[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]





    PNTR: OPENING THE WORLD'S BIGGEST POTENTIAL MARKET TO AMERICAN 
                     FINANCIAL SERVICES COMPETITION

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                    FINANCE AND HAZARDOUS MATERIALS

                                 of the

                         COMMITTEE ON COMMERCE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 23, 2000

                               __________

                           Serial No. 106-102

                               __________

            Printed for the use of the Committee on Commerce

                     U.S. GOVERNMENT PRINTING OFFICE
64-766CC                     WASHINGTON : 2000




                         COMMITTEE ON COMMERCE

                     TOM BLILEY, Virginia, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio               HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida           EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas                    RALPH M. HALL, Texas
FRED UPTON, Michigan                 RICK BOUCHER, Virginia
CLIFF STEARNS, Florida               EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio                FRANK PALLONE, Jr., New Jersey
  Vice Chairman                      SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania     BART GORDON, Tennessee
CHRISTOPHER COX, California          PETER DEUTSCH, Florida
NATHAN DEAL, Georgia                 BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma              ANNA G. ESHOO, California
RICHARD BURR, North Carolina         RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California         BART STUPAK, Michigan
ED WHITFIELD, Kentucky               ELIOT L. ENGEL, New York
GREG GANSKE, Iowa                    TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia             ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma              GENE GREEN, Texas
RICK LAZIO, New York                 KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming               TED STRICKLAND, Ohio
JAMES E. ROGAN, California           DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois               THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico           BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona             LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING, 
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland

                   James E. Derderian, Chief of Staff

                   James D. Barnette, General Counsel

      Reid P.F. Stuntz, Minority Staff Director and Chief Counsel

                                 ______

            Subcommittee on Finance and Hazardous Materials

                    MICHAEL G. OXLEY, Ohio, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     EDOLPHUS TOWNS, New York
  Vice Chairman                      PETER DEUTSCH, Florida
PAUL E. GILLMOR, Ohio                BART STUPAK, Michigan
JAMES C. GREENWOOD, Pennsylvania     ELIOT L. ENGEL, New York
CHRISTOPHER COX, California          DIANA DeGETTE, Colorado
STEVE LARGENT, Oklahoma              THOMAS M. BARRETT, Wisconsin
BRIAN P. BILBRAY, California         BILL LUTHER, Minnesota
GREG GANSKE, Iowa                    LOIS CAPPS, California
RICK LAZIO, New York                 EDWARD J. MARKEY, Massachusetts
JOHN SHIMKUS, Illinois               RALPH M. HALL, Texas
HEATHER WILSON, New Mexico           FRANK PALLONE, Jr., New Jersey
JOHN B. SHADEGG, Arizona             BOBBY L. RUSH, Illinois
VITO FOSSELLA, New York              JOHN D. DINGELL, Michigan,
ROY BLUNT, Missouri                    (Ex Officio)
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
  (Ex Officio)

                                  (ii)


                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Mastel, Greg, Director, Global Economic Policy Project, New 
      America Foundation.........................................    46
    Newhouse, Stephan F., Managing Director, Member of the 
      Management Committee, Morgan Stanley Dean Witter...........     4
    Valko, Cynthia Y., Executive Vice President, New York Life 
      International, Inc.........................................    34
    Watkins, Jesse J., Managing Director, Herbert L. Jamison & 
      Co., LLC, on behalf of the Council of Insurance Agents and 
      Brokers....................................................    37
    Whittaker, James S., Director, International Public Policy, 
      Hewlett-Packard Company....................................     8
    Yingling, Edward L., Deputy Executive Vice President, 
      Executive Director of Government Relations, American 
      Bankers Association........................................    41

                                 (iii)

  

 
    PNTR: OPENING THE WORLD'S BIGGEST POTENTIAL MARKET TO AMERICAN 
                     FINANCIAL SERVICES COMPETITION

                              ----------                              


                         TUESDAY, MAY 23, 2000

                  House of Representatives,
                             Committee on Commerce,
           Subcommittee on Finance and Hazardous Materials,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:40 p.m., in 
room 2123, Rayburn House Office Building, Hon. Michael G. Oxley 
(chairman) presiding.
    Members present: Representatives Oxley, Shimkus, Towns, 
Barrett, Luther, and Rush.
    Staff present: Robert Gordon, majority counsel; Linda 
Dallas Rich, majority counsel; Robert Simison, legislative 
clerk; Shannon Vildostequi, professional staff; Brian 
McCullough, professional staff; Consuela Washington, minority 
counsel; and Bruce Gwinn, minority professional staff.
    Mr. Oxley. The subcommittee will come to order. This week 
we will be called upon to vote on a pivotal issue. Many have 
called the vote on granting permanent normal trade relations 
with China the most significant vote before Congress in 
decades. In casting this vote, we will be choosing whether 
economic integration or economic isolation is most likely to 
foster democracy and capitalism in China. There is much to be 
desired of China's Democratic and economic record. The 
momentous legacy still permeates the country through State 
controls and social and economic life. Nevertheless, the last 
20 years show a pattern of China moving toward a market 
economy.
    Progress has been slow, and at times, frustrating. But the 
fact remains that China has become significantly more 
Democratic and capitalistic than it was in 1978, thanks mostly 
to the reforms of Deng Xiaoping. As a single remaining 
superpower, the United States, in its support of China's WTO 
accession, is critical to integrating China into our global 
free markets and rule of law.
    While a negative vote for PNTR will not prevent China's 
accession to the WTO, it will put the United States businesses 
and workers at an overwhelmingly competitive disadvantage 
versus our competitors in Asia, Latin America and Europe. A 
negative vote means that only the United States will be denied 
the benefits, and protections of China's accession to the WTO 
will confer on all other WTO member countries.
    China's accession to the WTO will facilitate the shift of 
economic power from state-owned enterprises to private sector 
market participants. An economic prosperity increases pressure 
for greater democracy. As Federal Reserve Board chairman Alan 
Greenspan recently observed, history has demonstrated that 
implicit in any removal of power from central planners and 
broadening of market mechanisms, as would occur under WTO, is a 
more general spread of rights to individuals. In fact, we have 
just witnessed this unfolding of democracy in South Korea and 
Taiwan over the last two decades, as they have integrated with 
international free markets. WTO accession will not only benefit 
China, essentially it will translate into greater global 
harmony.
    Free trade is more likely to foster cooperation than 
hostility. As China's global interdependency grows, so will its 
compliance with international protocols. This is precisely why 
Taiwan supports China's accession into the WTO. For WTO 
members, including the United States, China's WTO accession 
means increase access to the world's largest potential market. 
That translates to new opportunities and new jobs for American 
businesses and workers. With an aging population of 1.3 billion 
people, the potential opportunities for American financial 
services and providers are quite dramatic.
    It has been estimated that under the full benefits of 
China's WTO related market opening, our annual exports to that 
country would grow between $8 and $10 billion by the year 2005. 
In fact, the financial services agreement to which China agreed 
in the WTO negotiations represents the largest single trade 
agreement in history. It covers $60 trillion in banking, 
insurance and securities transactions each year. Furthermore, 
this trade agreement represents unilateral gain by American 
workers and businesses. China has offered major concessions in 
return for WTO membership, while the United States has agreed 
only to preserve its existing market access without any new 
concessions.
    For example, China has unilaterally provided for greater 
U.S. market access in telecommunications and financial services 
and has agreed to phaseout numerous import quotas, licensing 
and ownership requirements and geographic restrictions, and 
just last week, the European Union reached agreement with China 
as WTO negotiations gained further concessions. Those benefits 
will accrue to all WTO members, including the United States, if 
and only if we approve PNTR tomorrow.
    In addition to the opportunities a successful PNTR vote 
offers American companies and workers, a successful PNTR vote 
provides our companies and workers with protection in the form 
of the WTO dispute resolution system. The U.S. will be able to 
use that dispute resolution system to protect its rights with 
the support and pressure from 114 other WTO member countries 
who have similar interests in forcing open China's markets.
    We must remember that China's WTO accession does not hinge 
upon this week's PNTR vote. WTO members will reap the benefits 
of China's accession, regardless of the congressional vote on 
PNTR. If the Congress votes for PNTR, we will share in those 
benefits; if we vote against it, we will not. This is a chance 
we should not pass up. Extending PNTR to China is not only good 
economic policy, it is a good way to influence political 
reform. It will be much easier to influence Chinese reform as a 
trading partner than as the only WTO member that refuses to 
extend PNTR to China.
    Today we will hear from representatives of the finance, 
insurance and high-tech industries. They offer a vital 
perspective on how PNTR will impact our Nation's economy, our 
businesses, and our workers. I thank them all for their 
testimony. I look forward to hearing what each of you has to 
say.
    That ends the opening statement by the chair. I am pleased 
now to recognize the gentleman from New York, the ranking 
member, Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman. The 
subcommittee will consider the facts regarding the PNTR for 
China. This hearing is very important to the American public, 
particularly as it relates to the future of millions of 
American jobs. Some say it will improve our financial services 
industry, which is very important to my home State of New York, 
and I know that Ms. Cynthia Valko will testify in support of 
this viewpoint later on behalf of New York Life.
    I would still say if we believe that the export of 
financial services will be enhanced when we are still waiting 
for the government of China to honor its agreements with New 
York Life, Chubb Insurance, and Metropolitan Life, which are 
all New York companies. We also must question China's unfair 
labor practices, disrespect for fundamental human rights, and 
their tax and threats against Taiwan.
    Mr. Chairman, I am concerned about who will enforce the 
agreement between our two countries. I am also concerned about 
which enforcement method will be used to ensure that our 
agreement hold when our companies are not treated fairly by 
China. The most important question, though, I have, Mr. 
Chairman, is who will stop our jobs from going overseas to 
China?
    For all of the above reasons, Mr. Chairman, I am opposed to 
PNTR for China. However, I will be pleased to hear the 
different views of our witnesses this afternoon. Thank you very 
much for holding the hearing.
    Mr. Oxley. I thank the gentleman. His time has expired.
    [Additional statement submitted for the record follows:]
 Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
    On the heels of the comprehensive market access agreement reached 
with China last fall, Congress will be considering legislation this 
week to provide permanent status to normal trade relations with China.
    The agreement that the EU just reached with China last week makes 
China's accession to the WTO a virtual certainty. The question before 
us now is not whether China will join the WTO, but whether the United 
States will enjoy the benefits of the agreement we reached with China 
last fall. And whether the U.S. will have the same market access rights 
as our Japanese and European competitors.
    The Chinese market agreements are sweeping in their scope, and 
present significant new opportunities for American businesses. That 
translates into more good jobs for American workers. The financial 
services agreement alone covers sixty trillion dollars in potential 
transactions each year. With a population of 1.2 billion people and 
very little available in the way of financial services, the Chinese 
market for insurance, banking, and securities is vast. But right now, 
without PNTR, American companies have virtually zero access to China's 
market.
    The concessions to which China agreed in the high tech sector are 
also significant to U.S. companies--both high tech and financial 
companies. The convergence of finance and technology has changed the 
way our own financial markets work today. As the functions of finance 
become increasingly immersed in e-commerce and digital automation, the 
software and hardware that high-tech companies produce is becoming the 
backbone of the financial markets. These dramatic changes improve the 
lives of Americans, as well as consumers abroad.
    There is much work to be done to improve the rights, and the lives, 
of Chinese citizens. I strongly believe that by opening markets between 
the United States and China, we will be better able to achieve those 
goals. I look forward to the testimony of our witnesses today.

    Mr. Oxley. Now we will turn to our distinguished panel. Let 
me introduce them beginning with Mr. Newhouse on my right. Mr. 
Stephan F. Newhouse managing director, member of the management 
committee, Morgan Stanley Dean Witter. Mr. James S. Whittaker, 
director of international public policy from Hewlett-Packard 
Company. Did I see you on C-SPAN this morning?
    Mr. Whittaker. You did.
    Mr. Oxley. Very good. This will be a lot friendlier. Ms. 
Cynthia Y. Valko, executive vice president of New York Life. 
Mr. Jesse J. Watkins, managing director, Herbert L. Jamison & 
Company LLC, from West Orange, New Jersey, on behalf of the 
Council of Insurance Agents and Brokers. Mr. Edward L. 
Yingling, no stranger to this subcommittee, deputy executive 
vice president, executive director of government relations with 
American Bankers Association, and Mr. Greg Mastel, director, 
Global Economic Policy Project, New America Foundation here in 
Washington.
    Gentlemen and lady, thank you all for being with us, and we 
will begin with Mr. Newhouse. Let me ask if you could all try 
to stay to the 5-minute rule. We can facilitate this. I know 
Mr. Newhouse has to return to New York. We would love to be 
able to get through the testimony and then have an opportunity 
for members to ask questions to all of you. With that, I 
recognize Mr. Newhouse.

  STATEMENTS OF STEPHAN F. NEWHOUSE, MANAGING DIRECTOR, MEMBER 
OF THE MANAGEMENT COMMITTEE, MORGAN STANLEY DEAN WITTER; JAMES 
 S. WHITTAKER, DIRECTOR, INTERNATIONAL PUBLIC POLICY, HEWLETT-
 PACKARD COMPANY; CYNTHIA Y. VALKO, EXECUTIVE VICE PRESIDENT, 
 NEW YORK LIFE INTERNATIONAL, INC.; JESSE J. WATKINS, MANAGING 
   DIRECTOR, HERBERT L. JAMISON & CO., LLC, ON BEHALF OF THE 
 COUNCIL OF INSURANCE AGENTS AND BROKERS; EDWARD L. YINGLING, 
    DEPUTY EXECUTIVE VICE PRESIDENT, EXECUTIVE DIRECTOR OF 
 GOVERNMENT RELATIONS, AMERICAN BANKERS ASSOCIATION; AND GREG 
 MASTEL, DIRECTOR, GLOBAL ECONOMIC POLICY PROJECT, NEW AMERICA 
                           FOUNDATION

    Mr. Newhouse. Thank you, Mr. Chairman. Good afternoon. 
Again, thank you, Mr. Chairman, and good afternoon to you and 
members of the subcommittee. My name is Steve Newhouse. I am 
managing director and vice chairman of the Institutional 
Securities and Investment Banking Group at Morgan Stanley Dean 
Witter and Company.
    Morgan Stanley Dean Witter is one of the largest global 
financial services firms and maintains leading market positions 
in each of its three business segments, securities, asset 
management, and credit services. The company provides its 
products and services to a large and diversified group of 
clients and customers, including corporations, governments, 
financial institutions, and individuals.
    We support with enthusiasm your decision to hold these 
hearings to consider the implications for America's financial 
services industry of granting permanent normal trading 
relations to China. We are honored to have been invited to 
testify and to share with you Morgan Stanley Dean Witter's 
views on this timely and critical public policy issue. Without 
a doubt, granting permanent normal trading relations or PNTR to 
China is the single most important international trade issue to 
be considered by the 106th Congress and by this administration.
    Morgan Stanley Dean Witter has over 560 offices operating 
in 25 countries through the world. We have been active in China 
for almost two decades. We have offices in Beijing, Shanghai 
and Hong Kong. In 1995, Morgan Stanley Dean Witter became the 
first foreign investment bank to participate in a domestic 
joint venture investment bank in China. So we know firsthand 
that the continued opening of the foreign markets to U.S. goods 
and services has been and continues to be an essential driver 
of this country's economic growth and success.
    China, the world's fifth largest market and the U.S.'s 
fourth largest trading partner, stands ready to join the 
biggest block of trading nations in the world, the World Trade 
Organization. In order to do so, it has agreed to open its 
markets wider than ever before, making unprecedented unilateral 
concessions that will dramatically increase U.S. exports of 
goods and services. Both President Jiang Zemin, and more 
particularly the Premier Zhu Rongji, have put their personal 
and political credibility on the line for WTO membership. They 
have done so in the belief that economic openness and reform 
are the only answers to the economic challenges faced by China 
over the next decade.
    This commitment to gain WTO membership was underscored last 
Friday by additional concessions made by the Chinese to reach 
agreement with the European Union on the issue of China's 
entrance into the WTO. Parenthetically, that historic agreement 
with a group of trading partners, which is, in the aggregate, 
larger than the United States, makes an optimal bilateral trade 
relationship between China and that country even more 
imperative.
    We believe the United States must not miss this historic 
opportunity to embrace the commitments China has made and to 
welcome it fully into the world trading system on a most 
favored nation basis. The historic agreement reached by U.S. 
and Chinese negotiators in November 1999 is, as you are aware, 
both deep and broad-based, covering both the goods and services 
sectors. For the securities industry, the commitments from 
China, including minority ownership in local securities firms 
and asset management firms, creates a strong platform for 
continued development of China's capital markets. The 
commitments also importantly include grandfathering all of our 
existing activities and investments in that market place.
    The opportunities for financial services firms in China are 
enormous and will become even greater once China joins the WTO. 
For example, over the next decade, the financial resources 
required to be invested in improvements to China's 
communications and transportation infrastructure and energy-
related capital equipment are estimated to be over $1 trillion. 
The intermediation of both the domestic and international 
capital flows required to fill these requirements is one of the 
major business objectives of the next decade for U.S. financial 
services firms as well as for our competitors around the globe.
    Herein lies the challenge: For if Congress fails to grant 
PNTR to China, when China enters the WTO, American firms will 
be deprived of the benefits of China's commitments in all 
sectors, even while other countries reap those benefits. With 
PNTR, U.S. firms, including financial services firms, will be 
able to enter and expand in China on the same terms as our 
international competitors.
    At its core, bringing China into the WTO increases China's 
ties with the international community. And when U.S. companies 
establish operations in China, they bring with them the best 
practices that they have observed around the world. Our own 
experience as a partner in China's first domestic joint venture 
investment bank, China International Capital Corporation, 
provides us with a unique perspective on China's development 
and with a unique opportunity to assist in the development of 
China's economy and its capital markets. We are engaged in a 
number of dialogs in China across a wide variety of businesses, 
energy, technology, telecommunications, and banking, to name a 
few. We have been profoundly impressed with the high level of 
progress China has made and by its consistent commitment to 
reforming its economy.
    We believe economic stability in China during the Asian 
financial crisis significantly contributed to the turnaround in 
the regional economies and contributed to the global economic 
recovery. We believe China is deeply committed to developing 
its capital markets and to becoming an even greater participant 
in the global economy. We believe that the trade agreement 
reached by the U.S. and Chinese negotiators in November is a 
demonstration of that commitment. Finally, we believe the 
agreement will play a significant role in advancing the 
restructuring that is the linchpin of economic reform in China.
    Let me close with a personal observation. In my 25 years in 
international finance, I have spent a great deal of time 
working with emerging economies and emerging democracies. I 
have become convinced that the economic and financial reform 
and political and social reform are inextricably tied together. 
They are two sides of the same coin. Once a country accepts as 
an imperative the need to join the global economy, it has to 
make an implicit decision about a number of non-economic 
issues. It must embrace the rule of law or its trading partners 
will decline to enter into long-term commercial agreements with 
it. It must open its lines of communication and make 
transparent its disclosures about itself or capital will not 
flow across its borders and it must educate its people with the 
breadth and depth not needed in a closed economy, if they are 
to compete in a global one.
    We urge you to support permanent normal trade relationship 
status with China because we believe it is in the best interest 
of the United States, the global economies and the world 
trading system.
    Thank you very much for this opportunity to testify.
    [The prepared statement of Stephan F. Newhouse follows:]
  Prepared Statement of Stephan F. Newhouse, Managing Director & Vice 
               Chairman, Morgan Stanley Dean Witter & Co.
    Mr. Chairman and Members of the Committee. Good afternoon. I am 
Stephan Newhouse, Managing Director and Vice Chairman of Institutional 
Securities and Investment Banking Group of Morgan Stanley Dean Witter & 
Co.
    Morgan Stanley Dean Witter & Co. (the ``Company'') is a global 
financial services firm that maintains leading market positions in each 
of its three business segments--Securities, Asset Management and Credit 
Services. The Company provides its products and services to a large and 
diversified group of clients and customers, including corporations, 
governments, financial institutions and individuals.
    We support with enthusiasm your decision to hold these hearings to 
consider the implications for America's financial services industry of 
granting Permanent Normal Trading Relations to China. We are honored to 
have been invited to testify and to share with you Morgan Stanley Dean 
Witter's views on this timely and critical public policy issue. Without 
a doubt, granting Permanent Normal Trading Relations--or PNTR--to China 
is the single most important international trade issue to be considered 
by the 106th Congress and by this Administration.
    Morgan Stanley Dean Witter has over 560 offices operating in 25 
countries. We have been active in China for almost two decades. We have 
offices in Beijing, Shanghai and Hong Kong. In 1995, Morgan Stanley 
Dean Witter became the first investment bank firm to participate in a 
domestic joint venture investment bank in China. We know that the 
continued opening of foreign markets to U.S. goods and services has 
been and continues to be an essential driver of this country's economic 
growth and success.
    China, the world's fifth largest market and the U.S.'s fourth 
largest trading partner, stands ready to join the biggest block of 
trading nations in the world--the World Trade Organization. In order to 
do so, it has agreed to open its markets wider than ever before, making 
unprecedented unilateral concessions that will dramatically increase 
U.S. exports of goods and services. Both President Jiang Zemin and more 
particularly the Premier Zhu Rongi, have both put their personal and 
political credibility on the line for WTO membership. They have done so 
in the belief that economic openness and reform are the only answers to 
the economic challenges faced by China over the next decade. This 
commitment to gain WTO membership was underscored last Friday, by 
additional concessions made by the Chinese to reach agreement with the 
European Union on the issue of China's entrance into the WTO. 
Parenthetically, that historic agreement with a group of trading 
partners, which is in the aggregate larger than the United States, 
makes an optimal bilateral trade relationship between China and this 
country even more imperative. We believe the United States must not 
miss this historic opportunity to embrace the commitments China has 
made and to welcome it fully into the world trading system on a most 
favored nation basis.
    The historic agreement reached by U.S. and Chinese negotiators in 
November 1999 is, as you are aware, both deep and broad-based, covering 
both the goods and the services sectors. For the securities industry 
the commitments from China--including minority ownership in local 
securities firms and asset management firms--create a strong platform 
for continued development of China's capital markets. The commitments 
also, importantly, include grandfathering of existing activities and 
investments.
    The opportunities for financial services firms in China are 
enormous and will become even greater once China joins the WTO. For 
example, over the next decade, the financial resources required to be 
invested in improvements to China's communications and transportation 
infrastructure and energy-related capital equipment are estimated to be 
over $1 trillion. The intermediation of both the domestic and 
international capital flows required to fill these requirements is one 
of the major business objectives of the next decade for U.S. financial 
services firms as well for our competitors around the globe.
    Herein lies the challenge. For if Congress fails to grant PNTR to 
China, when China enters the WTO, American firms will be deprived of 
the benefits of China's commitments in all sectors, even while other 
countries reap those benefits. With PNTR, U.S. firms, including 
financial services firms, will be able to enter--and expand--in China 
on the same terms as our international competitors.
    At its core, bringing China into the WTO increases China's ties 
with the international community. And when U.S. companies establish 
operations in China they bring with them the best practices that they 
observe around the world.
    Our own experience as a partner in China's first domestic joint 
venture investment bank, China International Capital Corporation 
Limited (CICC), provides us with a unique perspective on China's 
development and with a unique opportunity to assist in the development 
of China's economy and its capital markets. We are engaged in a number 
of dialogues in China across a wide variety of businesses--energy, 
technology, telecommunications and banking, to name a few. We have been 
profoundly impressed with the high level of progress made by China and 
by its consistent commitment to reforming its economy.
    We believe economic stability in China during the Asian financial 
crisis significantly contributed to the turnaround in the regional 
economies and contributed to the global economic recovery. We believe 
China is deeply committed to developing its capital markets and to 
becoming an even greater participant in the global economy. We believe 
the trade agreement reached by US and Chinese negotiators in November 
is a demonstration of that commitment. Finally we believe the agreement 
will play a significant role in advancing the restructuring that is the 
linchpin of economic reform in China.
    Let me close with a personal observation. In my 25 years in 
international finance, I have spent a great deal of time working with 
emerging economies and emerging democracies, I have become convinced 
that economic and financial reform and political and social reform are 
inextricably tied together. They are two-sides of the same coin. Once a 
country accepts as an imperative the need to join the global economy it 
has made an implicit decision about a number of noneconomic issues. It 
must embrace the rule of law or its trading partners will decline to 
enter into long term commercial agreements. It must open its lines of 
communication and make transparent its disclosures about itself or 
capital will not flow across its borders. And, it must educate its 
people with a breadth and depth not needed in a closed economy if they 
are to compete in an open global one.
    We urge you to support Permanent Normal Trade Relations Status for 
China because we believe it is in the best interests of the United 
States, the global economy and the world trading system.
    Thank you again for this opportunity to testify. I will be pleased 
to answer whatever questions you have or to provide additional 
information for the hearing record.

    Mr. Oxley. Thank you.
    Mr. Whittaker?

                 STATEMENT OF JAMES S. WHITTAKER

    Mr. Whittaker. Chairman Oxley, members of the subcommittee, 
good afternoon. My name is Jim Whittaker and I am director of 
international public policy with Hewlett Packard Company. I am 
testifying before you today as chairman of the U.S. High-Tech 
Industry Coalition on China. The Coalition is comprised of 13 
high technology trade associations, which represents U.S. 
manufacturers of semiconductors, computers, electronics 
software, telecommunications equipment as well as U.S. service 
providers and Internet companies.
    U.S. China bilateral WTO accession agreement that 
Ambassador Barshefsky negotiated is a solid win for the U.S. 
high-tech industry. Under that agreement, China is committed to 
eliminate tariff and non-tariff barriers to trade, remove 
regulatory hurdles and investment restrictions on foreign 
firms. As a result, U.S. high-tech industries are poised to 
expand sales and exports to this rapidly growing market to 
increase high wage American jobs, and to maintain our 
technological leadership and competitiveness in international 
markets.
    However, in order for industry to reap these benefits, 
congressional approval of PNTR is necessary. For this reason, 
we believe that establishing permanent normal trade relations 
with China is the most important vote that Congress will make 
in support of American high-tech industry this year.
    A few quick words about our industry. The high-tech sector 
is a strong and important contributor to the U.S. economy. It 
is the largest manufacturing sector in the U.S. employing 5 
million Americans last year. It is our Nation's top 
manufacturing exporter with 25 percent of total exports, and 
its employees earn 82 percent higher than the average private 
sector worker.
    Over the next few years, China is expected to become one of 
the largest high technology markets in the world. According to 
International Data Corporation figures, annual growth rates for 
many segments of the high-tech sector will be 20 to 40 percent 
annually. Indeed, China's semiconductor and cell phone markets 
are projected to be the world's second largest by 2003, with a 
PC market projected to be number two in the world next year. 
More than 20 million Chinese will be on-line next year, and we 
expect that to go as high as 35 million in the following year.
    Given these opportunities and the strong terms of the 
bilateral agreement, China's WTO accession will provide 
significant opportunities and benefits to the high-tech 
industry, including increased exports and related jobs.
    I would like to just take a few minutes to highlight a few 
of the changes that will help us the most. One, China has 
agreed to adopt the information technology agreement, which 
eliminates tariffs altogether on an array of IT and telecom 
products by the year 2005.
    Two, China will, for the first time, permit American and 
other foreign companies to directly import and export products. 
It will also, for the first time, agree to permit us to 
distribute directly our products and provide after-sales 
service repair and maintenance.
    Three, China will immediately become subject to the TRIPs 
agreement on intellectual property protection. We believe that 
the TRIPs agreement is the best vehicle available to us to 
combat piracy of intellectual property and to support improved 
IT by Chinese's governmental authorities.
    Four, China has agreed to implement the TRIMS agreement 
upon accession. This means that it will not condition 
investment approvals, import licenses, or any other import 
approval on performance requirements of any kind, including 
local content requirements, technology transfer, or 
requirements to conduct R&D in China.
    Five, China has agreed that it will ensure that state-owned 
and state-invested enterprises will make purchases and sales 
based solely on commercial considerations providing U.S. firms 
with the opportunity to compete on nondiscriminatory terms and 
conditions.
    Six, China agreed, for the first time, to open its telecom 
market to foreign service providers. In the important area of 
value-added services, including Internet services, China has 
agreed to allow up to 50 percent foreign ownership 2 years 
after accession. In addition, China agreed to sign on to the 
WTO BTA agreement and committed to a set of regulatory 
principals contained in the so-called reference paper to the 
BTA.
    And finally, in the area of antidumping, the bilateral 
agreement enables the U.S. to maintain strong protections 
against dumping for 15 years. Since China's economy is not 
fully market-oriented yet, it is critical that the United 
States maintain its ability to utilize its existing non-market 
economy and methodology in the application of antidumping laws.
    In conclusion, the American high-tech industry has been the 
forefront of U.S. economic expansion and technological 
leadership. Ambassador Barshefsky was able to obtain an 
historic market opening package. We would hate to see these 
advantages to our foreign competition. Granting China PNTR 
coupled with significant market reforms in China embodied in 
its WTO commitments will ensure our industry is able to 
participate fully in this critical market.
    Along with many of America's leaders across the political 
spectrum, we believe that engagement, not isolation, will lead 
to improved economic and social conditions in China. The terms 
for China's accession in the WTO will help China to continue on 
its path of economic reform, which we believe will lead to 
positive changes in many areas. Already, American high-tech 
businesses are having a positive impact on China by bringing 
our best practices in the areas of human resource, 
environmental and business management to China.
    For these reasons, we support the establishment of PNTR 
with China and are urging Congress to pass H.R. 4444.
    Thank you, Mr. Chairman.
    [The prepared statement of James S. Whittaker follows:]
   Prepared Statement of James S. Whittaker, Director, Imternational 
  Public Policy, Hewlett-Packard Company, on Behalf of U.S. High-Tech 
                      Industry Coalition on China
    Chairman Oxley, members of the Subcommittee, good afternoon. My 
name is Jim Whittaker, and I am Director of International Public Policy 
with Hewlett-Packard Company. I have the honor of testifying before you 
today as the Chairman of the U.S. High-Tech Industry Coalition on 
China.
    The High-Tech Coalition on China is comprised of thirteen high-
technology trade associations, which work together on our highest 
priority public policy issue this year--China's accession to the World 
Trade Organization (WTO). The coalition represents U.S. manufacturers 
of semiconductors and semiconductor equipment and materials, computers, 
electronics, software, and telecommunications equipment, as well as 
U.S. service providers and Internet companies. A list of coalition 
members is attached.
    The U.S.-China bilateral WTO accession agreement reached on 
November 15, 1999 is a solid win for U.S. high-technology industries. 
In that agreement, China committed to comprehensive reform of its 
economy, and to eliminate tariff and non-tariff barriers to trade, 
regulatory requirements and investment restrictions. As a result of 
this historic step, U.S. high-tech industries are poised to expand 
exports to this rapidly growing market, increase high-wage American 
jobs, and continue our technological leadership and competitiveness in 
international markets.
    For our industry to reap the benefits of these market opening 
concessions that China has made, however, Congressional approval of 
permanent normal trade relations (PNTR) with China is necessary.

      IMPACT OF U.S. HIGH-TECHNOLOGY INDUSTRY ON THE U.S. ECONOMY

    The high-tech sector is a strong and important contributor to the 
U.S. economy. According to the American Electronics Association data 
from Cyberstates 4.0, the high-tech industry is the largest 
manufacturing sector in the United States, employing 5 million 
Americans in 1999. This was twice as many as in auto manufacturing and 
services, and far exceeds the one million workers in the chemical 
manufacturing industry. The high-tech industry added over 1.2 million 
jobs to the U.S. economy between 1993 and 1999, a 32 percent increase.
    In addition, the high-tech industry also provides its employees 
with salaries 82 percent higher than the average private sector wage. 
In 1998, the average high-tech wage was nearly $58,000 a year, while 
the average private sector wage was almost $32,000. While high-tech 
wages increased 29 percent, private sector wages grew only 8 percent 
between 1993 and 1998.
    Federal Reserve Chairman, Alan Greenspan, recently reported that 
the high-tech sector has been responsible for nearly half of U.S. 
domestic GDP growth since 1994. Please see the attached chart.
    In 1998, American high technology companies lead all other 
industries in private-sector expenditures on research and development 
(R&D). High-tech companies performed $55 billion in R&D--a 63 percent 
more than in 1993. Total industrial R&D amounted to $145 billion in 
1998, a 53 percent increase since 1993.
    The high-tech industry is our nation's the top manufacturing 
exporter. In 1999, the high-tech sector exported $181 billion. High-
tech exports comprised 25 percent of total U.S. exports in 1999. Based 
on U.S. Commerce Department data, China represented the 14th largest 
high-tech export market in 1999, with high-tech exports exceeding $3.3 
billion--a 121 percent increase since 1993.

                  OPPORTUNITIES IN THE CHINESE MARKET

    In the next decade, China is expected to become one of the largest 
markets in the world. According to International Data Corporation 
figures, annual growth rates for many high-tech products are increasing 
20 to 40 percent. The following provides an overview of the Chinese 
market for some of the key high-tech sectors.
Semiconductors and Semiconductor Equipment and Materials
    The current semiconductor market in China is estimated to be up to 
$8 billion per year. Some analysts expect it to become the third 
largest semiconductor market by 2001 (ahead of Germany, but behind 
Japan and the United States) and the second largest by 2010. The 
current semiconductor equipment and materials market in China is 
estimated to be over $1 billion per year and is projected to reach 
almost $4 billion in 2003.
Computers
    The market in China for computers is expanding rapidly, averaging 
37 percent growth per year for the past three years. The Chinese market 
will continue to grow--International Data Corporation predicts that by 
2001, China will be the second largest PC market after the US and 
Japan. More than 120 million Chinese citizens plan on buying a computer 
in the next two years.
Software
    China's software market is growing at 28 percent a year. High 
growth rates will continue as Internet use in China continues to climb 
and piracy rates decrease. The Internet is projected to reach an 
estimated 20 million people in China by the end of 2000.
Telecommunications
    China's market for cellular telecommunications is growing at a 
tremendous rate. By the end of 1999, China boasted approximately 40 
million cellular subscribers, bringing it closer to its target of 
becoming the world's second largest cellular market with approximately 
60 million subscribers. Only the cellular market of the United States 
is projected to be larger than China's by the end of this year. With 
the market potential for 3rd generation mobile communications also 
taken into consideration, China promises market opportunities for years 
to come.
Internet
    More than 9 million Chinese are already on-line, and in the next 
few years China is expected to become one of the largest Internet 
markets in the world. This growing market offers tremendous commercial 
opportunities to U.S. firms. By participating in this market, U.S. 
Internet service and content providers can make sure that vital social 
services--such as education, communications and telemedicine--are 
delivered across the Internet. We can also lay the groundwork for e-
commerce and the economic growth, productivity and jobs it will 
generate.

                   BENEFITS OF CHINA'S WTO ACCESSION

    As the China accession negotiations began in earnest, the High-Tech 
Industry Coalition on China set forth its objectives for our U.S. 
negotiators. The package that they have come back with meets those 
objectives.
    Under the terms of the November 1999 bilateral agreement, China's 
WTO accession would provide significant opportunities and benefits to 
U.S. high-tech industries. A summary of some of these key benefits 
follows.
     Information Technology Agreement: China has agreed to 
adopt the Information Technology Agreement (ITA), which eliminates 
tariffs on products such as computers, telecommunications equipment, 
semiconductors, semiconductor manufacturing equipment, computer 
equipment and other high technology products. China has agreed to 
eliminate nearly all of its IT tariffs (which currently average 13%) by 
2003, and the remainder by 2005.
    The benefits to U.S. high-tech industries are clear: duty-free 
entry of U.S. products should result in increased exports, sales and 
market share of U.S. products. In addition, American high-tech 
companies producing in China will have access to lower cost inputs. 
Finally, China's adoption of the ITA will help to combat smuggling, 
since the incentive for the creation a black market to circumvent 
tariff barriers will be removed.
     Trading and Distribution Rights: China will, for the first 
time, permit American and other foreign companies to directly import 
and export products--so-called trading rights. China has also, for the 
first time, agreed to permit American and other foreign companies to 
directly distribute their products, including wholesale and retail and 
after-sale service, repair, maintenance, and transport.
    For American high-tech industries, the right to provide direct 
service is essential to control quality and ensure the authenticity of 
the spare parts being delivered. Indeed, in other important overseas 
markets, American firms increasingly are using quality service as a 
strategic weapon against foreign competitors to win customers and grow 
market share. The inability to deal directly with end-users is a 
particular problem in the semiconductor industry, where the design and 
development of application-specific chips requires extensive contact 
between semiconductor producers and the ultimate end-users of the 
chips.
    Since China has agreed that all restrictions on trading and 
distribution rights will be eliminated three years after accession for 
most sectors, the benefit will be the ability for our industries to 
quickly excel in China's rapidly growing, competitive information 
technology market.
     Investment Restrictions: China has agreed to implement the 
WTO Trade-Related Investment Measures (TRIMS) Agreement upon accession. 
This means China will eliminate and cease enforcing trade and foreign 
exchange balancing requirements. China will also eliminate and cease 
enforcing local content requirements, and refuse to enforce contracts 
imposing these requirements. China will guarantee that laws or 
regulations to the transfer of technology or other know-how will be 
consistent with WTO obligations to protect intellectual property rights 
and trade-related investment measures.
    China has also agreed that, upon accession, it will not condition 
investment approvals, import licenses, or any other import approval 
process on performance requirements of any kind, including: local 
content requirements, offsets, transfer of technology, or requirements 
to conduct research and development in China.
    These provisions will help protect American firms against efforts 
by some Chinese officials to force the transfer of U.S. commercial 
technology to Chinese firms, which has been a significant issue for 
U.S. high-tech companies seeking market access or the right to invest 
in China.
     State-Owned and State-Invested Enterprises: China has 
agreed that it will ensure that state-owned and state-invested 
enterprises will make purchases and sales based solely on commercial 
considerations, providing U.S. firms with the opportunity to compete 
for sales and purchases on non-discriminatory terms and conditions. 
This is an important point for U.S. high-tech industries, since state-
owned and state-invested enterprises currently control a significant 
share of domestic and international trade in commercial high-tech goods 
in China.
     Telecommunications Services: Included in China's 
concessions in the telecom sector, China agreed to open its telecom 
market to foreign service providers according to the following 
schedule:

 Phase-in of foreign participation in paging/value-added 
        services in two years, allowing up to 50 percent ownership by 
        foreign investors;
 Phase-in of foreign participation in mobile/cellular services 
        over five years, allowing up to 49 percent ownership by foreign 
        investors;
 Phase-in of foreign participation in fixed line/international 
        long distance services over six years, allowing up to 49 
        percent ownership by foreign investors.
    In addition, China agreed to sign onto the WTO Agreement on Basic 
Telecommunications Services (BTA). The BTA commits participating 
countries to open their telecom services markets. China has committed 
to a set of regulatory principles contained in the so-called Reference 
Paper to the BTA, and has therefore made specific commitments to open 
up its telecom services markets. These include providing access to the 
public telecom networks of incumbent suppliers under non-discriminatory 
terms and at cost-oriented rates. China also agreed to technology-
neutral scheduling, meaning technology choices are made as commercial 
decisions, rather than government mandate.
    The Ministry of Information Industry (MII) is preparing China for 
competition from foreign service providers after China's accession to 
the WTO. To meet this goal, China's second telecom carrier, China 
Unicom, is slated to buildout an additional national cellular network 
in 2000 based on Code Division Multiple Access (CDMA) technology. This 
development is very positive for U.S. telecom equipment manufacturers, 
as they are the world's leading suppliers of this technology. In 
addition, China introduced a new service provider into the market in 
1999, China Netcom (CNC). This new company will focus on the provision 
of Internet Protocol (IP) telephony, allowing more efficient use of 
bandwidth on the Chinese networks.
     Intellectual Property: By joining the WTO, China will 
become subject to the Agreement on Trade Related Aspects of 
Intellectual Property (TRIPs). Moreover, China has agreed to be subject 
to all TRIPs obligations upon accession, without any transition period. 
The TRIPs agreement is the best vehicle available to high-tech 
industries to combat piracy of intellectual property and to create a 
healthy environment for the development of information technology in 
China.
    Industry experts estimate that 95 percent of the business 
applications software used in China was pirated in 1998 (the last year 
for which data is available), depriving the software industry of nearly 
$1.2 billion in licensing revenue. If China were to bring its legal 
system into compliance with the standards in the TRIPs Agreement, the 
U.S. software industry should be much more able to enforce its rights 
in Chinese courts and administrative tribunals. However, the United 
States will be unable to ensure Chinese compliance with the TRIPs 
Agreement absent the grant of PNTR to China.
     Antidumping: The bilateral agreement enables the United 
States to maintain strong protections against dumping. Since China's 
economy is not fully market-oriented, it is critical that the United 
States maintains its ability to utilize its existing non-market economy 
methodology in the application of U.S. antidumping laws. The United 
States and China have agreed that the United States may maintain this 
current methodology for 15 years after the date of China's accession to 
the WTO.

  PNTR IS NECESSARY FOR THE U.S. TO BENEFIT FROM CHINA'S WTO ACCESSION

    The United States must approve permanent normal trade relations 
(PNTR) status for China in order for U.S. firms to receive the benefits 
of China's accession to the World Trade Organization (WTO). If China 
accedes to the WTO and the U.S. Congress does not pass legislation 
granting China PNTR, it is expected that the Administration would 
invoke its right of ``non-application'' under Article XIII of the WTO 
Agreement, as has been done with respect to other countries subject to 
the Jackson-Vanik Amendment. This would be done at the time China 
formally accedes to the WTO. Even though China would become a WTO 
member, the United States would not treat China as a WTO member. 
Moreover, China would not be required to treat the United States as a 
WTO member.
    Without PNTR, an historic opportunity would be jeopardized for U.S. 
companies and their workers. The terms of the landmark U.S.-China 
bilateral agreement concluded in November and all other terms of 
China's WTO accession package would not apply to U.S.-China trade and 
investment, except to the extent that existing bilateral agreements 
make the WTO agreement terms binding between the two countries.
    While the United States would receive some modest benefits, such as 
tariff cuts, under the terms of the 1980 bilateral agreement between 
the United States and China, many of the hard-fought concessions by the 
Chinese are not covered by this agreement. For example, China's 
agreement to eliminate forced technology transfer and investment 
requirements would not be extended to the United States. Nothing in the 
1980 agreement requires the Chinese government to ensure that its 
state-owned and state-invested enterprises make their purchases solely 
on commercial terms, while China agreed to this commitment in the WTO 
accession agreement. Without PNTR, U.S. companies would not benefit 
from China's agreements to allow distribution rights for foreign 
companies and to allow investment in telecom and Internet services. 
Additionally, the United States would not have access to the WTO 
dispute settlement process to enforce intellectual property and other 
rights in the case of any noncompliance by China.

                 ANNUAL NTR EXTENSION IS NOT SUFFICIENT

    Article I of the General Agreement on Tariffs and Trade (GATT) 
requires that WTO members provide ``unconditional'' MFN treatment to 
other WTO members. This principle is a cornerstone of the WTO and an 
open global trading system.
    Some have argued that the United States can meet this unconditional 
MFN obligation, and thus be entitled to China's WTO concessions, as 
long as Congress renews NTR on a continual basis. But under the 
Jackson-Vanik Amendment to the Trade Act of 1974, China's MFN status is 
tied to annual Presidential findings or waivers regarding freedom of 
emigration, which can be overridden by Congress through a joint 
resolution of disapproval. Continued annual renewal of China's NTR 
status would violate WTO rules because it would be conditional (on 
freedom of emigration per the Jackson-Vanik Amendment) and 
discriminatory (requiring procedures for China that are not applied to 
other WTO members). Approval for permanent NTR is necessary to meet the 
WTO's unconditional MFN obligation.

                               CONCLUSION

    The American high-tech industry has been at the forefront of U.S. 
economic expansion and technological leadership. Granting China PNTR, 
coupled with the significant market reforms in China embodied in its 
WTO commitments, will enable our industry to expand its market presence 
and business opportunities in this critical market.
    Moreover, access to American commercial information technology 
enables people worldwide to improve business efficiency across all 
sectors, enhance educational and social opportunities, and connect with 
one another. Improved market access for U.S. commercial information 
technology in China will help to advance economic and social reform in 
China. A timely congressional vote granting PNTR to China is a critical 
and necessary step toward securing this goal.

               U.S. High-Tech Industry Coalition on China

    American Electronics Association; Business Software Alliance; 
Computer Systems Policy Project; Computing Technology Industry 
Association; Consumer Electronics Association; Electronic Industries 
Alliance; Information Technology Industry Council; National Venture 
Capital Association; Semiconductor Industry Association; Semiconductor 
Equipment & Materials International; Software & Information Industry 
Association; Telecommunications Industry Association; and United States 
Information Technology Office.
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    Mr. Oxley. Thank you.
    Ms. Valko.

                  STATEMENT OF CYNTHIA Y. VALKO

    Ms. Valko. Thank you, Mr. Chairman. I am grateful for the 
opportunity to offer New York Life International's perspective 
on the implications of China's impending membership into the 
WTO. As chair of the International Life Insurance Committee of 
the American Council of Life Insurers, I work closely with the 
colleagues throughout our industry to promote a China agreement 
that addresses our most pressing commercial priorities in that 
market. We have much to be enthusiastic about in the agreement 
negotiated by U.S. Trade Representative Barshefsky's team.
    At the outset, I would like to cite a few key examples of 
how the WTO agreement really offers a whole new basis for our 
industry's access in the China market. The provisions I am 
about to summarize represent the results of the WTO agreement 
negotiated between the U.S. and China, which we have studied in 
detail. The EU concluded its own agreement with China last week 
and while details are still emerging, we are hearing that that 
agreement may have achieved some additional enhancements for 
life insurance, particularly in terms of phase-in periods for a 
number of Chinese commitments.
    Because China's final WTO package will be based on the best 
offers on the table, the benefits to the U.S. can only get 
better as a result of any enhancements achieved as part of the 
EU agreement. Today, the ability of our company and many others 
to obtain a license to sell life insurance in China is governed 
by a process that is unpredictable, non-transparent and 
frequently politicized. Under the WTO agreement, China has 
committed to granting licenses based on clear-cut factors 
without easily manipulated economic needs, tests or 
quantitative limits on licenses. Today, American life insurers 
face geographic restrictions determining which Chinese cities 
are open for business to their activities.
    Under the WTO agreement, these restrictions will be 
eliminated fully within 3 years of China's accession, and a 
specified list of cities will be fully opened even sooner. 
Today, foreign life insurance firms operating in China are not 
allowed to offer the full range in financial products. Under 
the WTO agreement, companies like ours will be able to sell 
health products within 4 years of China's accession and pension 
group and annuity products within 5 years. Today, foreign 
insurers in China are limited in their form of ownership and 
restricted in their choice of joint venture partners.
    Under the WTO agreement, we will be able to select a 
Chinese partner of our choice immediately upon China's WTO 
accession with a provision for 50 percent share in equity.
    In short, these commitments represent a clear statement of 
the political will of China's leaders to open China's financial 
services markets to greater competition. In essence, China's 
political leaders are giving the country's regulators and 
bureaucrats some extremely significant marching orders and 
that, in the final analysis, is what really matters in this 
agreement. The significance of China's commitments is 
particularly striking in light of the tremendous potential of 
the Chinese market for life insurance. Although China has more 
than one fifth of the world's population, it currently accounts 
for less than .2 of a percent of the world's life insurance 
market. Clearly, there is an immense room to grow.
    The agreement offers us the possibility to participate in 
that growth. China's market liberalization steps will 
accelerate a process of awareness about life insurance. As 
China's huge population ages, the sheer number of elderly is 
stretching the traditional system beyond the breaking point. 
Recognizing this, individual Chinese are increasingly moving to 
assure their long-term social security by investing in life 
insurance and pension products. The WTO agreement will 
accelerate that trend.
    So the terms of the agreement are clearly good for U.S. 
providers of life insurance and related products, but the 
financial services dimensions of the agreement will also 
contribute to a process of positive societal change in China. 
We know from experience that competitive and transparently 
regulated financial services systems are at the very core of 
the entrepreneurship and economic freedom. New York Life very 
much looks forward to being a part of that process.
    Mr. Chairman, China's participation in the World Trade 
Organization is truly a momentous development. By approving 
PNTR, Congress can send a strong signal that it recognizes 
those benefits, for the citizens of both China and the United 
States, of China's decision to play by global trade rules. 
Thank you very much for your attention and for inviting me here 
today.
    [The prepared statement of Cynthia Y. Valko follows:]
 Prepared Statement of Cynthia Y. Valko, Executive Vice President, New 
   York Life International, Inc. and Chairperson, International Life 
         Insurance Committee, American Council of Life Insurers
    Mr. Chairman, members of the Committee, I'm grateful for the 
opportunity to offer New York Life International's perspective on 
China's impending membership in the WTO, and the implications for an 
American life insurance company like ours. As Chair of the 
International Life Insurance Committee of the American Council of Life 
Insurers (ACLI), I've worked closely with colleagues throughout our 
industry to promote a China agreement that addresses our most pressing 
commercial priorities in that market. I'm glad to report that we have 
much to be enthusiastic about in the far-reaching agreement negotiated 
by U.S. Trade Representative Charlene Barshefsky's team.
    In the life insurance and pension products sector, the agreement 
truly shifts the basis for foreign companies' participation in the 
Chinese market. I'd like to cite a few key examples of how the 
agreement negotiated by the United States will improve our prospects in 
China.
    I should note that last week's agreement between the European Union 
and China appears to encompass a number of elements which improve upon 
the deal negotiated by the U.S. team, particularly with respect to 
accelerated phase-ins of Chinese market-opening commitments. Details on 
the EU-China deal are still trickling out, so I will focus today on the 
provisions of the U.S. agreement, which we've had a chance to study. 
But I want to stress that our deal can only get better because of what 
the EU has negotiated. Because China's final WTO package will be based 
on the ``best'' offers on the table, American insurance companies will 
benefit from any enhancements that the European Union has in fact 
achieved.
    Today, the ability of our company and many others to obtain a 
license to sell life insurance in China is governed by a regulatory 
process that is unpredictable, non-transparent, and frequently 
politicized. Under the WTO agreement, China has committed to granting 
licenses based on clear-cut qualification factors, and without easily-
manipulated economic ``needs tests'' or quantitative limits on 
licenses.
    Today, American life insurers face geographic restrictions 
determining which Chinese cities are ``open for business'' to their 
activities. Under the WTO agreement, these access restrictions will be 
eliminated fully within three years of China's accession, and a 
specified list of cities will be fully opened even before that period 
expires.
    Today, foreign life insurance firms operating in China are not 
allowed to offer the full range of financial products. Under the WTO 
agreement, companies like ours will be able to sell health products 
within four years of China's accession, and pension, group, and 
annuities products within five years.
    Today, foreign insurers in China are limited in their form of 
ownership and restricted in their choice of joint venture partner. 
Under the WTO agreement, we'll be able to select a Chinese partner of 
our choice immediately upon China's WTO accession, with a provision for 
a 50 percent share in equity.
    China's commitments in the life insurance sector represent a clear 
statement of the political will of China's leaders to open China's 
financial services market to greater competition. In the process, these 
reforms will significantly enhance the ability of China's citizens to 
control their financial destinies. By sending this political signal, 
and by committing China to fundamental reforms through binding WTO 
obligations, China's leaders are giving the country's regulators and 
bureaucrats some extremely significant marching orders. And that, in 
the final analysis, is what really matters in this agreement.
    The significance of these commitments is particularly striking when 
one considers the future of the Chinese market for life insurance, 
pension products and other personal financial services. Although China 
has more than one-fifth of the world's population, it currently 
accounts for less than two-tenths of a percent of the world's life 
insurance market. Even though the Chinese have one of the highest 
individual savings rates in Asia, China spends less on all forms of 
insurance than 28 U.S. states.
    This disparity between China's size and its currently 
underdeveloped insurance market can be summed up in a single word: 
potential. The market-opening commitments contained in China's WTO 
agreement are likely to lead to volume increases that exceed 300 
percent--more than $4.8 billion.
    China's market liberalization steps will accelerate a process of 
awareness about life insurance and other personal financial management 
tools that is already underway in China, by virtue of changing 
attitudes about personal finance. As we have seen so clearly in the 
Eastern European region, doubts about the solvency of state-run pension 
systems are increasing the demand for privately-held pensions, 
annuities and life insurance.
    In China, this dynamic is particularly relevant in connection with 
emerging strains on the traditional rural system of old age support. As 
China's huge population ages, the sheer number of elderly will stretch 
the traditional rural system beyond the breaking point. Recognizing 
this, individual Chinese are increasingly moving to assure their long-
term social security by investing in life insurance, pension products, 
and other personal financial instruments. The WTO agreement will 
accelerate that trend, and will allow U.S. companies to participate 
more fully in it.
    So the terms of the agreement are clearly very good for U.S. 
providers of life insurance and related financial products. But I think 
it is important to stress that the financial services dimensions of the 
agreement will also contribute to a process of positive societal change 
in China.
    As members of the Committee are well aware, one of the key debating 
points regarding PNTR centers around the degree to which China's 
membership in the WTO, and its associated economic and trade 
liberalization commitments, will advance the development of a more 
stable and democratic China. We have to be careful in this argument. I 
think it is unwise to portray WTO membership as a sort of ``silver 
bullet'' that will rapidly transform Chinese society in a way that 
addresses many U.S. policy concerns. There are no quick fixes to these 
problems, and we should not pretend that the WTO will provide such a 
fix.
    But I do believe that U.S. goals can be achieved most effectively 
and most quickly by granting China PNTR status, bringing it into the 
WTO and integrating its economy more deeply with that of the rest of 
the world. Moreover, I'm convinced that the financial services 
dimensions of China's WTO package speak eloquently to the power of WTO 
accession to foster positive economic and social change in China.
    We have seen over and over in the ``newly industrializing'' 
countries that competitive, dynamic, and transparently-regulated 
financial services systems are at the very core of entrepreneurship and 
economic freedom. A mature and competitive financial services market 
creates stable pools for investment in infrastructure, housing, and 
other critical needs. Such a market also provides people with a larger 
set of options about managing their financial destinies and long-term 
well-being. I am convinced that the Chinese negotiators knew exactly 
what they were doing in offering such far-reaching ``concessions'' in 
the financial services area, because those very ``concessions'' are in 
fact critical to the development of strong social safety nets and 
individual prosperity in China.
    The investments that millions of Chinese make in an expanding array 
of personal financial instruments will be translated into a stronger 
financial foundation for the country as a whole. And just as the 
insurance industry in the United States has enabled some of this 
country's most significant investments in infrastructure and productive 
enterprises, the expansion of China's financial services market will 
reinforce the entrepreneurial spirit that is already at work creating a 
``new China.'' New York Life very much looks forward to being part of 
that process.
    The bottom line is that China's participation in the World Trade 
Organization is a truly momentous development in that country's 
evolution towards greater economic reform and political freedoms. 
Congress, by approving PNTR, can send a strong signal that it 
recognizes the benefits--for the citizens of both China and the United 
States--of China's decision to play by global trade rules.
    Thank you for your attention, and for inviting me to appear today.

    Mr. Oxley. Thank you.
    Mr. Watkins?

                  STATEMENT OF JESSE J. WATKINS

    Mr. Watkins. I am here as managing director of my company 
which is in New York, now that is New York and New Jersey. I am 
representing the Council of Insurance Agents and Brokers, which 
represent the Nation's largest commercial agents and brokers 
for property and casualty insurance. I am also a director of 
the U.S. China Foundation, which seeks to foster greater 
economic and cultural relationships with our neighbors in the 
east.
    At the outset, I want to thank Chairman Oxley and 
Congressman Towns for the great support you have given to us in 
our quest to open Chinese markets to foreign brokers. As you 
know, insurance brokerage dropped off of the table during early 
negotiations with the United States. In the Oxley-Towns letter 
to the Chinese Ambassador in Washington back in March, you 
strongly urged the Chinese Government to include this sector in 
the final Chinese agreement, which was reached with the 
European Union.
    I was in Hamburg, Germany last week at a meeting of the 
International Insurance Brokers Association, and I am delighted 
to report that the Chinese did concede to allow insurance 
brokers into their agreement. Now that the EU has obtained this 
new important concession from the Chinese, all brokers, 
including Americans, will be beneficiary. The leadership of 
this subcommittee has made an important difference in achieving 
this victory and we appreciate it. Even without this 
concession, though, our association strongly believes that 
China should be part of the WTO. In the past year, I personally 
have had an opportunity to travel to China to discuss the need 
for promoting access for international insurance brokerages to 
their market.
    Unlike some of the other firms, my work has not been 
focused singly on building a presence of my firm in the Chinese 
marketplace. Instead, I have been working with the Chinese to 
bring professionals to the U.S. to train them here so that they 
can build an effective industry in China.
    Ultimately, we hope to build the same kind of cooperative 
environment with the Chinese that we have built with Europe. We 
stand to benefit to the extent that the Chinese ultimately will 
have needs for property casualty insurance products that need 
to be serviced both here in the United States and those 
products which our clients need to be serviced locally in 
China. I am pleased to join the delegation from the U.S. China 
Foundation to begin this effort to extend economic and cultural 
ties to China. The extent of my activities have been largely 
educational, and I believe strongly we must encourage trade 
with China.
    It is a simple issue. The Chinese are isolated, they can't 
be educated. Active engagement in China in the trade's sphere 
is an essential link to bringing economic prosperity and 
economic freedom to China. Along the way, the prospects are 
limitless for American firms to engage in these exciting 
opportunities. It is difficult to argue that China's entry into 
the mainstream of the world trading system would not result in 
many positive benefits for the Chinese people. Distribution of 
the economic rewards throughout a society lead to greater 
political stability and ultimately a more Democratic process. 
History has shown that a country is more likely to move toward 
democracy when it has its own self-interest.
    Membership in the WTO is clearly in China's interest today. 
We are suggesting that China's inclusion can lead to greater 
cooperation, and as a result, our ability to influence human 
rights and other crucial issues will increase significantly. 
This I know from personal contact.
    We cannot ignore the benefits to American business. China 
is one fifth of the world's population, and an on-tap potential 
for U.S. businesses, many of which have already established 
offices in China. The financial service industry is the crest 
of the Chinese expansion. The three pillars of banking, 
insurance and securities are essential if that expansion is to 
continue, but those sectors must have access to the market and 
be able to operate in a competitive environment with clear 
rules and regulations.
    The proposed structure would provide this to U.S. 
businesses. We are joining in the view of the World Federation 
of Insurance Intermediaries who are meeting today in Lisbon, in 
which the Council is also participating. If your vote this week 
fails, our efforts to change China in a positive way will 
cease. Again, Mr. Chairman, thank you for your work in advance 
of the cause and we appreciate the opportunity to testify 
today.
    [The prepared statement of Jesse J. Watkins follows:]
 Prepared Statement of Jesse J. Watkins, Managing Director, Herbert L. 
                           Jamison & Co. LLC
    This statement is submitted on behalf of the members of The Council 
of Insurance Agents & Brokers (``The Council''). The Council is a 
national trade association founded in 1913 as the National Association 
of Casualty and Surety Agents. Since 1913, The Council of Insurance 
Agents & Brokers has provided industry leadership while representing 
the largest, most productive and most profitable commercial insurance 
agencies and brokerage firms in the U.S., and around the globe. Council 
members operate in over 3,000 locations and place nearly 80%--well over 
$100 billion--of the U.S. commercial property/casualty premiums. In 
addition, Council members specialize in a wide range of insurance 
products and risk management services for business, industry, 
government and the public. Council members, who operate nationally and 
internationally, also administer billions of dollars in employee 
benefits.
    Good afternoon, Mr. Chairman and members of the committee. I am 
Jesse Watkins, managing director of Herbert L. Jamison & Co. LLC, 
headquartered in West Orange, NJ, with offices in New York. I have been 
an insurance broker at Jamison since 1968, and I have been engaged in 
all aspects of our firm's business, which includes a full array of 
property/casualty products and employee benefits, with a focus on 
professional liability. Like many other insurance agencies and 
brokerage firms, our business is conducted on a national scale; 
additionally, we place business in international markets, and likewise 
receive the business of many companies that are headquartered offshore. 
I also serve as a member of the Board of Directors of the Council of 
Insurance Agents and Brokers.
    At the outset, the Council would like to thank Chairman Oxley and 
Congressman Towns for the great support that they have given to us in 
our quest to open Chinese markets to foreign brokers. In their March 28 
letter to the Chinese Ambassador Li Zhaoxing, Chairman Oxley and 
Congressman Towns expressed the importance of intermediaries. ``We 
believe it is critically important that intermediaries be included 
along China's commitments for entry to the World Trade Organization,'' 
they said. The letter went on to urge the Chinese government to include 
this sector in the final EU/China agreement.
    The Council is very appreciative of these efforts and has made 
access to the Chinese insurance markets one of its highest priorities. 
Indeed, in the past year, I personally have had an opportunity to 
travel to China on two occasions to discuss the need for promoting 
access for international insurance brokerages to their markets. Unlike 
some other firms, my work has not been focused singularly on building a 
presence for my firm in the Chinese marketplace. Instead, I'm working 
to bring Chinese professionals to the U.S. and to help train them to 
work effectively in this industry. Ultimately, we hope to build the 
same kind of cooperative environment with the Chinese that we have 
already built with European firms. We stand to benefit to the extent 
that the Chinese ultimately will have needs for property/casualty 
insurance products that need to be serviced in the United States.
    I've been pleased to join with delegations from the U.S.-China 
Foundation to begin this effort to extend economic and cultural ties to 
China. To the extent that my activities have been largely educational 
to date, I have strong views in support of China's entry into the World 
Trade Organization. It is a simple issue. If the Chinese are isolated, 
they can't be educated. Active engagement of China in the trade sphere 
is an essential link in bringing economic prosperity and economic 
freedom to the Chinese. Along the way, the prospects are limitless for 
American firms to engage in these exciting opportunities.
    Last week, I attended meetings of international insurance brokers 
in Europe, and I'm very excited to bring the news that the European 
Union successfully has persuaded the Chinese to include insurance 
brokerage as a part of their negotiated agreement on WTO entry. As you 
know, insurance brokerage ``dropped off the table'' during earlier 
negotiations with the United States. Now that the EU has obtained this 
new and important concession from the Chinese, all brokers--including 
American-based firms--will be the beneficiaries.
    As noted at the outset, the crucial assistance of Chairman Oxley 
and Congressman Towns helped to make this Chinese concession a reality. 
Both of these leaders wrote to the Chinese ambassador in Washington, 
strongly urging the Chinese government to include intermediaries in the 
agreement with the EU. This pressure was also brought to the attention 
of our European counterparts, and helped create the environment in 
which insurance brokerage remained a priority of negotiators. We are 
extremely grateful for this important assistance, which came at a 
perfect time in the negotiations.
    Even had this development not occurred, however, it is important to 
note that we would have strongly supported China's entry into the WTO. 
It has long been recognized that liberalization of trade is critical to 
economic growth and stability. When markets are opened and allowed to 
operate freely, society benefits from the prosperity created by a 
vigorous economy. Businesses flourish, jobs are created and living 
standards rise.
    It is difficult to argue that China's entry into the mainstream of 
the world trading system would not result in many of these positive 
benefits for the Chinese people. Furthermore, distribution of the 
economic rewards throughout a society can lead to greater political 
stability and ultimately a more democratic process. Most Americans, I 
think, agree that such stability can be most readily accomplished 
through an open and competitive marketplace.
    We are not suggesting that we should ignore China's many problems--
the most visible of which are human rights issues. And we are not 
suggesting that by mainstreaming China that it would transform itself 
into a thriving democratic society overnight. Rather, history has shown 
that a country is more likely to move towards democracy when it is in 
its interest to do so. And membership in the WTO is clearly in China's 
interest today. We are suggesting that China's inclusion in the WTO can 
lead to greater cooperation and as a result our ability to influence 
human rights and other critical issues will increase significantly.
    Nor can we ignore the economic benefits to American businesses. 
China has one-fifth of the world's population and the untapped 
potential of that market is vast. U.S. businesses are expanding at a 
rapid pace and many are establishing offices in China, offering 
services and products to the Chinese people and local businesses that 
are beginning to flourish in many areas of the country.
    The financial services industry is on the crest of the Chinese 
expansion. The three pillars of a competitive market--banking, 
insurance and securities--are essential if that expansion is to 
continue. But those sectors must have access to the market and be able 
to operate in a competitive environment with clear rules and 
regulations that are not subject to the arbitrary whims of the 
government. The WTO structure provides stability for US businesses 
operating abroad.
    With the financial sector, a liberalized insurance market can play 
a key role in enhancing such growth. The lowering of trade barriers to 
enhance the operation of foreign-based insurance agents and brokers is 
integral to this process.
    When barriers to foreign professional insurance intermediaries are 
lowered, benefits flow to all parts of the economy. One of the primary 
beneficiaries is the insurance consumer. A healthy insurance 
distribution system provides consumers with a greater array of choice 
in insurance products and services. This in turn, allows commerce to 
flourish and the economy to grow.
    In the 1950s, the manufacturing and service industries of the 
Western industrialized economies began to globalize and their insurance 
service providers began to globalize alongside their customers. 
Initially, the geographic expansion of insurance carriers and 
intermediaries was undertaken to ensure that the new risks associated 
with their clients' geographic expansion were identified and managed 
effectively. This first stage of globalization not only improved the 
lot of those engaged in cross-border endeavors, but it also provided 
the host countries with the economic benefits of goods and services, 
now manufactured locally, along with opportunities for local vendors to 
form partnerships with foreign-based concerns and the creation of new 
jobs to staff a modernizing economy.
    The second stage in this process, from which much of the world 
today is deriving benefits, involves providing insurance and risk 
management services to indigenous or local businesses, especially those 
enterprises poised for growth and expansion beyond the borders of their 
home countries.
    The process in which international intermediaries cultivate the 
business of home-grown companies is a crucial one for the China market. 
If unimpeded, this process transforms the relationship between 
developed and developing countries from one of producer-to-market to 
the more egalitarian one of competing producers. As the developing 
economies take shape, openness to foreign insurance intermediaries can 
make the difference between a country being included or excluded from 
the world economy. The benefits of global trading are not possible 
without liberalized trade in both insurance underwriting and 
distribution.
    The need for insurance is clear and becomes more so with the 
increasing complexity of modern life. Without protection against the 
risk of expanding into unfamiliar territory, there would be few risk-
takers and correspondingly little economic growth. Insurance earns its 
place in the business world by its ability to make certain risks worth 
taking, i.e. by transferring some of it to a third party formed 
expressly to assume a portion of a company's overall risk burden.
    The contribution of insurance intermediaries may be less widely 
recognized, but is no less significant. The indispensable function of 
agents and brokers is to guide companies in this search for the most 
cost-effective way of managing risk. Agents and brokers help companies 
find as much protection as they need, at the lowest price possible and 
the best terms available.
    Their contribution includes not just transferring risk to insurers, 
but evaluating and implementing other means of funding for potential 
losses (such as captive insurance companies and other forms of self-
insurance), providing services aimed at preventing losses in the first 
place (safety and other loss control programs), and providing services 
to minimize the cost of losses that do occur.
    International intermediaries do not simply procure products and 
services; linking their insurance and financial expertise with their 
expertise in client industries, they are true market innovators. 
Because of their close relationship with clients, they can often 
identify the need for a new product and may even create a suitable 
product before the underwriters themselves can do so.
    The natural development from pure insurance intermediaries to 
partners with clients in ``enterprise risk-management'' has been 
evolving. The process in countries with newly-privatized economies or 
newly-liberalized financial sectors is bound to be much faster as 
lessons learned over the years can be applied as needed.
    The foreign offices of international intermediaries are largely 
staffed and often headed by local inhabitants, whose knowledge of the 
local legal and economic conditions, as well as social and cultural 
mores, is indispensable. If you look at the overall geographic spread 
of intermediary networks, along with the make-up of their professional 
service teams, its clear that intermediation as a service, beyond 
simple placement of insurance, has become a worldwide commodity--a 
staple of modern economic development serving the interests of all 
involved.
    What is of benefit to the client is the combination of local 
service and international access offered. Through an international 
network, intermediaries can get the best possible deal for clients 
because of their ability to tap into the worldwide insurance 
marketplace. The more markets intermediaries can access for risk 
capital, the better it is for the buyer. Intermediaries can ``shop 
around'' to get clients the most protection for the least cost.
    Intermediaries also bring to bear considerable experience and 
expertise that helps clients in selecting markets that are both 
financially strong and well capitalized. Since the goal is not just 
growth, but safe growth for clients, the ability to draw on information 
about markets around the globe is key. Partnerships between local and 
foreign insurers, or local and foreign intermediaries, can instantly 
give the domestic insurance community critical international links.
    When intermediary operations are sufficiently liberalized, those 
producing goods and services can take advantage of the more competitive 
financial atmosphere, making the most of their risk management budgets. 
The effect of such a combination is to further propel economic growth 
in all quarters.
    Finally, liberalization of insurance intermediaries is a necessary 
complement to similar action in the insurance and reinsurance arenas. 
We recognize the importance of the US-China agreement reached last 
November to American interests and the financial services industry. It 
provides broad access to the Chinese market for banks, insurers and 
reinsurers. The initial failure of the US-China agreement to include 
insurance intermediaries was disappointing, because an offer made by 
the Chinese last April would have eliminated many of the geographic and 
other restrictions on foreign insurance intermediaries. Under current 
rules, intermediaries can only obtain a general business license in 
China, which places stringent restrictions on what they can do and 
where they can operate. Furthermore, they can be subjected to the whims 
of the government at any time. What is given can be taken away. It is 
therefore important that intermediaries have the same rights and 
protections that others in the financial services sector will receive 
once China accedes to the WTO. Had the Chinese not made the concession 
last week to allow intermediaries access to their markets, China would 
have denied insurance consumers the full benefits of a liberalized 
insurance marketplace.
    We are very pleased that the Chinese are now demonstrating their 
commitment to full market liberalization by providing intermediaries 
with the same level of access granted to insurance companies. Insurance 
companies and intermediaries work closely together and it is difficult 
to imagine a viable system that allows insurers broad access to 
consumers, but denies their agents and brokers the ability to 
distribute those products.
    We are joined in this view by the World Federation of Insurance 
Intermediaries, an organization representing over 500,000 professional 
insurance agents and brokers around the world, which is meeting this 
week in Lisbon with representatives from our organization. If the vote 
in the House of Representatives fails this week, it will be a severe 
blow to all of the participants in this international organization.
    We understand the economic interests at hand in this debate and the 
value of bringing China into the fold of the trading fraternity. 
China's market provides enormous economic opportunities for US 
businesses and opens China to the benefits of goods and services that 
can only lead to a higher standard of living, greater internal 
stability and cooperation. The Council is on record for supporting 
market liberalization of economies around the world and will continue 
to do so. Again, Chairman Oxley, we appreciate your and Congressman 
Towns' continued support.
    We appreciate the opportunity to express our comments today.

    Mr. Oxley. Thank you.
    Mr. Yingling.

                 STATEMENT OF EDWARD L. YINGLING

    Mr. Yingling. I want to thank you, Mr. Chairman, for 
holding this very important hearing. Our economy and our 
financial institutions are the envy of the world, but to 
sustain our growth, we must continue to look for opportunities 
to open markets to U.S. firms. Providing China with PNTR status 
is just such an opportunity. It will help to assure that China 
will adhere to international economic rules, treat businesses 
operating in the country fairly, and provide American 
businesses, particularly small and medium-size firms, greater 
access to the world's largest emerging market.
    I would like to emphasize three points. First, granting 
PNTR status to China will promote stronger economic growth. 
Chinese firms already have open access to U.S. markets, but up 
until now, U.S. firms have found it difficult to reach Chinese 
consumers. With 1.2 billion people in China and GDP growth 
exceeding 10 percent per year over the last decade, the 
potential export market for U.S. companies is extraordinary. 
Reducing barriers to trade and opening markets will increase 
U.S. exports, create new jobs to support this increase, and 
help sustain our current economic expansion.
    Mr. Chairman, your State of Ohio is a good example. As you 
know, Ohio is already a significant exporter of goods and 
services to China. According to one recent study, Ohio exports 
to China in 1998 exceeded $500 million. The possibility for 
further exports from Ohio and all other States, particularly 
given the infrastructure needs that China faces, are 
substantial.
    A second point granting PNTR will create new opportunities 
for banks and financial service providers. The financial 
services industry is one area in which the U.S. leads the 
world. U.S. banking, securities and insurance firms are the 
most innovative and strongest in the world. Opening foreign 
markets to financial services enables us to leverage these 
advantages leading to more U.S. jobs.
    In addition, and this is an important point, a local 
presence in China by U.S. financial firms will help other U.S. 
firms take advantage of new opportunities. PNTR will mean a 
major presence by U.S. financial institutions on the ground in 
China and U.S. financial institutions, say, for a small 
business in Ohio, can help pave the way. They can provide the 
advice on how you get into that new market, how you get the 
financing, how you get through the export controls and the 
import controls, and that type of thing. If we give that up to 
financial institutions from other countries, their first 
priority is going to be to help small and medium-size firms in 
their country, not U.S. firms.
    So having U.S. financial firms on the ground in China is a 
big advantage to all U.S. firms. A special word is in order 
about agriculture. The ABA has many members which are small 
community banks in agricultural areas. We have studied, in 
depth, the challenges that small rural communities face. To 
ensure the survival of these communities, we must solidify 
increased agricultural exports. We saw the other side of that 
coin a couple of years ago when Asia had its economic problems 
and the agriculture sector went right into the tank. Passage of 
PNTR for China will help small rural communities and their 
community banks.
    Our third and final point is granting PNTR will keep the 
U.S. on a level competitive playing field with our European and 
Asian competitors. Today, there are over 54 foreign banks with 
a presence in China. Delaying adoption of PNTR will harm U.S. 
banks as European and Japanese banks seize the opportunity to 
gain market share at U.S. banks' expense. Such a situation will 
not only hurt U.S. financial firms in China, it will give our 
financial services competitors a stronger, broader base from 
which to compete throughout the world.
    It doesn't just hurt us in China. It will hurt us 
throughout the world. In other words, failure to pass PNTR for 
China will hurt our competitive position, not just in China, 
but everywhere, because our competitors will have a stronger 
worldwide base than we will.
    Thank you for the opportunity to present the views of the 
ABA.
    [The prepared statement of Edward L. Yingling follows:]
  Prepared Statement of Edward L. Yingling on Behalf of the American 
                          Bankers Association
    Mr. Chairman, I am Edward Yingling, Deputy Executive Vice President 
and Executive Director of Government Relations for the American Bankers 
Association (ABA). ABA brings together all elements of the banking 
community to best represent the interests of this rapidly changing 
industry. Its membership--which includes community, regional, and money 
center banks and holding companies, as well as savings institutions, 
trust companies, and savings banks--makes ABA the largest banking trade 
association in the country.
    I want to thank you, Mr. Chairman, for holding this very important 
hearing. The financial services industry in the United States has been 
central to the economic expansion that we have enjoyed over the last 
decade. Our economy and our financial institutions are the envy of the 
world. To sustain our preeminence, we must continue to look for 
opportunities to open markets to U.S. firms. Providing China with 
permanent normal trade relation (PNTR) status is just such an 
opportunity. It will help to assure that China will adhere to the 
international economic rules, will treat businesses operating in the 
country fairly, and will provide American businesses--particularly 
small- and medium-sized firms--greater access to the world's largest 
emerging market. Not only will it stimulate economic growth in the 
U.S., but it will certainly boost economic growth in China and create a 
base for economic and social reform.
    In my statement today, I would like to emphasize three points:

 Granting PNTR will promote stronger economic growth in both 
        countries;
 Granting PNTR will create new opportunities for banks and 
        financial service providers; and
 Granting PNTR will keep the U.S. on a level competitive 
        playing field with our European and Asian competitors.
    I would like to touch briefly on each of these points in my 
statement today.

GRANTING PNTR WILL PROMOTE STRONGER ECONOMIC GROWTH IN THE U.S. AND CHINA

    Granting PNTR is in the best interests of both the U.S. and China. 
Chinese firms already have open access to US markets, but up until now 
U.S. firms have found it very difficult, in some cases impossible, to 
reach Chinese consumers. The historic trade agreement reached in 
November of last year, which paved the way to China's entry in to the 
World Trade Organization (WTO), was an important step in opening 
Chinese markets to U.S. goods and services.
    The potential economic benefits are striking. With 1.2 billion 
people and GDP growth exceeding 10 percent per year over the past 
decade, the potential export market for U.S. companies is extraordinary 
(see Figure 1). In spite of current restrictions, China has become 
America's fourth largest trading partner, with total trade exceeding 
$95 billion in 1999 (see Figure 2). The Congressional Research Service 
projects that U.S. exports to China will grow as much as $13 billion 
annually over the next 5 years, supporting as many as 200,000 jobs in 
the U.S.
    The reduction in tariffs will help both large and small firms. For 
example, Chinese tariffs on industrial and agricultural goods will fall 
by 50 percent or more over five years. This will substantially boost 
the potential market for U.S. exports. In fact, the United States 
Department of Agriculture estimates that improved access to China will 
increase agricultural exports by $2 billion per year by 2005 and will 
account for over one-third of US agricultural exports over the next 
decade. Moreover, China has committed to eliminating agricultural 
export and domestic subsidies, which have displaced U.S. exports in 
other foreign markets.
[GRAPHIC] [TIFF OMITTED] T4766.020

    The elimination of tariffs by 2005 on computers, semi-conductors 
and other high-tech products will also significantly boost the 
potential exports for the U.S. high-tech sector. There is no doubt that 
this sector has been a driving force behind the economic performance in 
the U.S. over the last five years. Exports to China from this sector 
have already grown rapidly over this period. The opening of new 
markets, under fair competitive rules, will help sustain this 
competitive advantage of U.S. firms.
    Mr. Chairman, your state of Ohio is already a significant exporter 
of goods and services to China and can serve as an example of what is 
at stake. According to the Massachusetts Institute of Social and 
Economic Research, Ohio exports to China in 1998 exceeded $260 million. 
Including goods from the U.S. going through Hong Kong to China, as well 
as exports from other states that pass to China through Ohio ports, 
adds another $256 million to the Ohio export total, according to K.C. 
Fung and Lawrence Lau.1 The possibilities for further 
exports from key Ohio industries such as industrial machinery, 
computers, instruments, fabricated metal products, electronic and 
electric equipment, and chemicals are substantial--particularly given 
the new infrastructure requirements that will face China over the next 
decade.
---------------------------------------------------------------------------
    \1\ Fung, K.C. and Lau, Lawrence, ``New Estimates of the United 
States-China Bilateral Trade Balances,'' March 1999, pg 9. It is 
estimated that over 40 percent of U.S. goods exported to Hong Kong are 
then shipped to China.
---------------------------------------------------------------------------
    Importantly, China is also reducing non-tariff barriers. For 
example, U.S. exporters will be able to reach Chinese consumers 
directly, and provide services in ways that could not have been done 
before. By increasing competition and eliminating the required use of 
middlemen, Chinese consumers will enjoy lower-priced and higher-quality 
goods and services.
    The net effect of reducing barriers to trade and opening markets is 
that exports from the U.S. and elsewhere will increase substantially. 
China's trade now accounts for 3 percent of world trade. Given the 
potential size of the market, there is plenty of opportunity for 
companies around the world to market and sell products to Chinese 
consumers. The result will be increased economic growth in China, as 
well as economic growth and new jobs in the exporting countries.

  GRANTING PNTR WILL CREATE NEW OPPORTUNITIES FOR BANKS AND FINANCIAL
                           SERVICE PROVIDERS

    The financial services sector is a key component of U.S. economic 
growth and development (see Figure 3). The opening of China's markets 
to financial firms presents tremendous opportunities for U.S. banks and 
financial firms and will add to U.S. economic growth.
    In this context, it is important to stress that the arena of 
financial services is one in which the United State clearly leads the 
world. In banking, securities, insurance, and other aspects of 
financial services, U.S. firms are generally regarded as the most 
innovative and the strongest. Opening foreign markets to our financial 
services firms enables us to expand these advantages, which of course 
lead, to more jobs in the U.S. In addition, to the degree U.S. 
financial institutions can set up local offices and come to know local 
economies, other U.S. firms will benefit, as the financial firms can 
provide advice on how to compete in those local economies. In other 
words, as China opens up, competitive strength of U.S. financial 
service companies will help promote not only financial service jobs in 
the U.S., but jobs in other sectors as well.
    Due to market restrictions, investment and lending in China has 
been limited. For example, direct investment in China lags far behind 
other countries (see Figure 4). According to Goldman Sachs, China's 
domestic banking market is $1.1 trillion in deposits and $1 trillion in 
loans. As of June 1999, deposits and loans had grown 20 percent and 16 
percent, respectively. 
[GRAPHIC] [TIFF OMITTED] T4766.021

    U.S. banks will have full market access by 2005 after China's 
accession into the WTO. This means that U.S. banks will be allowed to 
engage in all transactions that Chinese banks conduct today, including 
engaging in local-currency transactions with Chinese companies (within 
two years) and retail banking transactions with Chinese consumers 
(within five years). Moreover, all limits on geographic expansion 
within China will be lifted within five years. China will allow foreign 
institutions to establish direct branches or be allowed 100 percent 
ownership in subsidiaries without any numerical or geographic 
limitations. This is on par with what OECD countries have agreed to and 
is superior to commitments by most other developing countries. Foreign 
financial firms will also be allowed to acquire equity stakes (with 
limitations) in Chinese fund management companies and underwrite 
domestic securities.
    Products that U.S. banks would likely offer include foreign 
exchange, hedging, local-currency-based project finance and interbank 
transactions, syndicated lending, and cash management for large 
corporations. Chinese financial consumers will also benefit as consumer 
credit markets become more efficient and more readily available. One of 
the largest financing needs will be for infrastructure and 
telecommunication improvements, estimated to be $1 trillion. China's 
private and public sectors cannot finance this alone; foreign sources 
of funding will be required.
    Equally important is that the best practices of U.S. banking 
institutions will be exported to China. This will lead to more 
effective risk management, transparency of financial balance sheets and 
appropriate allocation and utilization of capital and credit.
    Changes will also occur in insurance and securities markets as 
others on this panel will testify. Relative to the size of the economy, 
capital markets are small. This fact does suggest substantial growth 
potential. However, major steps will be required to complete a modern 
regulatory and legal framework.
    Not only are there direct benefits from providing financial 
products and services in China, but there are many indirect benefits 
from U.S. banks as well. For example, U.S. banks provide export 
credits, trade finance and foreign exchange products to U.S. companies. 
They also lend to exporting companies such as the agricultural sector. 
In fact, it has been estimated that 80 percent of all exports to those 
with in China are produced by small to mid-sized firms. These 
companies, of course, rely on local bank financing for production and 
inventory control.
    A special word is in order about agriculture. The ABA has many 
members which are small community banks in agricultural areas. We have 
studied in depth the challenges small rural communities face. Many 
believe the most important thing that could be done to ensure the 
survival of such communities is to solidify and increase agricultural 
exports. Clearly we saw the impact of the Asian economic crisis a few 
years ago on these communities. China is obviously a huge market for 
U.S. agriculture. As is the case with financial services, agriculture 
is an arena in which U.S. producers shine. Passage of PNTR for China 
will help small rural communities and their community banks.
    There are of course many challenges ahead, and the difficulties 
they present should not be underestimated. These include the promotion 
of private sector firms, the need to clean up bad loans and enhance 
competition among banks, and the need to develop well-functioning 
financial markets. As China's economic wealth increases, however, these 
changes should occur, as will the demand for more financial services.
 granting pntr will keep the u.s. on a level competitive playing field 
                with our european and asian competitors
    It is important to keep in mind that China will receive the 
benefits of greater trade regardless of whether the U.S. takes this 
important step. China's accession to the WTO is near certain. The 
critical question, therefore, is whether U.S. banking and financial 
services firms (as well as firms in other sectors) will be allowed to 
benefit from the opening of China's markets.
    As indicated above, China will face major infrastructure, 
telecommunications and energy needs requiring significant foreign 
capital and financing. Modernizing its economy requires a significant 
capital investment. With the PNTR, U.S. banking institutions will be 
able to provide new products and services. But the competition for 
these markets will be intense. Today there are over 50 foreign banks 
with a presence in China. Delaying adoption of PNTR will harm U.S. 
banks as European and Japanese banks seize the opportunity to gain 
market share at U.S. banks expense. Such a situation would not only 
hurt U.S. firms in China, it would give our competitors a stronger, 
broader base from which to compete throughout the world. U.S. financial 
services companies must be allowed to maintain our preeminent status by 
opening markets for our products and services.

    Mr. Oxley. Thank you.
    And our final witness, Mr. Mastel.

                    STATEMENT OF GREG MASTEL

    Mr. Mastel. Thank you, Mr. Chairman. My name is Greg 
Mastel. I am the director of the Global Economic Policy Project 
of the New America Foundation. I am happy to be here today 
before the subcommittee. I want to testify today regarding the 
granting of PNTR status to China and China's membership in the 
World Trade Organization. I plan to focus my remarks on the WTO 
accession agreement with China and its record of keeping trade 
commitments and the ability of the WTO to cope with China.
    On paper, many have mentioned the WTO accession agreement 
negotiated between the United States and China has many 
positive features. The recent bilateral WTO accession agreement 
between the EU and China in which all WTO members will benefit 
appears to further strengthen the ultimate WTO accession terms 
with China. However, the key question remains: Will China make 
good on its promises? Ultimately, the WTO is a trade agreement. 
It has a detailed process for enforcing compliance, but as the 
ongoing conflict between the United States and Europe on 
several agricultural issues demonstrates, that process has a 
number of flaws and implementation of promises and dispute 
settlement panel decisions is far from automatic.
    The best indicator of China's willingness and ability to 
implement the promises it has made in the WTO context is its 
record in implementing other trade agreements. In the last 
decade, the United States and China have concluded a number of 
major trade agreements covering topics from protection of 
intellectual property to textile imports.
    A detailed record of China's compliance with these 
agreements is included in a recent article I wrote for the 
Weekly Standard, which I asked to be included in the record of 
the hearing. The conclusion that can easily be drawn from the 
Chinese trade history is that China has a poor record of 
keeping its trade promises that is has made to the United 
States. Every major trade agreement the United States and China 
have struck has been dogged by repeated instances of Chinese 
noncompliance, and at times, open violation of the terms of the 
agreement.
    China's supporters often point to several understandings 
struck on intellectual property as evidence of China's 
willingness to keep its trade commitments. Without question, 
the United States has invested a much greater effort in 
enforcing agreements on this topic than any other. In most 
areas, the United States has not seriously challenged China's 
agreement violations. With regard to intellectual property 
piracy, however, the United States has formally threatened to 
impose trade sanctions on China on at least three occasions to 
force China to live up to its bilateral agreements on the 
topic.
    As a result of this pressure, there is evidence that China 
has made an effort to curb piracy. As any informed observer 
would concede, however, piracy of intellectual property, often 
directly involving Chinese Government ministries, the People's 
Liberation Army, or the relatives of China's leaders, remains a 
widespread problem in China. In fact, industry estimates of the 
piracy problem in China are that piracy rates are over 90 
percent in most categories, and that total losses are actually 
higher than they were in 1995 when the Clinton administration 
began intense efforts to enforce the agreement. Moreover, the 
progress that has been made is the direct result of repeated 
threats of sanctions by the United States. Without these 
threats, China is likely to have made little progress in 
fulfilling its negotiated promises.
    Often observers seem to assume that the WTO will 
automatically be able to improve China's compliance with its 
trade agreements. There is simply no basis for this assumption. 
The WTO has the potential strengths over bilateral 
understandings of obligating China to meet a wider array of 
commitments and bringing some multilateral pressure to bear on 
China to reform its trade policies.
    Unquestionably, these are positive features, but the WTO is 
not well suited to policing China. The WTO is the ultimate 
rules-based, market-oriented organization. The fundamental 
problem is that China is neither a rules-based country nor a 
fully market-oriented economy, the ultimate square peg in a 
round hole.
    Given the arbitrary and non-transparent manner in which 
Chinese ministries often make trade policy, it is difficult to 
even determine exactly what Chinese trade policy is in some 
areas, let alone actually win a WTO dispute settlement panel 
finding against China. As a result, the WTO is likely to suffer 
from exactly the same type of compliance problems in China that 
have plagued bilateral trade agreements, and the United States 
will have given up its option to impose bilateral trade 
sanctions on China to enforce the agreements. At some point 
China, should become a WTO member.
    In a perfect world, it may be wise to keep China outside 
the WTO for a few years to allow its legal system to mature and 
the economic reform process to advance further. But policy is 
not made in a perfect world. I am cautiously willing to support 
China's WTO's membership, provided the United States invest 
time and effort to enforce the agreement. Congress could play 
an important role in ensuring the necessary time and energy is 
devoted to enforcement.
    In general, the Congress has taken more interest in 
enforcing trade governments than various administrations. In 
the case of the Clinton administration, much critical work is 
taking place in the last days of the administration at a time 
when many administration officials seem eager, perhaps too 
eager to complete China's WTO accession and convince Congress 
to vote for PNTR.
    PNTR is the Congress' major point of leverage vis-a-vis the 
administration in China. It will be wise, in my opinion, for 
the Congress to withhold its final vote on PNTR until the WTO 
accession process is complete. Failing that, Congress should at 
least insist that the final WTO accession protocol pay 
particular attention to enforcement issues and pass legislation 
to ensure regular U.S. efforts focused on enforcement.
    Thank you, Mr. Chairman.
    [The prepared statement of Greg Mastel follows:]
  Prepared Statement of Greg Mastel, Director, Global Economic Policy 
                    Project, New America Foundation
    Mr. Chairman and Members of the Subcommittee, my name is Greg 
Mastel and I am Director of the Global Economic Policy Project at the 
New America Foundation.
    I appreciate the opportunity to testify today before the Committee 
regarding the prospect of granting Permanent Normal Trade Relations 
status to China and China's membership in the World Trade Organization 
(WTO).
    I plan to focus my remarks on the WTO accession agreement with 
China, China's record of keeping trade commitments, and the ability of 
the WTO to cope with China.

                      THE WTO ACCESSION AGREEMENT

    On paper, the WTO accession agreement negotiated between the United 
States and China has many positive features. The recent bilateral WTO 
accession agreement between the EU and China--from which all WTO 
members will benefit--appears to further strengthen the ultimate WTO 
accession agreement with China.
    However, the key question will remain: ``Will China make good on 
its promises?''
    Ultimately, the WTO is a trade agreement. It has a detailed process 
for enforcing compliance, but as the ongoing conflict between the 
United States and Europe on several agricultural issues demonstrates, 
that process has a number of flaws and implementation of promises and 
dispute settlement panel findings is far from automatic.
    The best indicator of China's willingness and ability to implement 
the promises it has made in the WTO context is its record in 
implementing other trade agreements.
    In the last decade, the United States and China have concluded a 
number of major trade agreements covering topics from protection of 
intellectual property to textile imports. A detailed record of China's 
compliance with these agreements is included in a recent article I 
wrote for the Weekly Standard, which is attached.
    The conclusion that can immediately be drawn from the record is 
that China has a poor record of keeping the trade promises it has made 
to the United States. Every major trade agreement the United States and 
China have struck has been dogged by repeated instances of Chinese non-
compliance and, at times, open violation of the terms of the agreement.
    China's supporters often point to the several understandings struck 
on intellectual property as evidence of China's willingness to keep its 
trade commitments.
    Without question, the United States has invested a much greater 
effort in enforcing agreements on this topic than any other. In most 
other areas, the United States has not seriously challenged China's 
agreement violations. With regard to intellectual property piracy, 
however, the United States has formally threatened to impose trade 
sanctions on China on at least three occasions to force China to live 
up to bilateral agreements on the topic.
    As a result of this pressure, there is evidence that China has made 
an effort to curb piracy. As any informed observer would concede, 
however, piracy of intellectual property--often directly involving 
Chinese government ministries, the People's Liberation Army, or the 
relatives of China's leaders--remains a widespread problem in China.
    In fact, industry estimates of the piracy problem in China are that 
piracy rates continue at over 90 percent in most categories and that 
total losses are actually higher than they were in 1995 when the 
Clinton administration began intense efforts to enforce the agreement.
    Moreover, the progress that has been made is the direct result of 
repeated threats of sanctions by the United States. Without these 
threats, China is likely to have made little progress in fulfilling its 
negotiated promises.

                           THE WTO AND CHINA

    Often, observers seem to assume that the WTO will automatically be 
able to improve China's compliance with its trade agreements. There is 
no basis for this assumption.
    The WTO has the potential strengths over bilateral understandings 
of obligating China to meet a wider array of commitments and bringing 
some multilateral pressure on China to reform its trade policies.
    Unquestionably, these are positive features, but the WTO is not 
well suited to policing China.
    The WTO is the ultimate rules-based, market-oriented organization. 
The fundamental problem is that China is neither a rules-based country, 
nor a fully market-oriented economy.
    Given the arbitrary and non-transparent manner in which Chinese 
ministries often make trade policy, it may be difficult to even 
determine exactly what Chinese trade policy is in some areas, let alone 
actually win a WTO dispute settlement panel finding against China.
    As a result, the WTO is likely to suffer from exactly the same type 
of compliance problems in China that have plagued bilateral trade 
agreements with China. And the United States will have given up its 
option to impose bilateral trade sanctions on China to enforce the 
agreements.

                            CONGRESS'S ROLE

    At some point, China should become a WTO member. In a perfect 
world, it may be wise to keep China outside the WTO for a few years to 
allow its legal system to mature and its economic reform process to 
advance further.
    But policy is not made in a perfect world.
    I am cautiously willing to support China's WTO membership provided 
the United States invests time and effort to enforce the agreement.
    Congress could play an important role in assuring that necessary 
time and energy is devoted to enforcement. In general, the Congress has 
taken more interest in enforcing trade agreements than various 
administrations.
    In the case of the Clinton administration, much critical work is 
taking place in the last days of the administration, at a time when 
many administration officials seem eager--perhaps too eager--to 
complete China's WTO accession and convince Congress to vote for PNTR.
    PNTR is the Congress' major point of leverage vis-a-vis the 
administration and China. It would be wise for the Congress to withhold 
its final vote on PNTR until the WTO accession process is complete.
    Failing that, Congress should insist that the final WTO accession 
protocol pay particular attention to the enforcement issue and pass 
legislation to ensure regular U.S. efforts focused on enforcement.
    Thank you, Mr. Chairman.
    [GRAPHIC] [TIFF OMITTED] T4766.022
    
    [GRAPHIC] [TIFF OMITTED] T4766.023
    
    [GRAPHIC] [TIFF OMITTED] T4766.024
    
    Mr. Oxley. Thank you. Thanks to all of our panel. Let me 
begin with my questions before yielding to my friend from New 
York. Let me ask Mr. Newhouse, you mentioned that Morgan 
Stanley has been in China for over two decades. Are there other 
comparable American companies, securities firms that are broker 
dealers and investment houses that are in China as well?
    Mr. Newhouse. I would have to say not comparable, in that 
there has been only one license granted for a joint venture 
investment bank, and that was the Morgan Stanley and CICC. It 
is currently contemplated there will be a number of additional, 
and this would have happened with or without a WTO quite 
frankly, a number of additional joint venture licenses granted 
within the next 12 to 18 months. Setting that aside, the 
opportunity exists currently for virtually all international 
financial intermediaries to intermediate, create between China 
and in the global financial markets. In other words, to operate 
as underwriters and distributors for external financings done 
by Chinese enterprises and by the government. So many of us 
compete in the global markets. Currently there is only one 
joint venture investment bank that is domestic.
    Mr. Oxley. What about European firms or other firms from, 
say, South Korea or Japan? Are they entrenched in China?
    Mr. Newhouse. Currently they are on the same status as the 
U.S. firms, but it is clear, as I said, with the momentum to 
import, if you will, transfer technology that with membership 
in WTO, China will be asking other international financial 
firms to embark in joint ventures for this technology transfer 
with Chinese firms. Obviously, this country's failure to grant 
normalized trade relationships would disqualify us from that. 
So I would say if this bill were not passed, you would see 
joint ventures that occur over the next 12 to 18 months. As I 
said, there will be several involving partners not from the 
United States, but solely from Europe and Japan.
    Mr. Oxley. Mr. Whittaker, you mentioned there are 20 
million Chinese on-line currently; is that correct?
    Mr. Whittaker. That should be by the end of this year, yes.
    Mr. Oxley. By the end of this year. How would that compare 
to the number of Americans on-line?
    Mr. Whittaker. I don't know for sure, 22 million now.
    Mr. Oxley. So they are pretty close to us right now.
    Mr. Whittaker. Growing very, very rapidly.
    Mr. Oxley. Frankly, I was struck by the phone calls that 
you got this morning. It pulled me away from Sportscenter. That 
is how fascinating it was. It was interesting because I was 
struck by the lack of information that most of the callers had, 
and frankly it was real scary. I thought you did a good job of 
handling it, but it was obvious that there were a lot of folks 
that didn't have a whole lot of information in that regard. 
They probably don't have a really firm grasp of what is really 
going on in China. Was that your impression?
    Mr. Whittaker. That was my impression. It is obviously an 
emotional issue. There are any number of reasons why you might 
not like China or have the wrong impression of what is going on 
or have the wrong impression of this agreement, and that 
certainly came out this morning.
    Mr. Oxley. A lot of the critics of the PNTR say, well why 
should we reward China for, and then fill in the blank, 
whatever this particular transgression is, and the labor unions 
are talking about not giving China a blank check, whatever that 
means. But when I look at the agreement, all the concessions 
are on the side of the Chinese. We are not giving up anything, 
and they are basically making muck at opening concession in 
virtually every area. They are going from 100 percent on 
automobiles down to 25 percent immediately on the farm 
products, opening up markets for financial services that we are 
talking about today, and it boggles my mind to think that 
somehow we are doing them a favor by passing PNTR. Yet that is 
the kind of rhetoric we hear around these halls virtually every 
day lately. It is mind boggling.
    Anyone else have any comment on that?
    Mr. Newhouse. I do. I would make this observation. The 
Chinese are also very aware of that fact. From their 
perspective, there is no economic reason why the United States 
would fail to pass this status for them because, in fact, all 
the benefits are to the United States.
    Mr. Oxley. Where is the largest opposition in China to this 
agreement?
    Mr. Newhouse. Basically, in those who want to keep the 
markets close, for example, the telecommunications industry, 
who wants to allow almost no investment. As you know, when 
Premier Zhu Rongji went home after his first attempt to 
negotiate an agreement here, the conservative powers over there 
made life very difficult for him. From the Chinese perspective, 
if there is no economic reason for us to oppose this agreement, 
the only reason for opposition must be some kind of basic 
hostility to China, and that is their attitude toward what this 
vote means. If there is no reason for us to do it for 
economics, we must be doing it for some other reason.
    Mr. Oxley. Anybody else?
    Mr. Mastel. If I could take issue with the statement a 
little bit. I support PNTR, as I said, in my testimony. But it 
simply is not true that the U.S. gives up nothing in the 
agreement. There are two major things the U.S. gives up. By 
making China a WTO member, we phaseout the textile restrictions 
faster than we otherwise would. That means China gets more 
access to the U.S. textile market than it otherwise would if it 
remained outside. Most importantly, the reason that China began 
this whole effort to enter the WTO was to get some assurance 
that it would be free from the threat of U.S. Unilateral 
sanctions as we threaten every year to withdraw them within, as 
we have threatened a number of times to impose sanctions on 
them.
    Those are pretty good reasons. Those are pretty compelling 
reasons on China's behalf. I think it still makes sense to 
grant PNTR, but it is not true we don't give up anything in the 
debate.
    Mr. Oxley. Give me one example of how yearly votes on most 
favored nation has somehow changed attitudes or behavior on the 
part of the Chinese.
    Mr. Mastel. I didn't say it has changed attitudes or 
behavior on the part of the Chinese. I think, in fact, the 
annual threat ran out of credibility about 5 or 6 years ago, 
but the threat of sanctions has made a difference. In fact, the 
sanctions on intellectual property, as I explained in my 
testimony, is one of the important factors to push China toward 
better enforcement. The threats have some impact on China. That 
is, as I said, the whole reason that China began to go down the 
road for WTO membership was to get some assurance it would not 
be threatened by unilateral sanctions. They are not a bunch of 
rues. They have done a pretty good job of negotiating the 
agreement that achieves that goal for them. The U.S. Achieves 
many things, as you pointed out, but China gets some things, 
too.
    Mr. Oxley. It is obvious that China is going to join the 
WTO whether we vote tomorrow on PNTR or not; is that correct?
    Mr. Mastel. I think it is very likely, yes.
    Mr. Oxley. As a matter of fact, this administration has 
made it clear they would not oppose China entry into the WTO, 
and after the European deal last week, it is pretty clear that 
they will join the WTO. The real issue is whether we are going 
to take yes for an answer in regard to all of these 
concessions. That is basically the issue. I have run over time. 
Let me recognize my friend from New York, Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman. Let me begin 
with you, Mr. Mastel. I am concerned about, it was your 
characterization of China in its failure to comply with 
commitments that it has made in the past. I note that you say 
China has failed even to make public its laws and regulations 
that pertain to foreign trade. What does this say about what 
our expectations should be that China will comply this time 
around, with its commitments to--would they actually file the 
agreement? What makes us think that this would happen? Is there 
any tiff here?
    Mr. Mastel. I think we should have some doubt. I was really 
struck today in testimony. I have done a number of these panels 
in the last couple of months that all the witnesses today cited 
the benefits of China's WTO accession. They seem not even to 
conflict the possibility that China would not fulfill its 
commitments. The reality is, every single agreement we struck 
with China in the last 10 years, I know intellectual property, 
on market access, on textiles, on prison labor, have all had 
serious compliance problems.
    In fact, as we should expect, insurance would say we should 
suspect, if anything, China will not fulfill its commitments. 
WTO has a different enforcement scheme than bilateral 
agreements do, and it is a very well regulated process that 
relies upon the rule of law and transparent processes. None of 
those things really exist in China right now. There is no 
reliable rule of law. Many regulations are kind of made sub-
rosa through administrative guidance. It is hard to know what 
the policy is in China.
    I support, as I said, WTO membership for China, but let's 
be honest here. It is going to be a very long struggle to bring 
China into compliance, and it is a very difficult one. WTO is 
not a magical solution. It will take at least a decade, 
probably more, to really bring China in compliance. That should 
be the fundamental challenge the U.S. is facing now. That 
should be the real issue, I think, as opposed to talking about 
some of the side issues.
    Mr. Towns. You agree with that, Mr. Watkins?
    Mr. Watkins. I would say there is no question that having 
gone and met with many of the governmental officials in China 
and the provinces that there will be compliance is not 
automatic. Compliance really, in most cases, is similar to our 
States here. It is difficult. The Providence runs their areas, 
and the central government makes policy. I do know from 
institutions I have had that the central government has been 
continually making efforts to impose compliance with a number 
of the policies that they have agreed to. There is no question 
it will take time.
    My own personal feeling is in dealing with this, there will 
be more competition within China to gain investment in their 
local area, that that is their concern, local area, and to do 
those things that are necessary in the local area, to gain the 
investment. The more we can do that, the more they will deal 
with that, and they will, I know in dealing with local areas, 
they will do things to achieve investment that they feel is 
necessary for compliance.
    It will not be overnight. There is no question in my mind, 
but there is a desire, one, for investment, and two, to do 
those things necessary to gain investment. If that means 
complying in many areas on a local basis, I think that can be 
achieved, but you have to educate them and have to work with 
them.
    Mr. Towns. Why wouldn't the annual review get us there 
faster? Going year by year?
    Mr. Watkins. I really can't go into that totally, because 
it really would be speculative on my part. You have to 
understand China is 56 ethnic groups.
    Mr. Towns. Sounds like my district.
    Mr. Watkins. Or Jersey City, right? I sell to those groups, 
too. It is a tough sale. But in those areas, the control of the 
central government is enforceable up to certain levels, but 
there is a lot of freedom on a local level in the provinces 
just to maintain that control. Now, I think it really is 
educational, and I do know from talking to local officials, 
there is more pressure for compliance from the central 
government. Whether it is achievable in all cases, I couldn't 
answer that.
    Mr. Towns. Yes, Ms. Valko.
    Ms. Valko. Congressman, I would just like to reiterate a 
little bit of what Mr. Watkins said. I don't think China 
getting accession into WTO is going to be the silver bullet, as 
we say, to create compliance with everything all at once. If I 
can speak from the life insurance industry perspective from 
where New York Life comes from, today, right now, getting a 
license in that country is extremely unpredictable, is 
extremely non-transparent, and what the WTO agreement will do 
is start to give us some clear-cut factors as to how they 
identify and how companies can get licenses. And it will not be 
easily manipulated, politically done, as it has been in the 
past, and I think that is one step in the right direction, 
particularly from the life insurance side.
    Mr. Towns. Thank you, Ms. Valko. Yes?
    Mr. Newhouse. Congressman, I am always more comfortable 
depending on enlightened self-interest than altruism for 
compliance with agreements. The facts are that China and 
China's leadership needs global openness for its economy if it 
is going to sustain the kind of growth rates, 8 to 9 percent, 
that are required for China to absorb its growing work force. 
So they are committed to the requirement to open their economic 
activity to globalization. That will not happen without the 
rule of law. Governments may enter into agreements where 
compliance is an issue, but businessmen don't.
    So without the rule of law developing in China, the 
objectives that this global openness of economy that have been 
set forth by the government will not take place. Once this 
happens, I think you can be confident that the rule of law, the 
clarity of the regulations, will become a fact of life. 
Otherwise, the objectives won't be met.
    Mr. Towns. Mr. Whittaker?
    Mr. Whittaker. If I might, Congressman Towns, our view 
really is that the multilateral mechanism using 135 countries, 
with all its imperfections and difficulties and challenges, is 
far preferable to a unilateral sanction approach over the long 
run. I certainly agree that we all need to be vigilant, and 
actually our industry is gearing up programs to be able to work 
with Chinese Government officials, U.S. Government officials, 
and in the WTO, to address these kinds of issues which are a 
challenge, and we understand that and we are not naive in that 
sense.
    But I think, as Mr. Newhouse said, ultimately what is 
really going to make things change is the commitment on the 
part of the Chinese Government to transform their economy. It 
is in their own best interest to make it work, their own 
economy, and it is also in their best interest to make sure 
that they behave and act responsibly in the WTO scheme.
    Mr. Towns. Thank you very much. Thank you, Mr. Chairman.
    Mr. Oxley. The gentleman's time has expired. Let me just 
close with a couple of questions, if I may, and we will release 
this panel as I know the gentleman from New York has to go 
back. Let's assume for a moment that we don't do the right 
thing tomorrow and we don't pass PNTR. This is a very close 
vote, one of the closest votes I have been involved in since I 
have been in Congress, and it could literally could go either 
way. But let's say we, for some reason, we don't do that. Let 
me ask each one of you how you view that in terms of where you 
stand with your current and potential competitors in the 
Chinese market, where are they, who are they, and what effect 
would you have?
    Mr. Newhouse. As I suggested before, the short run, the 
competitive impact will be that clearly the Chinese response 
would be to grant concessions, and the joint venture licenses 
to non-U.S. firms. But I think more importantly, from our 
perspective, you can divide the world in a lot of different 
ways. Our firm chooses to divide it by latitude, if you will. 
Europe, the Americas, and Asia and the Pacific rim. In Europe, 
with the end of the cold war and with the reform of the Eastern 
European economies and the Soviet Union, that is on track. In 
North America and Latin America, Latin America particularly, 
with the progress Mexico is making that is on track, if you 
will, from our perspective as a global investment bank.
    In Asia, China is the question mark. If China goes one way, 
that third leg, if you will, of our global investment banking 
and securities strategy, we will prosper. If it goes the other 
way, the opposite could be true. I think that, in my view, this 
vote and this stance taken by the United States will have a 
significant impact on the development of relationships between 
China and the west or in the U.S.
    Mr. Whittaker. A couple of comments. One is I think 
rejection of PNTR would certainly hurt the prospects of the 
reformers in China, those entrepreneurs, those political groups 
that want to transform the Chinese economy. I think it would be 
a statement that the U.S. for some reason, is not part of this.
    I do believe that we would, as an industry, face 
competition from Europe, Korea, Japan, Taiwan, any number of 
locations, very tough competition, and we would expect to be 
put at a disadvantage. Not only because we wouldn't get some of 
the advantages that would come from our being part of the WTO 
agreement with China, but also because I think our issues of 
reliability, questions that our Chinese customers would have 
about, are we a reliable supplier under these circumstances, 
and all of this would have a negative impact on us, and it 
would impact our ability to get the benefits to generate the 
exports and jobs here in the United States.
    Ms. Valko. We believe from the insurance industry, and 
certainly from New York Life, that without PNTR, and China 
remains closed to American insurers, it is very clear that the 
Europeans will end up getting licenses. In the past, what has 
happened is the Europeans have gotten doled out one license, 
and an American company has gotten one license in any given 
year. And it is very clear that if we do not end up voting for 
PNTR, that we are going to be at a clear disadvantage from the 
United States perspective of getting licenses in that country.
    Our Europeans, the Japanese the Canadians, are going to be 
the ones that get the licenses granted, and quite frankly, we 
feel that we would ultimately be locked out from that 
marketplace to do life insurance.
    Mr. Watkins. European brokers service, European industry. 
Europe would have the edge on us, and so therefore, U.S. 
brokers would not be players at all.
    Mr. Yingling. I think it is important, if you look at this 
panel, to recognize you have high-tech and financial services 
here, and if you were picking two industries where the U.S. has 
a competitive leg up on the rest of the world, those would be 
the two high-tech and financial services. I think they would be 
more generally recognized in the high-tech area, but it is 
really true in financial services. We are the best.
    So we would be shooting ourselves in the foot. Clearly, 
U.S. banks would be at a serious disadvantage, just as others 
have talked about the advantage of the Europeans and the 
Japanese in their sectors. That would be the case with banking. 
But it wouldn't be just in China again. It would hurt us 
throughout Asia. China is going to clearly be the economic base 
of Asia over time, and it would hurt us worldwide because if 
you are basically at a huge disadvantage and a huge country, it 
is going to hurt you worldwide when you are trying to compete.
    Again, I put in a plug for community banks here. We have 
done a lot of work studying the future of rural communities, 
and the key in the next few years is agriculture exports. We 
are really at a crossroads in agriculture in this country, and 
if we don't open up those markets for our agricultural exports 
again in an area where we have a competitive advantage, our 
rural communities are going to suffer, and community banks in 
those rural communities are going to suffer.
    Mr. Mastel. Again, not to be a contrarian today. I agree 
with a lot of what was said. If we do imagine that the Congress 
turned down PNTR, which I guess I think is unlikely, but if we 
do imagine that, I think clearly reduction of--negative period 
of U.S.-China relations and the Chinese would try to find ways 
to have their ill feelings toward the U.S. known, but remember 
also, the U.S. has something like a $70 billion trade deficit 
with China. If the U.S. administration were willing to 
aggressively use its bilateral leverage to make sure that China 
didn't discriminate against U.S. companies, didn't grant 
licenses to European companies, I think that would be a 
powerful disincentive to China than embarking on a course of 
trade retaliation. But again, unquestionably, there would be a 
rough period in U.S.-China relations. I am not as certain as 
some of the other panelists are that that would mean the U.S. 
Would face direct retaliation. That is very difficult for the 
Chinese to pull off, especially in the face of the U.S. Having 
considerable resources on its own to counter those kind of 
threats.
    Mr. Oxley. Thank you. Mr. Rush, do you have any questions?
    Well, that was good timing as we proceed to a floor vote. 
Thank you all very much for your excellent testimony and the 
subcommittee stands adjourned.
    [Whereupon, at 3:50 p.m., the subcommittee was adjourned.]
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