresh garlic imports is $.0128/kg., or 
$.005/lb. See Exhibit 2. In 1996, 48.4 million pounds were imported 
from all countries into the United States, so that a theoretical total 
of $242,000 in regular import duties was collected. Since the total 
declared customs value of these imports was $27.1 million, the 
effective U.S. ad valorem tariff rate is .28 percent, which is .7 
percent of China's combined tariff and VAT of 38 percent.
---------------------------------------------------------------------------
    As a result, no U.S. garlic is exported to China, despite 
the fact that the U.S. industry exports a significant portion 
of its production to foreign countries other than China. 
Further, other significant WTO producers of fresh garlic are 
similarly locked out of the huge Chinese market by its 
insurmountable tariff and VAT rates.
    If China's tariff were as low as the U.S. tariff on fresh 
garlic imports, and it were to eliminate its VAT rate on this 
import, major garlic producers such as Taiwan, Korea and 
Russia, which are more closely situated to China than the U.S. 
fresh garlic producers, would be able to direct more of their 
exports to China, and reduce their exports to the Western 
Hemisphere and Europe, thereby creating significant export 
opportunities for the U.S. industry.
    Accordingly, FGPA strongly encourages the United States to 
demand in negotiations with China that its accession to the WTO 
be conditioned upon it meeting the trade liberalization 
commitments that other developed nations have undertaken. Until 
such time when China removes, or reduces, these tariff 
barriers, any potential market that exists in China cannot be 
developed by the U.S. fresh garlic industry.

C. Conclusion

    China's combined import tariffs and VAT duties on the goods 
and products discussed in this statement are huge, and 
effectively close the massive Chinese market to imports from 
many WTO countries (including the United States). In 
comparison, the corresponding tariff rates for these products 
of other WTO countries (again including the United States) are 
tiny. Unless China agrees to lower its tariff rates to the very 
small levels maintained by the United States, and to eliminate 
its VAT, China will continue to be able to keep its market 
closed to U.S. exports.
    Accordingly, the United States should accept a tariff 
binding offer from the Chinese only if it includes a commitment 
to match the U.S. tariff rates on the products named here, and 
to eliminate China's significant VAT on those imports.
    We appreciate the opportunity to submit this statement on 
behalf of AHPA, ABF and FGPA.
      

                                


      
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Statement of Charles P. Heeter, Jr., Partner, Office of Government 
Affairs, Andersen Worldwide

                              Introduction

    Mr. Chairman and distinguished members of the Subcommittee: 
My name is Charles Heeter. I am a Partner with Andersen 
Worldwide and am responsible for addressing international trade 
and related public policy issues that affect my firm's global 
operations. I appreciate the opportunity to submit this 
statement concerning China's possible accession to the World 
Trade Organization (WTO), and I wish to commend you for taking 
a close and thoughtful look at this critical issue.

                           Andersen Worldwide

    Andersen Worldwide is the world's largest professional 
services organization, operating through two business units--
Arthur Andersen and Andersen Consulting--with member firms in 
80 countries and correspondent relationships in 39 more. The 
Arthur Andersen business unit has a multidisciplinary practice 
in accounting, tax, legal, business advisory and specialty 
consulting services. The Andersen Consulting business unit 
provides global management and technology consulting services. 
Our global revenues exceeded $11 billion in the fiscal year 
ending August 31, 1997, and we employ more than 100,000 people 
worldwide. We presently have offices in three Chinese cities--
Beijing, Shanghai and Shenzhen--and employ more than 500 people 
there.

                Andersen Worldwide's Support for the WTO

    Our organization has more than doubled in size over the 
past five years. This record growth is in large part 
attributable to our increasing involvement in markets overseas. 
We have benefited tremendously from the worldwide trend toward 
trade and investment liberalization. Such liberalization helps 
economies grow and helps our clients grow. When our clients 
grow, we grow. We view continuing liberalization as vitally 
important to our continued success.
    More specifically, our success in servicing clients around 
the globe depends upon our ability to gain access to national 
markets and to supply our professional services through the 
establishment of member firms and through cross-border 
transactions. For this reason, we attach a great deal of 
importance to a healthy, rules-based international trading 
system, and we strongly support the WTO and, especially, the 
General Agreement on Trade in Services (GATS), which embodies 
the basic rules of international trade and investment for 
service providers.

                Support for China's Accession to the WTO

    It goes without saying that China is the largest and most 
dynamic of the emerging economies, and it looms large in any 
company's plans for growth in the Asia-Pacific region. For this 
reason alone, it is important to bring China into the WTO at 
the earliest possible date, and we at Andersen Worldwide fully 
support that objective. China's membership in the WTO will be 
good for the countries and companies that do business with her, 
and equally important, it will be good for China, helping to 
protect her interests and reinforcing the profound market-
oriented changes in her economy.
    Having said this, however, I must quickly add that the 
terms of China's accession are vitally important. The 
regulatory environment in China imposes significant constraints 
on the operations of international professional services firms, 
especially in the area of regulated services, such as auditing. 
The negotiations on China's accession to the WTO provide an 
opportunity to address some of these regulatory constraints by 
making sure that China's governmental policies conform to the 
disciplines of the GATS.

                    Focus on the Terms of Accession

    The critical issue is that China make concrete and 
substantial commitments on market access and national treatment 
in its GATS schedule. Many of the GATS disciplines (in addition 
to market access and national treatment) only take effect for 
the sectors in which a signatory makes scheduled commitments. 
Examples include Article VI on domestic regulation and Article 
XI on payments and transfers. So, the quality of China's GATS 
schedule is especially important to service providers.
    With respect to our particular businesses, we believe that 
China should schedule commitments on accounting, auditing and 
bookkeeping, tax services, legal services, management 
consulting, and computer-related services. Furthermore, we 
believe these commitments should be structured in such a way as 
to ensure that China:
     Permits international firms to establish or 
affiliate with local member firms of their choosing on 
contractual terms substantially equivalent to those used 
elsewhere in the world;
     Allows joint venture firms and member firms to 
open branches in multiple locations with full rights to provide 
statutory services;
     Assures that any individual who meets the 
educational, experience and examination requirements to become 
a Chinese Certified Public Accountant (CPA) is allowed to be 
certified and registered;
     Removes the citizenship requirement for becoming a 
CPA and provides assurance that onerous residency and 
employment requirements will not be instituted;
     Removes the ban on advertising by accounting 
firms;
     Changes the basis for mandatory fees paid to the 
Chinese Institute of CPAs from an assessment on gross income to 
a membership fee per individual professional;
     Adopts and promotes the use of international 
accounting and auditing standards for all publicly held 
companies in China, whether or not they are permitted to have 
foreign shareholders, including the use of international 
standards of auditor independence;
     Improves the transparency of regulation by 
adopting administrative procedures that permit comment on 
proposed regulations and provide for an appeal of regulatory 
decisions, and by publishing all laws, regulations and 
administrative decisions in a timely fashion; and
     Eases controls on exit visas so that greater 
numbers of Chinese staff can be placed in offices in Hong Kong 
and abroad for training and experience purposes.
    Accepting these obligations would give substance to China's 
market opening initiatives, would pave the way for a more rapid 
modernization of the accounting profession and the broader 
financial services sector, and would assure China's transition 
into the global marketplace.

                               Conclusion

    As I said earlier, Mr. Chairman, we at Andersen Worldwide 
strongly support China's membership in the WTO at the earliest 
possible date. But we also believe that the terms of membership 
should be structured in such a way as to reinforce and 
strengthen the still fragile services trade regime.
    I have taken the liberty of attaching to this statement a 
``white paper'' that we have developed to further explain the 
regulatory challenges in China and our ideas about how China 
can make a more rapid and successful transition to 
international norms.
    Thank you very much.
      

                                


Accounting Modernization and the Chinese Regulatory Environment: Making 
a Successful Transition to International Norms

                              Introduction

    This document presents a constructive assessment of the 
regulatory environment in which international accounting firms 
operate in China--the progress made and some of the remaining 
tasks as China continues its opening to the outside world and 
integration into the global trading system. Substantial 
progress has been made over the past 15 years, and it is 
evident from their public statements that the Chinese 
authorities and leaders of the profession are committed to 
addressing the remaining issues. The observations herein, based 
on experience, are intended to encourage a dialogue among all 
parties interested in completing the reform process and 
achieving China's goal of a modern accounting profession at the 
earliest possible date.

              The Value of a Modern Accounting Profession

    A thriving accounting profession employing modern 
accounting practices is an essential element of the financial 
infrastructure required by emerging economies. Accounting is 
the universal language of business. Modern practices help 
enterprise management evaluate and control operations. They 
ensure that investors receive essential information and 
facilitate the development and efficiency of capital markets. 
They help integrate national economies into an increasingly 
global marketplace. And they assist government in performing 
its role of oversight and regulation to protect public 
interests. Indeed, the success of accounting reform in 
economies opening to the outside world is an important factor 
in determining the overall pace and success of economic 
modernization.
    International accounting firms are the most dynamic agents 
of accounting modernization--helping nations move from the 
bookkeeping traditions of command economies to the modern 
practices and standards necessary to the functioning of market-
based economies. These firms transfer technology, deliver 
state-of-the-art training, provide career paths to local 
professionals (leading to management and ownership), and, most 
important, make modern professional services available to local 
companies and foreign investors to help them succeed in the 
marketplace.
    It follows that international firms need a regulatory 
environment that permits innovation and expansion at acceptable 
levels of risk if they are to deliver these benefits to the 
degree and at the pace necessary to meet the demands of a 
rapidly expanding economy. Put another way, inappropriate 
regulation of the accounting profession and accounting firms 
can impede or, at least add significant inefficiencies to, the 
modernization process.

     The Opening of the Chinese Accounting Market and the Role of 
                          International Firms

    China reportedly has some 53,000 certified accountants in 
over 6,000 firms, the vast majority of which are affiliated 
with, or sponsored by, governmental ministries and agencies at 
the national, provincial or local levels. The Ministry of 
Finance (MOF) in Beijing exercises close supervision of the 
Chinese Institute of Certified Public Accountants (CICPA) and 
must give prior approval of many of the Institute's decisions. 
The indigenous profession and firms are not the private, 
independent, professional entities common in most nations 
around the globe. In addition, practice standards, while 
improving, are well below international norms.
    China has recognized since at least the early 1980s the 
need for accounting modernization and has sought to achieve it 
by developing linkages to the worldwide profession and by 
opening its market to participation by international firms. 
Steady progress has been made and relationships have deepened. 
This is most recently evident in the announcement that the 
CICPA will join the International Federation of Accountants and 
the International Accounting Standards Committee.
    Nonetheless, the regulatory situation and operating 
environment in China impose certain constraints on the role of 
international firms--constraints that ultimately limit the full 
contribution that they can make to integrating China into the 
global marketplace, moving the accounting profession to 
international standards of performance, and providing higher 
levels of protection to Chinese investors.

Bifurcated Market

    There is a significant disparity between the standards of 
performance, the level of fees charged and the market's 
expectations of local firms and the performance, fees and 
expectations of the international firms. This is best seen in 
the development of a bifurcated market for audits of Chinese 
enterprises whose shares are publicly traded. The China 
Securities Regulatory Commission determines which Chinese 
companies qualify for public listing and, indirectly, the firms 
that can audit those companies. International firms are 
permitted to audit ``B'' share listings, or those companies in 
which foreign investment is allowed. Very few, if any, 
international firms perform audits for ``A'' share listings, 
which are solely for Chinese investors.
    In effect, international firms have not been able to access 
the major share of the audit market and their penetration is 
limited largely to cases in which China wishes to provide 
assurances to international investors. One important reason for 
this is the disparity between the fees charged by international 
firms and those charged by local firms, but these fee levels 
also reflect the quality of the work and the expectations of 
the market. Another significant reason is that newly listed 
companies often use auditors who are linked to the same 
government entities from which the listed companies come, 
thereby bringing into question the auditors' independence. A 
unified market for audit services, with high expectations and 
standards of performance at internationally-acceptable levels, 
would provide significant assurance to Chinese and 
international investors alike and would significantly 
strengthen China's capital markets.

Business Structures

    China permits international accounting firms to operate in 
three forms:
     As representative offices, which may provide 
consulting services to local and foreign enterprises, but may 
not employ Chinese CPAs or provide audit and attest services;
     As joint ventures subject to a 50 percent foreign 
equity limit and certain management conditions, as well as a 
requirement that they be converted to member firms within five 
years; and
     As member firms with a 30 percent foreign equity 
limitation and a requirement to phase out foreign ownership in 
the future.
    All international firms are committed to localization of 
management and ownership. They operate this way throughout the 
world. But the foundation for localization in China is still 
being laid. In an economy without the traditions and experience 
of modern accounting practices, considerable time is required 
to develop local member firms and professionals to a sufficient 
level of expertise to meet the international firms' global 
standards--typically 15, 20 or more years. Even in countries 
with ``mature'' accounting professions, it normally requires 
ten or more years for a newly-hired college graduate to gain 
the training and experience needed to be eligible for 
partnership, that is, to become an owner of the firm. And many 
do not survive the competition to achieve partnership.
    The typical local member firm of an international 
accounting firm, moreover, is subject to contractual 
relationships with its affiliated member firms in other 
countries. These contractual relationships ensure that all 
member firms perform to a common standard and otherwise uphold 
the values and practices represented by the international 
firm's name and inherent in its reputation. They also provide 
the basis for transferring technology and sharing global 
resources. Uncertainty about whether these normal contractual 
arrangements will be permitted increases the commercial and 
legal risk to the international firm. A legal environment 
preserving the right to execute these contractual relationships 
will be essential to the successful creation of local member 
firms.
    In an environment such as China's, international firms need 
time and flexibility to develop local member firms to expected 
levels of performance, and they require contractual assurances 
that standards will be observed. Regulatory requirements that 
impose unprepared local partners on them, force them to 
accelerate the development process unreasonably, deny their 
normal contractual relationships and increase their risk 
exposure only serve to reduce the international firms' ability 
to commit the types of investment needed to develop China's 
accounting profession.

Operating Restrictions and Impediments

    The Chinese authorities impose a number of other 
restrictions on the operations of international accounting 
firms, which interfere with the delivery of services and the 
development of the profession.
     International firms are limited to one joint 
venture, and that entity is limited to one office, although 
with a license to practice throughout China. Despite the fact 
that the law permits the establishment of branches, the CICPA 
takes the position that the joint venture cannot exercise 
adequate control over branches in distant locations. This 
imposes a significant constraint on the delivery of services 
and on growth. (Although international firms may affiliate with 
more than one Chinese member firm in different locations, this 
is a sub-optimal solution because the two Chinese entities are 
not affiliated themselves and have no experience in working 
together.)
     Only the joint venture or member firm may employ 
Chinese CPAs. Although other operations, such as a consulting 
firm or representative office, may employ accounting majors 
these employees may not be certified and registered as CPAs in 
these other locations. Thus, these restrictions serve as a 
constraint on career development and opportunities for Chinese 
citizens, and work to the detriment of the local profession as 
a whole.
     There have been indications that the Ministry of 
Finance has questioned the number of expatriates assigned to 
foreign-affiliated operations in China. While all international 
firms are committed to localization, expatriates play an 
essential role in managing a practice and delivering services. 
They are critical to delivering training--the medium by which 
technology is transferred--as well as to filling gaps in 
technical and management skills until these can be developed 
locally.
     Foreign accountants, since 1994, have been 
permitted to take the professional examination, which is part 
of the professional qualification process in China, but they 
still must be Chinese citizens to practice. The CICPA announced 
this year its intention to remove the citizenship requirement, 
but it is likely to retain or impose other significant 
restrictions related to residency and employment To date, no 
action has been taken to eliminate the citizenship requirement, 
or to impose alternative conditions.
     Accounting firms are prohibited from advertising 
their services. This is a constraint on the ability of all 
firms to get necessary information to consumers and to compete 
in the marketplace. Reasonable guidelines regarding honesty and 
decency in advertising ought to be sufficient to meet any 
public interest need.
     International firms are subject to an assessment 
by the CICPA equal to two percent of gross income, which means 
that the vast majority of the Institute's funding comes from 
international firms without a tangible relationship to benefits 
received. Moreover, the CICPA assessment is frequently the 
subject of dispute over who collects it and the precise 
definition of the revenue base from which it is calculated. 
Professional membership fees should be assessed on the 
individual members of the professional body.
     Restrictions on exit visas, especially to Hong 
Kong, have proven to be a significant constraint on training 
opportunities. The inability to secure visas prevents 
international firms from assigning Chinese staff to other 
offices, in Hong Kong and outside China, where they could 
acquire on-the-job experience and exposure to the international 
business environment. This would reduce training costs by 
improving off-season utilization of manpower.

Regulatory Transparency and Consistency

    While Chinese laws affecting the accounting profession are 
published and available, they establish a skeletal framework 
which must be fleshed out through regulation and administrative 
decision-making. The regulatory decision-making environment in 
China is highly opaque--international firms rarely have a voice 
in the process; there is no established administrative 
procedure; decisions are frequently not published; new rules 
are applied retroactively; and there is no appeals process. In 
addition, there is a concern that enforcement is somewhat 
arbitrary and may even discriminate against international 
firms. This naturally creates uncertainty in the operating 
environment and often places those outside the system at a 
disadvantage.

       Transitioning to International Norms through WTO Accession

    The negotiations leading to Chinese membership in the World 
Trade Organization (WTO) provide an opportunity to assist 
China's market opening and transition to international norms by 
establishing a predictable regulatory environment conducive to 
the rapid growth and development of China's accounting 
profession. As part of the terms of accession, China will 
become a signatory to the General Agreement on Trade in 
Services (GATS). Because many of the GATS rules only apply to 
service sectors for which the signatory country has scheduled 
specific commitments, it is crucial that China include 
accounting, auditing and bookkeeping services in its schedule. 
In addition, China should schedule commitments on tax services, 
management consulting and computer-related services.\1\
---------------------------------------------------------------------------
    \1\ International firms have multidisciplinary practices involving 
all these services. As a practical matter, client engagements 
frequently commingle services, individual professionals cross practice 
lines, and the skills and intellectual capital underlying the various 
service lines reinforce each other.
---------------------------------------------------------------------------
    An important feature of the GATS is that it goes beyond 
traditional trade measures at the border to address internal 
regulatory requirements and conditions that de facto impede the 
ability to take advantage of market openings. In this light, 
China's schedule of commitments under the GATS should:
     Permit international firms to establish or 
affiliate with local member firms of their choosing on 
contractual terms substantially equivalent to those used 
elsewhere in the world;
     Allow joint venture firms and member firms to open 
branch offices in multiple locations with full rights to 
provide statutory services;
     Assure that any individual who meets the 
educational, experience and examination requirements to become 
a Chinese CPA is allowed to be certified and registered;
     Remove the citizenship requirement for becoming a 
CPA and provide assurance that onerous residency and employment 
requirements will not be instituted;
     Remove the ban on advertising by accounting firms;
     Change the basis for CICPA fees from an assessment 
on gross income to a membership fee per individual 
professional;
     Adopt and promote the use of international 
accounting and auditing standards for both ``A'' and ``B'' 
listings on China's stock exchanges, including the use of 
international standards of auditor independence;
     Improve the transparency of regulation by adopting 
administrative procedures that permit comment on proposed 
regulations and provide for an appeal of regulatory decisions 
and by publishing all laws, regulations and administrative 
decisions in a timely fashion; and
     Ease controls on exit visas so that greater 
numbers of Chinese staff can be placed in offices in Hong Kong 
and abroad for training and experience purposes.
    Accepting these obligations would give further substance to 
China's market opening initiatives in the field of accounting, 
would pave the way for a more rapid modernization of the 
accounting profession, and would assure China's transition into 
the global marketplace. On the basis of these and other 
commitments, China should be welcomed into full WTO membership.
      

                                


Statement of Cast Iron Soil Pipe Institute

    Pursuant to the October 22, 1997 announcement by the 
Subcommittee on Trade of the Committee on Ways and Means, the 
Cast Iron Soil Pipe Institute (``CISPI'') submits the following 
statement for consideration by the Committee and for inclusion 
in the printed record of the November 4, 1997 hearing held by 
the Subcommittee regarding the future of United States-China 
trade relations and the possible accession of China to the 
World Trade Organization (WTO).
    Briefly summarized, CISPI submits this statement 
recommending that China's membership to the WTO be conditioned 
on China granting significant concessions as to its tariff and 
non-tariff barriers restricting imports of U.S. merchandise. 
With 1.2 billion citizens, China is the world's largest market 
for virtually all merchandise. Nevertheless, China's tariff and 
non-tariff barriers to trade effectively close that market to 
potential U.S. exporters.
    Accordingly, CISPI has strong interests in improving access 
to the Chinese market. In particular, the comments set forth 
below address CISPI's concerns about the tariff rates currently 
in place in China that effectively impede the industry's access 
to the Chinese market.

I. CISPI: China's Tariff and Non-Tariff Barriers Relating to Cast Iron 
    Soil Pipe and Fitting Imports Deny Fair Access to China's Market

    CISPI, first organized in 1949 by the leading American 
manufacturers of cast iron soil pipe, is a national trade 
association dedicated to advancing the interests of its member 
foundries in the manufacture, use, and distribution of cast 
iron soil pipe and fittings.\1\ Currently, CISPI's membership 
is comprised of the three leading foundries manufacturing cast 
iron soil pipe and fittings in the United States, with 
significant production and levels of employment in North 
Carolina, California, and Texas.\2\ Through cooperative efforts 
with its members, CISPI conducts research and other programs in 
order to improve the industry's products, achieve 
standardization of cast iron soil pipe, and provide continuous 
programs for product testing, evaluation, and development.
---------------------------------------------------------------------------
    \1\ Cast iron soil pipe comprises the major input product of the 
plumbing industry. It is characterized by superior performance in terms 
of durability, resistance to corrosion from fluids and gases, 
resistance to infiltration and exfiltration, and the ability to 
withstand extremes in temperature as well as pressure. Consequently, 
cast iron pipe is used primarily in building construction for sanitary 
and storm drain, waste, and vent piping applications. The product is 
installed in residential construction, hospitals, schools, and 
commercial and industrial structures. As a result, the pattern of cast 
iron soil pipe shipments and sales is directly related to the pattern 
of building activity.
    \2\ The member foundries of CISPI are Charlotte Pipe & Foundry 
Company, Charlotte, NC; the American Brass & Iron Foundry, Oakland, CA; 
and Tyler Pipe Industries, Tyler, TX.
---------------------------------------------------------------------------
    The U.S. cast iron soil pipe industry is competitive 
worldwide and, more and more, the business strategy of CISPI's 
membership has been export-oriented. CISPI members currently 
export U.S. cast iron soil pipe and pipe fittings to buyers in 
Canada, Mexico, Korea, and Malaysia. More recently, CISPI 
members are looking for additional markets in the Pacific Rim 
region. With respect to China, CISPI believes there may be 
significant potential for its members to expand their sales 
into the Chinese market as well. However, the Chinese market 
currently offers more in the way of potential than it does 
immediate rewards. As a result, it is very important to CISPI 
that China remove, or significantly reduce, its barriers to 
entry of cast iron soil pipe and fittings before it is admitted 
as a member of the WTO.
    Under China's current two-tiered customs regime, however, 
the cast iron soil pipe and fittings expected to be exported to 
China in the future are subject to excessive tariffs, with 
effective rates as high as 38 percent ad valorem. See Exhibit 
1. By contrast to the U.S. tariff rates for cast iron soil pipe 
and pipe fittings, which are respectively 3.9 percent and 4.8 
percent, the Chinese rates are exceptionally high. Indeed, 
these rates significantly reduce access to the Chinese market 
for U.S. producers of cast iron soil pipe and pipe fittings.
    Given these barriers, China successfully shields its 
domestic producers of cast iron soil pipe from competition by 
imports. In response, the United States ought to insist during 
the course of the accession negotiations that China either 
remove these tariff barriers, or at least reduce their 
effective rates to levels commensurate with those of the United 
States.
    Finally, U.S. cast iron soil pipe and pipe fittings have 
been adversely affected by China's non-compliance in the area 
of intellectual property rights. CISPI is aware that U.S. 
product designs and patterns, and those of its members, have 
been copied and used by competitors in China without risk of 
punishment and even less hope for effective redress for the 
U.S. producers and trademark holders. Thus, like tariff 
barriers, these obstacles to fair access also demand attention 
from the United States during its negotiations with China.
    For the foregoing reasons, CISPI strongly urges that 
China's accession to the WTO be conditioned upon it meeting the 
trade liberalization commitments that apply to other developed 
nations. Until China removes its excessive tariffs and complies 
with international norms for open and fair trade, the potential 
market that exists in China cannot be developed by the U.S. 
cast iron soil pipe and pipe fitting industry.

                             II. Conclusion

    China's combined import tariffs and VAT duties on the goods 
and products discussed in this statement are huge, and 
effectively close the massive Chinese market to imports from 
many WTO countries (including the United States). In 
comparison, the corresponding tariff rates for these products 
of other WTO countries (again including the United States) are 
tiny. Unless China agrees to lower its tariff rates to the very 
small levels maintained by the United States, and to eliminate 
its VAT, China will continue to be able to keep its market 
closed to U.S. exports.
    Accordingly, the United States should accept a tariff 
binding offer from the Chinese only if it includes a commitment 
to match the U.S. tariff rates on the products named here, and 
to eliminate China's significant VAT on those imports.
    We appreciate the opportunity to submit this statement on 
behalf of CISPI.
      

                                



   Exhibit 1.--Articles of Interest to CISPI by U.S. Harmonized Tariff
   Schedule Number and by Chinese Import/Export Tariff Classification
                                 Number
                              United States
------------------------------------------------------------------------
                                                                 General
          Classification No.                    Product            rate
------------------------------------------------------------------------
HTSUS 7303...........................  Tubes, pipes and hollow         -
                                        profiles, of cast iron.
HTSUS 7303.0010......................  Tubes and pipes of            2.6
                                        circular cross-.
                                       section, of the internal
                                        diameter of 500 mm or
                                        more.
HTSUS 7303.0090......................  Other...................      2.6
HTSUS 7307...........................  Tube or pipe fittings           -
                                        (for example,
                                        couplings, elbows,
                                        sleeves), or iron or
                                        steel.
HTSUS 7307.1100......................  Cast fittings; of non-        4.8
                                        malleable cast iron.
HTSUS 7307.1900......................  Cast fittings; other....      5.8
------------------------------------------------------------------------


                                                      China
----------------------------------------------------------------------------------------------------------------
             Classification No.                             Product                     Rate             VAT
----------------------------------------------------------------------------------------------------------------
7303........................................  Tubes, pipes and hollow profiles,            -
                                               of cast iron.
7303.0010...................................  Tubes and pipes of circular cross-   13/40 \1\               17
                                               section, of the internal
                                               diameter of 500 mm or more.
7303.0090...................................  Other............................    18/40 \1\               17
7307........................................  Tube or pipe fittings (for                   -
                                               example, couplings, elbows,
                                               sleeves), or iron or steel.
7307.1100...................................  Cast fittings; of non-malleable      10/20 \1\               17
                                               cast iron.
7307.1900...................................  Cast fittings; other.............    10/20 \1\               17
----------------------------------------------------------------------------------------------------------------
\1\ Most favored nation duty rate/general duty rate.


      

                                


Joint Statement Committee on Pipe and Tube Imports; and Weirton Steel 
Corp.

    These written comments are submitted to the Trade 
Subcommittee of the House Committee on Ways and Means on 
November 18, 1997 in response to the November 4, 1997 hearing 
on U.S.-China Relations and Possible Accession to the World 
Trade Organization (WTO) on behalf of the Committee on Pipe and 
Tube Imports (CPTI) and Weirton Steel Corporation 
(``Weirton''). The CPTI is a not-for-profit trade association 
consisting of 27 United States producers of steel pipe and tube 
products. Weirton of Weirton, West Virginia, is a manufacturer 
of flat-rolled steel products with 5,300 employees.
    As a whole, the CPTI and Weirton have supported global 
trade policies which promote free and fair trade. During the 
recent Uruguay Round the CPTI was engaged in the debate over 
strengthening the U.S. unfair trade laws to ensure there was a 
level playing field in steel trade. Weirton Steel also 
participated in this dialogue and supported measures to ensure 
that U.S. trade laws would not be weakened in the final Uruguay 
Round Agreement. Since the completion of the Round, the U.S. 
pipe and tube industry and steel manufacturers throughout the 
country have carefully monitored activities that would involve 
the admission of new WTO members. These comments reflect the 
views of U.S. pipe and tube producers and Weirton and address 
the primary issue of China's accession to the WTO and the 
impact China's membership will have on the global steel market.

                    Chinese Steel Industry--Overview

    Since China's economy opened in the early 1980s, steel consumption 
and production have grown at a tremendous rate. In fact, China is now 
the largest steel consumer and producer in the world. Crude steel 
production has doubled from 1986 to 1995. In 1996, China produced over 
100 million metric tons of steel and consumed over 110 million metric 
tons. China has informed the OECD that by 2000, an additional 20 
million metric tons of capacity and production are likely. China's 
steel exports are now greater than U.S. steel exports and its steel 
import levels have fallen to less than half the levels of U.S. imports. 
Continuation of these trends could result in China taking the lead as a 
significant global leader in steel exports. The Chinese steel industry 
is still almost completely state owned and controlled. Furthermore, 
there are numerous major producers and an even greater number of 
smaller and less efficient companies in the market. In an effort to be 
admitted into the WTO, China reduced its average tariff on steel 
products from approximately 13% to 9%. Tariffs for other steel products 
like stainless steel, tin-plate, and pipe and tube, remain above 20%.

      Application of the Non-Market Economy Provisions of U.S. Law

    China is asking that its WTO accession agreement provide 
for the treatment of China as a market economy under the 
Dumping Code. The current Dumping Code does not address the 
criteria for treating a country as a market or non-market 
economy. Under U.S. law the application of criteria for non-
market economy status is not determined by WTO membership, but 
rather by a set of economic factors delineated by the U.S. 
Congress and determined by the Secretary of Commerce. It is 
inappropriate for this issue to be addressed in the WTO 
accession negotiations. For myriad reasons affecting both 
import competition and export opportunities, CPTI and Weirton 
both look forward to a time when China is in fact a market 
economy. However, this must occur through the Chinese 
government taking actions to remove import licensing, 
liberalize credit and financial markets, remove domestic price 
controls of key commodities, and end massive subsidization of 
state-owned enterprises. However, while China should eventually 
be rewarded when it achieves market economy status, this goal 
should be achieved through economic reforms not through 
political pressures for WTO accession.

  China Should Be Subject to Subsidy Code Discipline After a Phase-In 
                  Period of Not More Than Three Years

    China is requesting admission to the WTO as a ``least 
developed country,'' which if allowed by the WTO would provide 
for a lengthy phase-in period for subsidy code commitments.\1\ 
The Subsidy Code would also allow China, as a non-market 
economy undergoing a transformation to a market economy, to 
apply programs and measures necessary for such a transformation 
during the phase in period. If China is permitted to join the 
WTO under these terms, China could continue to provide massive 
subsidies to its state owned steel industry and avoid both 
Subsidy Code violations and penalties and national 
countervailing duty laws while it continues to modernize its 
steel production facilities and adopt new export strategies.
---------------------------------------------------------------------------
    \1\ Whereas ``developing'' country members are given a Subsidy Code 
phase I period of eight years, a ``least developed'' country may be 
excused from compliance in a manner consistent with their individual 
development, financial and trade needs, or their administrative and 
institutional capabilities.
---------------------------------------------------------------------------
    It is disturbing to think that China views itself as a 
``least developed'' country. Their request for this status 
should not be granted. Its economy is no longer in infancy. 
Given that China will soon have the largest economy in the 
world, it is difficult to believe that it would qualify as a 
``least developed'' country by definition. The entire premise 
for offering ``developed'' country status is to enable poorer 
countries with temporary protection to build a manufacturing 
base. The past decade and a half proves that China no longer 
needs to build its manufacturing base and support this 
expansion through government subsidies. This request for 
special treatment is no longer valid.
    CPTI and Weirton are certainly concerned about the massive 
subsidies previously granted to and currently being granted to 
the Chinese steel industry by the Chinese government. All major 
Chinese steel producers remain state-owned enterprises. It has 
been widely reported in the press that most of these steel 
producers suffer from large losses. Therefore, the Chinese 
government is making regular direct equity infusions into these 
money losing enterprises. In addition, most of these 
enterprises are believed to borrow from Chinese government 
owned banks, with little hope that these government owned banks 
will ever be repaid these loans. Finally, the Chinese Ministry 
of Metallurgical Industry admitted in a Salomon Brothers 
investment report issued in mid 1997 that the Chinese 
government supports the steel industry by providing raw 
material inputs, such as iron ore, coal, and energy from state-
owned enterprises to steel producers at prices that are only 
half the market value of these inputs. These types of massive 
subsidy practices must be stopped within a very short period of 
time after China's accession to the WTO. This is particularly 
appropriate given the injury from these subsidies that can be 
suffered by the U.S. steel industry both in the U.S. market and 
in export markets. China was the second largest exporter of 
plate to the United States in 1996 and the first quarter of 
1997 and was the second largest exporter of standard pipe to 
the U.S. in the third quarter of 1997. In general, U.S. steel 
imports from China have risen rapidly in 1996 and 1997 from 
previous levels.
    The U.S. steel industry has fought long and hard to ensure 
that global trading partners adhere to the rules of the world 
trading system. We have supported strong laws which provide for 
a level playing field. Allowing China to enter on its requested 
and preferred terms would undermine the objectives of the WTO 
and allow China to continue to subsidize industry and distort 
trade. These practices can not and should not be permitted by 
the U.S. or by WTO members. The current WTO provisions on 
Subsidies should be enforced as to China. If they are enforced, 
China will be forced to undertake the necessary reforms to 
steer their economy toward becoming a true market-based system.

                               Conclusion

    In sum, the members of the CPTI and Weirton cannot support 
China's accession to the WTO absent strong conditions that they 
will adhere to the WTO Subsidy Code. The U.S. government should 
carefully look at Chinese business practices to evaluate the 
terms of their accession into the WTO. Entrance into this 
global trading body is a privilege and not a right. WTO 
membership should be an opportunity to curb unfair trade 
practices and to remove tariff and non-tariff barriers to 
foreign trade with China. Absent conditions which would ensure 
that China would be held accountable to the Subsidy Code, 
Congress should urge the U.S. Government to deny China's entry 
into the WTO. Non-market economy dumping issues should not be 
addressed in the WTO, but rather continue to be addressed under 
U.S. law.
    As an industry which employs thousands of American workers, 
we ask Members of the Ways and Means Committee and the Congress 
to carefully review this important trade policy consideration. 
We believe it is important that all global trading partners 
adhere to the same rules and fulfill their obligations. If 
China is unwilling to comply with these guidelines, then its 
request to enter into the WTO should be denied.
      

                                


Statement of Paul H. DeLaney, Jr.

                         History and Background

    The People's Republic of China was shunned by the United 
States government until the Nixon-Kissinger breakthroughs of 
the early 1970's. In 1980, the House Ways and Means Committee 
was urged by the President of the United States to go to China 
to determine whether it might be willing to vote for Most 
Favored Nation (``MFN'') trading Status for China. Based on 
this visit, the Committee recommended a normal trading 
relationship between the United States and China, and MFN 
status was granted soon thereafter.
    China has been seeking World Trade Organization (``WTO'') 
admission for more than ten years. To date, the United States 
has not been willing to support China's membership, unless it 
is sure that China is ready, in terms of economic organization 
and international deportment, to accept the full obligations of 
WTO participation.
    In recent months, it has been suggested again that the 
United States should decide what it expects of China and lay 
out its expectations to China for the purposes at hand.
    The Chinese government has undertaken a slow but steady 
deregulation of the economy since it allowed for free 
enterprise in the countryside in 1982. Marketization of the 
Chinese economy has led to unprecedented improvements in the 
living standards and purchasing power of ordinary Chinese. In 
the past 15 years, China's per capita GDP has more than 
tripled, from $889 to $2,923, and it is forecast to be $4,190 
in 2000.
    The United States trade deficit with China has been growing 
at an unacceptable rate, and a prosperous and stable 
relationship with the United States can only continue as long 
as the United States has fair access to China's markets (See 
Attachment A). Bringing China into the WTO should help to 
establish a level playing field for Americans to compete with 
China.
    Many believe that the time has come for China to be a full 
member of the new global economic system and to share in the 
maintenance and growth of that system and that the sooner China 
is a part of the WTO the better for everyone.
    In considering United States-China trade relations and 
China's efforts to join the WTO, it is useful to review the 
general trade relationship with China and the status of 
negotations for China's accession to the WTO, including 
possible signs of progress at last month's United States-China 
summit.
    It appears that President Clinton and President Jiang Zemin 
held an important and constructive summit meeting and that the 
two Presidents had in-depth and frank exchange of views on an 
array of issues affecting the entire relationship ranging from 
human rights, to non-proliferation, environmental protection 
and various economic issues.
    China is now the world's tenth largest trading nation and 
the United States' fourth largest trading partner. The United 
States is China's largest export market. United States imports 
from China were over $51 billion in 1996 (or more than 20 
percent of China's exports to the world). By contrast, United 
States exports of goods to China last year stood at $12 
billion. China is rapidly approaching Japan as the single 
largest bilateral trade problem for the United States. It is 
important that China recognize that the United States must see 
greater balance in this trade relationship.
    Despite China's movement away from a centrally planned 
economy toward a quasi-market economy, China's markets remain 
relatively closed. China is still protecting its domestic 
markets through high tariffs, quotas, restrictive standards and 
activities of state trading enterprises. China's failure to 
meet fundamental international norms, such as national 
treatment, transparency, or the right to import or export 
freely, deprives United Sates exports of a level playing field.
    The United States should continue to pursue market opening 
initiatives on a broad scale for American goods, services and 
agricultural products through the WTO accession process and 
through bilalteral initiatives and agreements. American firms 
should have access, and necessary protection for their 
properties, in China's market, equivalent to that which China 
enjoys in the United States market.
    The United States should also ensure that China accepts the 
rule of law and encourage China to develop trade and economic 
policies that are consistent with international trade practices 
and norms. The rule of law is important in assuring that China 
provides meaningful market access and meets its obligations 
under bilateral and multilaternal agreements. It now appears 
that China may have adopted a more serious attitude about the 
accession negotiations, and the United States should take 
advantage of this opportunity by pressing China further on the 
need for China to move more aggressively on these issues.
    China has committed to make information available to other 
governments and to people engaged in trade on all of the issues 
covered in the WTO. Translations of laws and regulations will 
be available and WTO members will have the opportunity to 
comment on proposed laws and regulations before they become 
effective. Further, China has agreed that it will enforce only 
those laws and regulations that are published.
    China has agreed to have independent tribunals for the 
review of administrative actions relating to implementation of 
the WTO Agreements and grant the right to seek judicial review 
of these administrative actions. This should help address 
corruption and encourage development of the rule of law in 
China. China has committed to implement the Agreement on Trade 
Related Aspects of Intellectual Property Rights upon accession.
    China has agreed not to use export subsidies for 
agriculture products. Although agreement on these points 
represents progress in the negotiations, a great deal still 
remains to be done on market access, implementation of WTO 
rules and safeguards.
    On agriculture, the United States is now engaged in 
negotiations on market access for key United States export 
products. These discussions encompass tariff levels, 
administration of tariff rate quotas, the activities of state 
trading enterprises and the details of China's implementation 
of the WTO Agreement on Agriculture. The United States and 
other WTO members are also urging China to implement the 
Agreement on Sanitary and Phytosanitary Measures. China now has 
the world's third largest economy, and China is the sixth 
largest market for American agricultural products.
    Many United States businesses are committed to building 
support for full normalization of the United States-China 
commercial relationship. This includes support for permanent 
and unconditional extension of MFN trading status for China, 
China's entry into the WTO under commercially viable terms, and 
the removal of unilateral economic sanctions against China. 
Such a policy would strengthen the commercial foundation 
between the United States and China and would encourage 
cooperation on the full range of issues impacting the bilateral 
relationship from security and nonproliferation to human 
rights.

             Terms and Conditions for China's WTO Accession

    If the United States is to capitalize fully on China's 
enormous market opportunities, a sound WTO accession deal with 
China is critical. For this reason, China must show a 
commitment to core WTO principles, including national 
treatment, non-discrimination, reciporcal market access, 
transparency, protection of intellectual property rights, 
binding dispute settlement, trading rights, judicial review, 
and adherence to state-trading and subsidy disciplines. China 
must also offer measures that will ensure United States access 
to China's growing market in agriculture, goods, and services. 
Only after China has demonstrated that it is taking these steps 
should the United States support China's accession to the WTO.
    During Chinese President Jiang Zemin's recent state visit 
to the United States, it was clear that there is now an 
opportunity to move the bilateral relationship forward by 
strengthening commercial ties. Both Chinese and United States 
leaders recognize that China's entry into the WTO will be 
important for improving trade relations, but achieving that end 
will require action by China.
    China's efforts to join the WTO represents a significant 
opportunity to apply internationally accepted multilateral 
disciples to one of the world's fastest growing economies. 
Commitments made by China in the WTO accession negotiations 
should demonstrate China's willingness to integrate itself into 
the world's trading system and to open its markets to foreign 
goods and services.
    American companies must be given the chance to compete 
fairly in China. The United States cannot afford to miss out on 
the great potential represented by the enormous China market. 
Therefore, many American firms fully support China's accesion 
to the WTO, but only in a manner consistent with its status as 
a major trading power and with full adherence to the market 
principles assumed by all other WTO signatories.

                   United States-China Trade Deficit

    China's trade surplus with the United States is second only 
to that of Japan and is growing at a faster rate (See 
Attachment B).
    There are steps the United States and China should take to 
address this trade imbalance. China's markets should be open to 
foreign goods and services. Currently, foreign companies that 
have not invested in China are now allowed to import, export, 
distribute, or sell directly into the Chinese market.They must 
trade through authorized trading companies. Beyond providing 
basic trading rights, China should continue to make progress on 
tariff reduction and intellectual property protection. In 
addition to these measures, there are a number of other 
important commitments that China must make before the United 
States should should support China's accession into the WTO.
    Although China may require some latitude in making the 
transition to a market economy, the United States must insist 
that China adhere to basic WTO obligations. In this regard, 
China has shown a reluctance to engage in serious negotiations 
on fundamental issues such as transparency and uniform 
application of trade rules. Trade and industrial polcies, 
certification, registration, and licensing procedures should be 
published so United States firms can make informed business 
decisions.
    It is also important to understand that WTO accession terms 
for China will possibly serve as a precedent for accession 
negotiations for Russia, Vietnam and other economies that are 
still in transition to market economies. This only reinforces 
the need to make certain that the terms of WTO accession for 
China should be defined for the purposes at hand.
    Based on these considerations, it is clear that expansion 
of United States commercial ties with China is vital to 
America's future and that the terms of China's WTO accession 
must expand market access for American companies, strengthen 
China's commitment to the rule of law, and require China to 
play by the normal rules of international trade and investment.

                       United States-China Summit

    At the invitation of President William Clinton of the 
United States of America, President Jiang Zemin of the People's 
Republic of China visited the United States from October 26 to 
November 3, 1997. This was the first state visit by a President 
of China in twelve years.
    During the Summit, the two Presidents related that while 
the United States and China have areas of agreement and 
disagreement, they have a significant common interests. 
Although the United States and China have major differences on 
human rights, it was noted that there is great potential for 
cooperation in maintaining global and regional peace and 
stability and promoting world economic growth.
    China stressed that the Taiwan question is still the most 
important and sensitive issue in China-United States relations. 
The United States indicated that it contines to adhere to a 
``One China'' policy and the principles set forth in United 
States-China joint communiques.
    The two Presidents indicated that they are prepared to take 
positive and effective measures to expand United States-China 
trade and economic ties. China expressed its intention to 
participate as soon as possible in the Information Technology 
Agreement, and in the context of WTO negotiations, China 
confirmed that it would continue to make further substantial 
tariff reductions.
    The United States and China recognize that China's full 
participation in the multilaterial trading system is in their 
mutual interest. It was agreed to intensify negotations on 
market access, including tariffs, non-tariff measures, 
services, standards and agriculture with a view toward 
implementation of WTO principles so that China could accede to 
the WTO on a commercially meaningful basis at the earliest 
possible date.
    The United States and China intend to establish a joint 
liaison group to pursue cooperative legal activities, which 
would include exchanges of legal experts, training of judges 
and lawyers, strengthening legal information systems and the 
exchange of legal materials, sharing ideas about legal 
assistance, consulting on administrative procedures, and 
strengthening commercial law and arbitration.

Protection of Trademarks and Brand Names and Reversion of Hong Kong to 
                                 China

    In recent years, a number of American firms have made 
substantial financial and people commitments to China, and 
several have been quite successful doing branded products 
business in China. To reinforce American trends and lifestyle 
appeal, such firms have undertaken a range of marketing 
activities. In addition to advertising and promotion (sometimes 
in conjunction with local licensees), these American firms have 
sponsored public service efforts.
    American firms which sell different products in different 
parts of the world make substantial efforts to comply with the 
rules of law of each country in which they do business. For 
example, certain products may be considered more appropriate 
for Hong Kong than Mainland China.
    American firms realize the importance of the broader 
relationship with China and therefore they have often made 
considerable efforts to respect cultural differences and to be 
in full compliance with Chinese rules of law, regulations and 
procedures.
    In this regard, China clearly stated its support for the 
principle of ``One China and Two Systems'' as this relates to 
Hong Kong's reversion to China this past summer. Senior 
officials of the Chinese government have confirmed that they 
intend to respect the economic and political differences 
between the two systems.
    In their efforts to be good citizens in Mainland China and 
Hong Kong, American firms have provided scholarships and 
technical training for Chinese nationals. Such initiatives help 
to support general rule of law considerations and the 
protection of intellectual property (including trademarks and 
brand names) by involving Chinese nationals more directly in 
this process.

                          Private Sector Views

    In the Twenty First Century, it is expected that China will 
become the largest economy in the world. This will have a major 
impact not only on the global economy, but also on the 
individual economies of the United States and other major 
developed nations. Therefore, due to the vast size and 
influence of China's economy, it is in the United States 
interest to have China become integrated into the world trading 
system.
    China's accession to the WTO offers an unusual opportunity 
to restructure United States-China trade in a direction that 
leads to a more stable and prosperous commercial relationship. 
WTO rules and dispute settlement procedures would provide a 
more effective means to enforce China's market access 
commitments and adherence to WTO obligations. China's accession 
to the WTO must be based on a commercially acceptable protocol 
that improves United States market access and implements WTO 
rules and obligations.
    China should provide substantial reduction and binding of 
tariffs and commit to phase out residual quotas and import 
licensing restrictions. China should provide national treatment 
with respect to the treatment of foreign goods, services, and 
investment. China should fully implement the United States-
China bilateral intellectual property rights agreements of 1992 
and 1995.
    China should eliminate barriers to United States 
agricultural exports which are inconsistent with the WTO, 
including sanitary and phytosanitary measures that operate as 
disguised restrictions on trade.
    In recent weeks, considerable attention has been directed 
to the efforts of Congressmen Bereuter and Ewing to work with 
the Administration to bring about China's admission to the WTO 
on the basis of a commercially reasonable protocol of accession 
and to look to the terms upon which the United States could 
extend permanent MFN treatment to China. Such positive 
initiatives should improve the chances for securing China's 
admission to the WTO and could promote a constructive strategic 
partnership between the United States and China.
    In terms of an integrated China policy, it should be clear 
that the maintenance of the One China policy must be maintained 
as part of the commitments that the United States has made to 
China.

 Importance of United States Agriculture Exports and Views of American 
                              Agriculture

    United Sates agricultural exports continue to be a bright 
spot in America's trade picture. Last year, the United States 
agricultural trade surplus was $27.4 billion, making 
agriculture the largest positive contributor to the United 
States balance of trade (See Attachment C). The United States 
is the world's leading exporter of agricultural products with a 
21 percent share of world trade. The agricultural sector is 
twice as reliant on international trade as the total United 
States economy, with exports accounting for an estimated 30 
percent of gross cash receipts.
    While American agricultural export performance has been 
good, foreign trade barriers and other factors continue to 
prevent American farmers and ranchers from realizing their 
potential in international markets. The failure of China to 
agree to a meaningful WTO accession protocol that will provide 
increased access for United States agricultural exports is a 
major problem for American agriculture.
    For the past ten years the United States has been 
negotiating with China regarding its accession to the WTO. 
While some progress has been made, the two sides remain far 
apart on many matters involving agricultural market access.
    If the United States prematurely supports China's WTO 
accession, the ramifications for American agricultural 
exporters would be serious. This could result a long and 
arduous campaign to open China's markets with many adverse 
consequences in the years ahead.
    Despite these problems, many American firms have been 
working to establish relationships and build a foundation for 
market development through trade in the People's Republic of 
China.
    In 1992, the United States and China entered into a Market 
Access Memorandum of Understanding in which the Chinese 
government committed itself to open its markets to American 
agricultural products. Since that time, officials of the United 
States Department of Agriculture and the Office of the United 
States Trade Representatives have been meeting with their 
counterparts in the Chinese government to address outstanding 
technical issues. Bilateral agricultural trade meetings have 
been held several times both in China and in the United States 
to negotiate the terms and conditions of agricultural trade 
compatible with obligations of country membership in the WTO. 
To date, these efforts have yet to produce a satisfactory 
resolution. The Chinese government persists in its resistance 
to protocols that would open its markets to American 
agricultural products.
    China has yet to domonstrate full acceptance and 
implementation of WTO agreements on the Application of Sanitary 
and Phytosanitary Measures on Technical Barriers to Trade and 
on Import Measures.
    China is clearly a significant market for American 
agriculture. If the Chinese government would finally allow more 
American agricultural products into the Chinese marketplace, 
this would help to reduce an annual bilateral trade deficit 
with China now approaching $50 billion (See Attachment A).
    Therefore, various American agricultural groups have urged 
Congress to resist granting permanent MFN status to China and 
to oppose China's accession to the WTO until China further 
opens its markets to American agricultural products, lives up 
to its existing commitments in bilateral agreements, and fully 
demonstrates adherence to obligations inherent in WTO 
Membership.
      

                                


[GRAPHIC] [TIFF OMITTED] T2839.013

      

                                


      
    [GRAPHIC] [TIFF OMITTED] T2839.014
    
      

                                


      
    [GRAPHIC] [TIFF OMITTED] T2839.015
    
    Source: See United States Foreign Trade Annual 1974-1980, 
United States Department of Commerce, Bureau of the Census; and 
FT 990, Highlights of United States Export and Import Trade, 
United States Department of Commerce, Bureau of the Census.
      

                                


Statement of NACCO Materials Handling Group, Inc.

    Pursuant to the October 22, 1997 announcement by the 
Subcommittee on Trade of the Committee on Ways and Means, the 
NACCO Materials Handling Group, Inc. (``NACCO'') submits the 
following statement for consideration by the Committee and for 
inclusion in the printed record of the November 4, 1997 hearing 
held by the Subcommittee regarding the future of United States-
China trade relations and the possible accession of China to 
the World Trade Organization (WTO).
    Briefly summarized, NACCO submits this statement 
recommending that China's membership to the WTO be conditioned 
on China granting significant concessions as to its tariff and 
non-tariff barriers restricting imports of U.S. merchandise. 
With 1.2 billion citizens, China is the world's largest market 
for virtually all merchandise. Nevertheless, China's tariff and 
non-tariff barriers to trade effectively close that market to 
potential U.S. exporters.
    Accordingly, NACCO has strong interests in improving access 
to the Chinese market. The comments set forth below address 
NACCO's concerns about the tariff rates currently in place in 
China that effectively impede the industry's access to the 
Chinese market.

 I. NACCO: China's Tariff and Non-Tariff Barriers Relating to Imported 
  Fork Lift Trucks and Truck Parts Deny Fair Access to China's Market

    NACCO is one of the leading worldwide designers, 
manufacturers, and marketers of forklift trucks and truck 
parts, which comprise the largest segment of the materials 
handling equipment industry. In terms of unit sales, NACCO 
leads all other producers of forklift trucks in the United 
States. NACCO has facilities in Alabama, Kentucky, Illinois, 
North Carolina, and Oregon, employing thousands of Americans. 
In addition, NACCO has a network of dealers in more than 200 
locations across North America.
    NACCO markets two full lines of a wide variety of forklift 
trucks and related service parts. The principal categories 
include electric rider, electric narrow-aisle, and electric 
motorized hand forklift trucks primarily for indoor use, and 
internal combustion engine forklift trucks for indoor and 
outdoor use. NACCO also derives significant revenues from the 
sale of service parts for its products, as well as replacement 
parts for most competing brands.
    NACCO is also highly competitive worldwide, with facilities 
in Europe, South America, and Australia. Based on the number of 
lift-trucks sold, NACCO is the leading manufacturer of forklift 
trucks in the world. NACCO's business strategy is export-
oriented and, in particular, NACCO believes that the Chinese 
market offers an opportunity for growth.
    Currently, China imports approximately 4,000 industrial 
trucks annually, compared to domestic sales by Chinese 
producers numbering over 20,000 units per year. And although 
the Chinese market may be relatively small, it is growing at a 
rate of about 10 percent each year. Even so, the Chinese market 
currently offers more in the way of potential than it does 
immediate rewards. As a result, it is very important to NACCO 
that China remove its barriers to entry of industrial lift-
trucks and truck parts as a condition to its accession to the 
WTO.
    However, under China's current two-tiered customs regime, 
the majority of industrial lift-trucks and parts that are 
anticipated to be exported to China would be subject to 
excessive tariffs, with effective rates as high as 38 percent 
ad valorem, which significantly reduces access to this 
important market for U.S. producers. See Exhibit 1.
    By contrast to the U.S. tariff rate for forklift trucks and 
truck parts--which is zero--the Chinese rates are exceptionally 
high, even by Chinese standards. Moreover, there is an apparent 
inconsistency between China's tariff schedules and its 
application of customs duties, at least with respect to 
forklift trucks. NACCO's experience in China indicates that, in 
fact, a tariff rate of 25 percent has been applied to forklift 
trucks upon their entry into China, making the effective rate 
46 percent ad valorem. Thus, in addition to excessive rates, 
there exists an even more troubling lack of transparency in the 
enforcement of China's law.
    In addition, China's value added tax in practice unfairly 
discriminates against importers who re-export industrial trucks 
and truck parts. For example, re-exporters receive a credit for 
the VAT paid, but only up to 9 percent of the article's value. 
Moreover, it may take as long as one year after they pay the 
VAT for the credit to be paid. By contrast, domestic producers 
that export the same products often receive credit for their 
VAT payments more quickly than foreign importers and for 
amounts over 9 percent, up to the full 17 percent VAT. In light 
of these kind of barriers, China successfully shields its 
domestic producers of forklift trucks and truck parts from 
competition by imports.
    With respect to non-tariff barriers, NACCO's experience in 
the Chinese market has exposed it to measures that further 
inhibit access to U.S. industrial trucks and their parts. 
Although China's tariff schedule does not mention the existence 
of any licensing requirements for these imports, NACCO 
understands such licenses are required. These are often 
difficult and, therefore, expensive to obtain. Of even more 
concern to NACCO is the somewhat arbitrary availability of so-
called ``low duty'' import licenses from state trading 
companies. These licenses offer benefits to those importers 
able to obtain them in the form of reduced tariff and tax rates 
on imports. Often, the amount of savings depends on the terms 
of the arrangement the importer manages to strike with the 
state trading company. The result is that, without such a 
license, an importer simply cannot compete, either with other 
importers or with Chinese producers.
    NACCO has also been competitively disadvantaged and 
deterred by general complexities and bureaucratic nuances 
involved in doing business in China. For example, if a company 
has helpful connections, or is willing to offer financial 
``inducements'' to state trading companies, it may receive 
preferential low duties when importing or VAT tax breaks when 
selling in the domestic Chinese market. However, none of these 
``programs'' are either transparent or uniform in their 
application.
    Finally, industrial forklift trucks and truck parts have 
not been immune from China's well-documented non-compliance in 
the area of intellectual property rights. Foreign technology 
and product designs are frequently copied and used by 
competitors in China without risk of punishment and even less 
hope for effective redress for the foreign importers. Thus, 
like tariff and non-tariff barriers, these obstacles to fair 
access also demand attention from the United States during its 
negotiations with China.
    For the foregoing reasons, NACCO strongly urges that 
China's accession be made conditional upon it meeting the trade 
liberalization commitments that apply to other developed 
nations.

                             II. Conclusion

    China's combined import tariffs and VAT duties on the goods 
and products discussed in this statement are huge, and 
effectively close the massive Chinese market to imports from 
many WTO countries (including the United States). In 
comparison, the corresponding tariff rates for these products 
in the United States are zero. Unless China agrees to lower its 
tariff rates, and to eliminate its VAT, China will continue to 
be able to keep its market closed to U.S. exports.
    Accordingly, the United States should accept a tariff 
binding offer from the Chinese only if it includes a commitment 
to match the U.S. tariff rates on the products named here, and 
to eliminate China's significant VAT on those imports.
    We appreciate the opportunity to submit this statement on 
behalf of NACCO.
      

                                


      
    Exhibit 1.--Articles of Interest to NACCO by U.S. 
Harmonized Tariff Schedule Number and by Chinese Import/Export 
Tariff Classification Number

                              United States
------------------------------------------------------------------------
                                                                 General
          Classification No.                    Product            rate
------------------------------------------------------------------------
HTSUS 8427...........................  Fork-lift trucks; other         -
                                        works trucks.
                                       fitted with lifting or
                                        handling equipment.
HTSUS 8427.1000......................  Self-propelled trucks        Free
                                        powered by.
                                       an electric motor, other
                                        self-propelled trucks.
HTSUS 8427.2010......................  Fork-lift trucks for         Free
                                        containers.
HTSUS 8427.2090......................  Other...................     Free
HTSUS 8427.9000......................  Other trucks............     Free
HTSUS 8431...........................  Parts suitable for use          -
                                        solely or.
                                       principally with the
                                        machinery of headings
                                        Nos. 84.25 to 84.20.
HTSUS 8431.2000......................  Of machinery of heading      Free
                                        No. 84.27.
------------------------------------------------------------------------



                                  China
------------------------------------------------------------------------
        Classification No.               Product          Rate     VAT
------------------------------------------------------------------------
84.27............................  Fork-lift trucks;          -
                                    other works trucks.
                                   fitted with lifting
                                    or handling
                                    equipment.
8427.1000........................  Self-propelled         18/30       17
                                    trucks powered by       \1\
                                    an.
                                   electric motor,
                                    other self-
                                    propelled trucks.
8427.2010........................  Fork-lift trucks       18/30       17
                                    for containers.         \1\
8427.2090........................  Other..............    18/30       17
                                                            \1\
8427.9000........................  Other trucks.......    18/30       17
                                                            \1\
84.31............................  Parts suitable for         -
                                    use solely or.
                                   principally with
                                    the machinery of
                                    headings Nos.
                                    84.25 to 84.20.
8431.2000........................  Of machinery of        10/30       17
                                    heading No. 84.27.      \1\
------------------------------------------------------------------------
\1\Most favored nation duty rate/general duty rate.


      

                                


Statement of National Juice Products Association

    Pursuant to the October 22, 1997 announcement by the 
Subcommittee on Trade of the Committee on Ways and Means, the 
National Juice Products Association (``NJPA'') submits the 
following statement for consideration by the Committee and for 
inclusion in the printed record of the November 4, 1997 hearing 
held by the Subcommittee regarding the future of United States-
China trade relations and the possible accession of China to 
the World Trade Organization (WTO).
    Briefly summarized, NJPA submits this statement 
recommending that China's membership to the WTO be conditioned 
on China granting significant concessions as to its tariff 
barriers restricting imports of U.S. merchandise. With 1.2 
billion citizens, China is the world's largest market for 
virtually all merchandise. Nevertheless, China's tariff 
barriers to trade effectively close that market to potential 
U.S. exporters.
    Accordingly, NJPA respectfully requests that the United 
States not accede to China's membership in the WTO without a 
significant improvement in China's treatment of imported fruit 
juices. The comments set forth below address NJPA's concerns 
about the tariff rates currently in place in China that 
effectively impede the industry's access to the Chinese market.

 I. NJPA: China's Tariff Barriers Relating to Fruit Juice Imports Deny 
                     Fair Access to China's Market

    NJPA is a national trade association comprised of over 70 
juice growers and processors located throughout the United 
States. See enclosed membership list. NJPA understands that the 
United States, along with other members of the WTO, is 
negotiating with China for entry into the WTO. It is very 
important to NJPA that China remove its barriers to entry of 
U.S. fruit juices before it is admitted into the WTO.
    China imposes excessive tariffs on fruit juice, 
significantly reducing access to this important market for U.S. 
juice producers. China currently imposes a 55 percent tariff on 
fruit juice imported from most favored nations such as the 
United States. In addition, China imposes a value added tax 
(``VAT'') of 17 percent on fruit juice, which, because it is 
imposed on the tariff-inclusive price of the juice, raises the 
effective import tariff rate to 81 percent.
    Indeed, China's current published tariff and VAT rates on 
juice products are dramatically higher than the U.S. MFN tariff 
rates on fruit juice, which range from no duty to a duty of 
8.58/liter. See 1997 Harmonized Tariff Schedule of the United 
States, Heading 2009 (Fruit juices (including grape must) and 
vegetable juices, not fortified with vitamins or minerals, 
unfermented and not containing added sugar or other sweetening 
matter).
    NJPA, therefore, strongly urges that China not be admitted 
to membership in the WTO unless it meets the trade 
liberalization commitments that apply to other developed 
nations. NJPA members represent 90 percent of U.S. juice 
production and employ thousands of Americans. The Chinese 
market represents a significant opportunity for U.S. juice 
producers to expand their exports, thereby creating jobs in 
Florida, California, and throughout the United States. This 
potential market cannot be developed, however, until China 
removes its excessive tariffs and complies with international 
norms for open and transparent trade.

                             II. Conclusion

    China's combined import tariffs and VAT duties on the goods 
and products discussed in this statement are huge, and 
effectively close the massive Chinese market to imports from 
many WTO countries (including the United States). In 
comparison, the corresponding tariff rates for these products 
the United States are tiny. Unless China agrees to lower its 
tariff rates to the very small levels maintained by the United 
States, and to eliminate its VAT, China will continue to be 
able to keep its market closed to U.S. exports.
    Accordingly, the United States should accept a tariff 
binding offer from the Chinese only if it includes a commitment 
to match the U.S. tariff rates on the products named here, and 
to eliminate China's significant VAT on those imports.
    We appreciate the opportunity to submit this statement on 
behalf of NJPA.
      

                                


      
    [GRAPHIC] [TIFF OMITTED] T2839.016
    
      

                                


Statement of U.S. Integrated Carbon Steel Producers

    This statement sets out the views of five major integrated 
U.S. producers of carbon steel products--Bethlehem Steel Corp., 
U.S. Steel Group a Unit of USX Corp., LTV Steel Co., Inland 
Steel Industries, Inc., and National Steel Corp.--on U.S.-China 
trade relations and, in particular, China's possible accession 
to the World Trade Organization (WTO). We commend the 
Subcommittee for holding this hearing and appreciate the 
opportunity to express our views.
    China's bid to join the WTO raises issues of great 
commercial as well as political importance. China has become a 
major player in the international economy, as reflected in the 
steel sector where China is now the world's largest producer. 
(See Chart 1.) To cite just one example of the shifts that are 
underway, Chinese exports of cut-to-length carbon steel plate 
to the U.S. market grew from zero in 1993 to 300,000 tons in 
1996.
[GRAPHIC] [TIFF OMITTED] T2839.017


    While China's rapidly growing economy offers a huge 
potential market for U.S. exports, U.S.-China bilateral trade 
continues to be significantly out of balance. (See Chart 2.) 
The U.S. trade deficit with China, nearly $40 billion last 
year, continues to grow. Among the many causes of this deficit 
are Chinese policies that promote export-led growth in certain 
sectors while restricting imports through a discriminatory and 
nontransparent trade and investment regime. Many of these 
policies are inconsistent with both the letter and spirit of 
the WTO agreements.
[GRAPHIC] [TIFF OMITTED] T2839.018

    The two pillars of the WTO are free and fair trade--
elimination of barriers coupled with clear and enforceable 
rules against unfair trade. In the steel sector and many 
others, China today does not trade fairly. China's WTO 
accession must be handled carefully in order to address these 
concerns and ensure fair global competition.
    With an appropriate protocol of accession, U.S. steel 
producers are prepared to support China's accession to the WTO. 
The existing draft protocol, however, does not adequately 
address several key issues. Of these, three are of particular 
importance to the steel industry: antidumping rules, purchasing 
by state-owned enterprises, and subsidies. These issues must be 
addressed, and addressed successfully, well before the 
conclusion of the accession negotiations.

                  Non-Market Economy Antidumping Rules

    Current U.S. law provides that, in the case of imports from 
a nonmarket economy (``NME''), the Commerce Department is to 
determine the ``normal value'' of a product under investigation 
by valuing the NME producer's factors of production (plus 
amounts for general expenses and profit) in a surrogate country 
that is similarly developed but market-oriented. This 
methodology is critical to ensuring a fair comparison of the 
normal value of goods produced in China, and other NMEs, with 
the export price of those goods to purchasers in the United 
States. Other GATT signatories (now WTO members) have long 
applied similar rules.
    The basis in the GATT for this methodology has been a note 
to GATT Art. VI, which recognizes that, ``in the case of 
imports from a country which has a complete or substantially 
complete monopoly of its trade and where all domestic prices 
are fixed by the State, . . . importing contracting parties may 
find . . . that a strict comparison with domestic prices in 
such a country may not always be appropriate.''
    Citing recent reforms that have occurred in China, Chinese 
trade officials argue that China is no longer a non-market 
economy and therefore should not be subject to NME antidumping 
rules in the United States, the EU and other jurisdictions. 
Nevertheless, a substantial percentage of Chinese manufacturers 
continue to be state-owned and controlled, and state control 
over input prices persists. This is especially true in the 
steel industry. In fact, in recent cases both inside and 
outside the steel sector, the Commerce Department has 
reaffirmed that China continues to be a non-market economy. The 
Department's consistent findings in this regard should not be 
negotiated away to smoothen WTO accession.
    Were the Commerce Department to begin relying on state-
controlled prices, the Chinese Government could easily 
manipulate these prices in such a way as to mask the true level 
of dumping taking place. For this reason, application of a 
``market economy'' antidumping analysis is inappropriate and 
will produce inequitable results so long as prices and 
enterprises remain under state control in China. For this very 
reason, in the accessions of other non-market countries such as 
Poland and Romania, the continued ability to use NME 
methodology has been made explicit.
    Without a clear provision in China's protocol, there is a 
risk that applying NME antidumping rules to post-accession 
imports from China would be found inconsistent with the WTO 
agreements. Accordingly, clear language must be included in 
China's protocol that specifically guarantees the right of the 
United States and other countries to continue to apply NME 
antidumping rules with respect to goods of Chinese origin--at 
least until such a time as substantial state control over 
prices no longer exists in China. The language included in the 
current draft protocol, intended to meet this concern, has not 
been accepted by China.
    Because this is such a fundamental requirement for an 
acceptable protocol, it should be addressed decisively at an 
early stage in the discussions. Experience has shown that such 
issues cannot be effectively addressed in the pressured 
atmosphere that prevails at the end of a negotiation.

                 Purchasing by State-Owned Enterprises

    China, although the world's largest producer of steel, 
continues to import some steel products from countries such as 
Japan and Russia. However, the Chinese Government is 
undertaking a significant effort to boost domestic steel 
production, with the goal of reaching self-sufficiency and 
ending imports of basic steel by the year 2000.
    There exists, therefore, an increasing risk that the 
Chinese Government will exercise the power it maintains over 
state-owned enterprises in the steel sector and downstream 
industries in order to induce these enterprises to purchase 
only domestic steel. If Chinese state-owned enterprises do not 
make purchases of steel on the basis of commercial 
considerations, and are instead influenced by the Chinese 
Government's import substitution policies, foreign steel 
products will no longer be able to be sold in China.
    A closing of the Chinese market to imports of steel will 
not only affect U.S. exports, but will divert third-country 
exports away from China and toward the world's few open markets 
for steel. The United States--the single largest open market 
for steel--would face an even greater onslaught of excess world 
steel production, often at dumped prices.
    Accordingly, China's protocol of accession should include 
an affirmative obligation on the part of the Chinese Government 
to ensure that state-owned enterprises make purchases solely on 
the basis of commercial considerations. The protocol should 
also provide for a regular review of purchasing decisions by 
Chinese state-owned enterprises to ensure compliance with this 
obligation.

                               Subsidies

    The accession protocol should commit China fully to WTO 
subsidy rules and include a realistic and enforceable schedule 
for phasing out existing subsidies. The protocol ``annex'' 
establishing a timetable for phasing out Chinese subsidies has 
not been made publicly available, but must be fully vetted with 
Congress and affected U.S. industries well before any accession 
pact is finalized.
    Equally important is ensuring, through appropriate protocol 
provisions and statutory amendments, that U.S. anti-subsidy 
laws can be applied to offset and deter such subsidies. While 
China already is a prolific subsidizer, the risk of improper 
use of subsidies in an economy like China's increases as the 
economy becomes more market-oriented. U.S. trade remedies must 
be capable of responding effectively to this problem both 
during and after China's transition.

                               Conclusion

    Carbon steel producers welcome the Subcommittee's active 
oversight of what promises to be one of the most significant 
U.S. trade policy initiatives over the next several years. As 
U.S. trade with China continues to grow, the domestic and 
international rules applicable to that trade will take on ever-
greater importance.
    Joining the WTO will require China to reform its legal and 
commercial structures to make them compatible with the 
international trading system and its rules. It is widely stated 
and accepted that the accession pact itself must be 
``commercially viable'' if accession is to be in the U.S. 
national interest. From the carbon steel industry's 
perspective, no protocol can be ``commercially viable'' unless 
it successfully addresses the fundamental issues of antidumping 
rules, purchasing by state-owned enterprises, and subsidies.
      

                                


       United States Council for International Business    
                                               New York, NY
                                                  November 18, 1997

The Honorable Philip M. Crane
Chairman, Trade Subcommittee
Committee on Ways and Means
1104 Longworth House Office Building
Washington, DC 20515-6354

    Dear Chairman Crane:

    The future of United States trade relations with China and China's 
accession to the World Trade Organization (WTO) are very important 
issues for the members of the United States Council for International 
Business (USCIB). Your November 4 hearing on this subject was very 
timely and we encourage you to maintain your Subcommittee's focus on 
these issues.
    In the context of our work for U.S. business on issues relating to 
the WTO, USCIB takes the position that all prospective members 
regardless of size must comply with established disciplines and commit 
to comparable trade liberalization. It would be damaging to the WTO 
rules, which define the trade opportunities for all our companies, and 
to the WTO institution itself if a two-tier set of rules is created 
through accession requirements that accord certain countries a lesser 
discipline. The specific requirements for comparable trade 
liberalization that our members seek in China's accession are 
elaborated in two recent letters to the United States Trade 
Representative. We would respectfully request that these letters (which 
are attached) be included in the written record of your hearing.
    USCIB membership comprises 300 American corporations, professional 
firms and business associations. A copy of our membership list is also 
attached for the Subcommittee's reference.
    Thank you for your consideration. We appreciate your attention to 
this very important trade issue.

            Sincerely,

                                               Abraham Katz
                                                          President

Attachments
      

                                


       United States Council for International Business    
                                               New York, NY
                                                     March 17, 1997

Mr. Frederick L. Montgomery
Chairman, Trade Policy Staff Committee
Office of the United States Trade Representative
600 17th St., NW
Washington, DC 20508

    Dear Mr. Montgomery:

    The U.S. Council for International Business is pleased to submit 
the recommendations of its China Working Group in response to your 
request for public comments on negotiations regarding China's accession 
to the World Trade Organization (WTO).
    The U.S. Council is the American affiliate of the International 
Chamber of Commerce (ICC), the Business and Industry Advisory Committee 
(BIAC) to the OECD, the International Organization of Employers (IOE). 
As such, it officially represents U.S. business positions both in the 
main intergovernmental bodies and with foreign business communities and 
their governments. The U.S. Council formulates its positions in over 
forty committees and other working bodies composed of experts drawn 
from its membership of 300 multinational corporations, service 
companies, law firms and business associations.
    China's WTO accession negotiations offer an important opportunity 
for the U.S. Government to effectively address various barriers to 
trade with that country. We support China's accession to the WTO under 
a commercially acceptable protocol that commits China to comply with 
established WTO disciplines and includes specific market-opening 
measures.
    To assist you in addressing market access issues in particular, we 
sent out a questionnaire asking our working group members to prioritize 
specific market access issues of concern to U.S. businesses operating 
in China. The results are summarized below.

                  Transparency and Uniformity of Laws

    The majority of respondents cited a lack of transparency 
and uniformity of laws as the most serious obstacle faced by 
American companies operating in China. Companies mentioned 
ongoing problems with undisclosed rules and regulations, laws 
that are vague and subject to varying interpretations, and 
inconsistent application and enforcement of laws at different 
levels of government and between different entities.
    GATT Article X calls for trade regulations to be published 
promptly and administered in a uniform, impartial and 
reasonable manner. The U.S. Government should press China to 
publish in advance and circulate laws, directives and 
regulations governing foreign trade and investments. Further, 
many existing laws require clarification and additional details 
on procedural guidelines, requirements, and consequences. There 
should be a uniformity of laws and their implementation at all 
levels.
    This complaint applied across numerous sectors, including 
consumer products, manufacturing, natural resources, services 
companies, etc.

                    Tariffs and Non-Tariff Measures

    Companies cited tariffs and non-tariff measures together as 
the second most pressing set of issues. While China announced 
at the APEC Summit in November, 1996 that it would lower 
tariffs by 30 percent on 4,000 items, duties on many products 
remain over 50%, particularly raw materials, chemicals, and 
some finished goods. The U.S. Government should press China to 
substantially reduce its overall tariff rate (which currently 
stands at 32%) to a level comparable to the commitments of WTO 
members.
    Many companies also indicated that import licensing 
restrictions and quotas on hundreds of imported products 
inhibit their competitiveness in China. The U.S. government 
should insist that China adhere to GATT Article XI, which 
prohibits such practices.

                                Services

    China continues to maintain barriers to foreign service 
providers in areas such as financial services, 
telecommunications, publishing and tourism. The U.S. Government 
should press China to provide non-discriminatory market access 
and to liberalize existing limitations so as to bring its 
practices into conformity with the obligations in the General 
Agreement on Trade in Services (GATS) and it annex on 
telecommunications services.
    Moreover, now that the WTO negotiations on basic 
telecommunications have concluded successfully, it is 
especially important that basic telecommunications be addressed 
as part of the process of China's accession to the WTO. Chinese 
commitments on basic telecommunications must be meaningful and 
commensurate with the stature and importance that China has 
assumed in the world economy, including full adoption of the 
regulatory principles.

                    Intellectual Property Protection

    On paper, China has made significant progress toward 
bringing its intellectual property regime up to international 
standards, particularly since the 1992 and 1995 agreements 
signed with the U.S. on this subject. However, piracy of U.S. 
software, books, magazines, videos and sound recordings remains 
a serious problem. And some companies argued that the IP laws 
in place are not enforced objectively. As one respondent put 
it, the ``rule of men'' still takes precedence over the rule of 
law. The U.S. Government should continue to press China to 
vigorously enforce its IP laws under the terms of the two 
bilateral agreements and the WTO Agreement on Trade-Related 
Intellectual Property Rights (TRIPs).

                          Investment Policies

    Some companies noted that they are generally prohibited 
from retail marketing, that investment approvals by the Chinese 
Government are set at extremely low levels, and that foreign 
firms are generally forced to joint venture with local firms. 
China's requirements of foreign investors to enter into 
commitments regarding technology transfer, import substitution, 
exchange rate balancing and export performance are overly 
restrictive and in violation of GATT Article III and the WTO 
Agreement on Trade-Related Investment Measures (TRIMs). 
Automotive companies complained about China's lengthy 
transition period for phasing out barriers to investment in the 
auto sector. China must take on the TRIMs obligations within 
the time frame prescribed in the WTO.

                              Other Issues

    Members raised several other issues, including the 
following:


Trading rights

    Some companies cited concerns with the Chinese policy of 
limiting the import of goods into China to authorized trading 
companies.

Dispute resolution

    Problems mentioned in this area include difficulty 
enforcing contracts in court; difficulty enforcing judgments/
decrees from Chinese courts; the fact that foreign arbitral 
decrees are often ignored by Chinese courts; and that 
arbitration awards made in one region of China are not enforced 
in other regions.

Customs

    Some companies complained that the Chinese customs 
authorities do not apply their regulations uniformly. Chinese 
customs practices need to be modernized to incorporate the key 
procedures set out in the ICC International Customs Guidelines, 
which include implementation of the WTO agreement on valuation, 
rules of origin and preshipment inspection.

Access for agricultural products.

    Some companies suggested that, before joining the WTO, 
China must remove GATT-illegal barriers to foreign agricultural 
products. The Chinese Government's phyto-sanitary measures, for 
example, operate as disguised trade restrictions.
    I hope that this information is useful to your discussions 
with the Chinese government. We stand ready to meet with you to 
discuss these concerns in more detail, if necessary.

            Sincerely,

                                               Abraham Katz
                                                          President
      

                                


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[GRAPHIC] [TIFF OMITTED] T2839.020

      

                                


       United States Council for International Business    
                                               New York, NY
                                                   October 30, 1997

The Hon. Charlene Barshefsky
United States Trade Representative
Office of the U.S. Trade Representative
600 17th St., NW
Washington, DC 20506

Via FAX: 395-3911

    Dear Charlene:

    I am writing to follow up on my correspondence with your office of 
March 17 regarding the negotiations on China's accession to the World 
Trade Organization. The U.S. Council for International Business is 
particularly concerned that the interests of service providers should 
be vigorously pursued in the negotiations. Our earlier letter covered 
the full range of WTO issues; I would like to take this opportunity to 
elaborate on the issues affecting the services sector.
    As you know, the U.S. Council's position is that China's accession 
to the WTO must be based on a commercially viable terms that commit 
China to comply with WTO disciplines and to open its markets to 
additional imports of both goods and services. The terms should include 
special measures to ensure that the transparency of China's laws and 
regulatory procedures is improved significantly. This issue is vitally 
important to all our members, but it has special implications for those 
companies, such as service providers, many of which require a local 
commercial presence and operate in more regulated environments. The 
accession negotiations offer an important opportunity to seek 
improvements in China's administrative and regulatory procedures to 
bring about a high degree of transparency and to bring them more into 
line with practices in other major markets.
    With regard to market access for services, China's adherence to the 
General Agreement on Trade in Services will be a welcome step forward, 
but China must include in its GATS schedule specific market access and 
national treatment commitments on a broad range of service sectors. 
Many of the other GATS rules (in addition to market access and national 
treatment) only apply to service sectors for which the signatory has 
scheduled specific commitments, so the quality of China's GATS schedule 
is especially important to our service providers. With regard to 
specific sectors, we strongly recommend the following measures.

                           Telecommunications

    As with other countries acceding to the WTO, China should 
make meaningful commitments under the WTO Agreement on Basic 
Telecommunications. At a minimum, meaningful commitments would 
include a date certain for full liberalization and adoption of 
the Reference Paper in its entirety.

                           Financial Services

    China should make high-quality commitments under the GATS 
to liberalize access to its financial service sector, including 
banking, insurance, securities and diversified services.

                         Professional Services

    In its scheduled GATS commitments, China should cover the 
full range of professional services, including accounting, 
auditing and bookkeeping services, as well as tax and 
management consulting, legal services, services related to 
advertising and media sales, and advertising and marketing 
services. Those commitments should eliminate a variety of de 
facto impediments. For example, in the accounting sector China 
should assure the right to choose local affiliates on 
contractual terms substantially equivalent to worldwide norms; 
permit the establishment of branches or other offices 
authorized to perform statutory work; adopt the use of 
international standards; and remove the ban on the advertising 
of professional services. As another example, China should 
extend complete reciprocity to legal services and permit 
American firms to hire Chinese attorneys licensed to practice 
law in China. There should be no restrictions on the number of 
licenses or locations for legal practice.

                               Publishing

    China should make timetabled commitments to liberalize both 
investment (including joint ventures) and access to publishing 
services for books, magazines and newspapers, such as financial 
information services. As a related matter, it is essential that 
China demonstrate a significant commitment to enforcing its 
intellectual property protection legal system and to stop 
piracy and exploitation of copyrighted materials.

                                Tourism

    China should agree to repeal by a date certain its law 
prohibiting non-Chinese companies from establishing full 
service travel agencies in China. As part of this 
liberalization, China should permit non-Chinese companies the 
same rights that are enjoyed by travel companies in other WTO 
countries. A full service travel license would permit the sale 
of standard tourist financial services such as selling 
travelers checks and would permit all licensed travel agencies 
to act as ticketing agents for international and domestic 
airlines.
    In addition to the specific service sectors mentioned in 
this letter, a broad issue of concern to many U.S. firms 
remains the ability of foreign firms to distribute their 
products within China. Currently foreign firms are not 
permitted to distribute directly their products within China, 
but must instead use government-authorized Chinese 
distributors. Such restrictions on the ability to distribute 
goods within China impose a significant barrier to market 
access for foreign firms. China should agree to provide all 
foreign firms with the right to determine how their products 
are distributed within China. This is a fundamental market 
access issue which must be resolved in the services 
negotiations related to China's WTO accession.
    In closing, while all the areas we identified in my March 
17 letter remain important to our members, we believe that the 
United States cannot afford to accept Chinese membership in the 
WTO without clear and meaningful commitments on services. The 
U.S. is the world's leading service exporter, and China is an 
increasingly important market for our service providers and for 
the international companies they serve. China itself, moreover, 
will benefit from access to modern, state-of-the-art services 
which provide an essential infrastructure for business growth 
and development.
    I wish you every success in completing the negotiations 
with China, and want to assure you that the U.S. Council stands 
ready to assist your effort in any way we can.

            Sincerely,
                                               Abraham Katz
                                                          President

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