    [House Hearing, 108 Congress]
    [From the U.S. Government Publishing Office]

     UNITED STATES-CHINA ECONOMIC RELATIONS AND CHINA'S ROLE IN THE GLOBAL
                                    ECONOMY

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

                                    HEARING

                                   before the

                          COMMITTEE ON WAYS AND MEANS
                         U.S. HOUSE OF REPRESENTATIVES

                          ONE HUNDRED EIGHTH CONGRESS

                                 FIRST SESSION

                                   __________

                            OCTOBER 30 and 31, 2003

                                   __________

                               Serial No. 108-22

                                   __________

             Printed for the use of the Committee on Ways and Means

                            U.S. GOVERNMENT PRINTING OFFICE

    92-208                            WASHINGTON : 1997
    _____________________________________________________________________
    For sale by the Superintendent of Documents, U.S. Government Printing
    Office Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800
    Fax: (202) 512-2250  Mail: Stop SSOP, Washington, DC  20402-0001

                          COMMITTEE ON WAYS AND MEANS

                       BILL THOMAS, California, Chairman

    PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
    E. CLAY SHAW, JR., Florida           FORTNEY PETE STARK, California
    NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
    AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
    WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
    JIM MCCRERY, Louisiana               JIM MCDERMOTT, Washington
    DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
    JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
    JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
    SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
    JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
    MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
    ROB PORTMAN, Ohio                    XAVIER BECERRA, California
    PHIL ENGLISH, Pennsylvania           LLOYD DOGGETT, Texas
    J.D. HAYWORTH, Arizona               EARL POMEROY, North Dakota
    JERRY WELLER, Illinois               MAX SANDLIN, Texas
    KENNY C. HULSHOF, Missouri           STEPHANIE TUBBS JONES, Ohio
    SCOTT MCINNIS, Colorado
    RON LEWIS, Kentucky
    MARK FOLEY, Florida
    KEVIN BRADY, Texas
    PAUL RYAN, Wisconsin
    ERIC CANTOR, Virginia

                        Allison H. Giles, Chief of Staff
                      Janice Mays, Minority Chief Counsel

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

                                C O N T E N T S

                                   __________
                                                                       Page
    Advisories announcing the hearing................................     2

                                   WITNESSES

    U.S. Department of the Treasury, Hon. John B. Taylor, Under
      Secretary of Treasury for International Affairs................    11
    Council of Economic Advisers, N. Gregory Mankiw, Ph.D., Chairman.    16
    Office of the U.S. Trade Representative, Hon. Josette Sheeran
      Shiner, Deputy U.S. Trade Representative.......................    23
    Congressional Budget Office, Douglas Holtz-Eakin, Ph.D., Director    51
    U.S. General Accounting Office, Loren Yager, Ph.D., Director,
      International Affairs and Trade................................    75
    United States International Trade Commission, Robert A. Rogowsky,
      Ph.D., Director of Operations..................................    83

                                     ______

    Alticor, Inc., Douglas L. DeVos..................................   108
    American Farm Bureau Federation, Charles E. Kruse................   130
    American Federation of Labor and Congress of Industrial
      Organizations, Richard M. Trumka...............................   193
    Atkins & Pearce, Inc., Jeb Head..................................   179
    Denim North America, Larry L. Galbraith..........................   176
    DeVos, Douglas L., Alticor, Inc..................................   108
    Galbraith, Larry L., Denim North America.........................   176
    Head, Jeb, Atkins & Pearce, Inc..................................   179
    Intel Corporation, James W. Jarrett..............................   123
    Kruse, Charles E., Missouri Farm Bureau Federation, and American
      Farm Bureau Federation.........................................   130
    Mack Northern Operations, Mack Molding Company, Jeff Somple......   189
    Malpass, David R., Bear Stearns..................................   114
    Missouri Farm Bureau Federation, Charles E. Kruse................   130
    National Electrical Manufacturers Association, Malcolm O'Hagan...   127
    Recording Industry Association of America, Joseph Papovich.......   141
    Somple, Jeff, Mack Northern Operations, Mack Molding Company.....   189
    Trumka, Richard M., American Federation of Labor and Congress of
      Industrial Organizations.......................................   193

                           SUBMISSIONS FOR THE RECORD

    AdvaMed, statement...............................................   219
    American Council of Life Insurers, Brad Smith, statement.........   221
    American Iron and Steel Institute, statement.....................   226
    Carus Chemical Company, Peru, IL, statement......................   230
    Cato Institute, Daniel T. Griswold, statement and attachments....   234
    Customs Bond Committee of the American Surety Association,
      statement......................................................   238
    Five Rivers Electronic Innovations, LLC, Greeneville, TN, Tom
      Hopson, statement..............................................   240
    Franc, Michael, Heritage Foundation, letter and attachment.......   242
    Griswold, Daniel T., Cato Institute, statement and attachments...   234
    Heritage Foundation, Michael Franc, letter and attachment........   242
    Hopson, Tom, Five Rivers Electronic Innovations, LLC,
      Greeneville, TN, statement.....................................   240
    Hunt, Leo and Jean, Naples, FL, statement........................   244
    International Mass Retail Association, Arlington, VA, statement..   244
    Manufacturers' Association of Northwest Pennsylvania, Erie, PA,
      Ralph J. Pontillo, statement...................................   250
    Morici, Peter, Alexandria, VA, statement.........................   255
    Motion Systems Corporation, Eatontown, NJ, William Wolf,
      statement......................................................   256
    Motor and Equipment Manufacturers Association, statement.........   258
    Pontillo, Ralph J., Manufacturers' Association of Northwest
      Pennsylvania, Erie, PA, statement..............................   250
    Robinson, Jr., Roger W., U.S.-China Economic & Security Review
      Commission, statement..........................................   283
    Ross, Jr., Wilbur L., statement..................................   260
    Securities Industry Association, New York, NY, statement and
      attachment.....................................................   264
    Semiconductor Industry Association, statement....................   272
    Slattery, Hon. Jim, statement....................................   277
    Smith, Brad, American Council of Life Insurers, statement........   221
    Society of the Plastics Industry, Inc., statement................   178
    U.S.-China Economic & Security Review Commission, Roger W.
      Robinson, Jr., statement.......................................   283
    Wolf, William, Motion Systems Corporation, Eatontown, NJ,
      statement......................................................   256

     UNITED STATES-CHINA ECONOMIC RELATIONS AND CHINA'S ROLE IN THE GLOBAL
                                    ECONOMY

                                  ----------

                           THURSDAY, OCTOBER 30, 2003

                         U.S. House of Representatives,
                                   Committee on Ways and Means,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 2:10 p.m., in
    room 1100, Longworth House Office Building, Hon. Bill Thomas
    (Chairman of the Committee) presiding.
        [The advisory, the revised advisory, and the revised
    advisory #2 announcing the hearing follow:]

    ADVISORY

    FROM THE
    COMMITTEE
     ON WAYS
    AND
    MEANS

                                                      CONTACT: 202-225-1721
    FOR IMMEDIATE RELEASE
    October 06, 2003
    FC-9

                          Thomas Announces Hearing on

                     United States-China Economic Relations

                     and China's Role in the Global Economy

        Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways
    and Means, today announced that the Committee will hold a hearing on
    United States-China economic relations and China's role in the global
    economy. The hearing will take place on Thursday, October 16, beginning
    at 2:00 p.m., and Friday, October 17, 2003, beginning at 10:00 a.m., in
    the main Committee hearing room, 1100 Longworth House Office Building.

        Testimony on October 16th will be from invited government
    witnesses. Testimony on October 17th will be from private-sector
    witnesses. Also, any individual or organization not scheduled for an
    oral appearance may submit a written statement for consideration by the
    Committee or for inclusion in the printed record of the hearing.

    BACKGROUND:

        Since the United States and China established diplomatic relations
    in 1979, China has become an increasingly important trading partner of
    the United States and a major player in the global economy. Two-way
    trade between the two countries has increased since that time, growing
    from $4.8 billion in 1980 to $147.2 billion in 2002. In 2002, China was
    the United States' fourth largest trading partner, the third largest
    supplier of U.S. imports, and the seventh largest buyer of U.S.
    exports. The U.S. trade deficit with China was $103 billion in 2002,
    increasing by more than $20 billion between 2000 and 2002. Imports into
    the United States from other major Asian trading partners decreased by
    more than $40 billion during that same period. The United States is the
    second largest overall foreign direct investor in China. China is one
    of the world's fastest-growing economies, with an average annual growth
    rate of 9.3 percent. Reflecting its growing role in the world economy,
    China became a member of the World Trade Organization (WTO) on December
    11, 2001, after many years of negotiations on its accession.

        Since its accession to the WTO, China's integration into the global
    economy has proceeded rapidly and impacted its trading partners,
    including the United States. As a result, Congress, the Administration,
    and the U.S. private sector have focused on China's compliance with its
    WTO commitments, its trade balance, and the relationship between
    China's pegged currency and trade with the United States.

        The goal of this hearing is to discuss China's importance as an
    economic partner to the United States and the issues surrounding the
    United States--China economic relationship. In announcing the hearing,
    Chairman Thomas stated, ``China is an important player in the United
    States and the global economies. However, we need to ensure that China
    is integrating itself into the rules-based trading system that governs
    all WTO Members. During this hearing, we will focus on China's
    important role in the global economy as well as on China's progress in
    meeting its new trade commitments.''

    FOCUS OF THE HEARING:

        The hearing will focus on United States-China economic relations
    and China's role in the global economy, with a narrower focus on the
    following: (1) implementation of China's WTO accession commitments
    (including issues relating to removal of quotas and tariff-rate quotas,
    export subsidies and discriminatory taxes on imports, and the use of
    non-tariff barriers to limit bio-engineered imports); (2) trade
    relations between the United States and China; (3) China's currency
    management; and (4) the relationship between trade with China and the
    U.S. economy, particularly the manufacturing sector.

    DETAILS FOR SUBMISSIONS OF REQUESTS TO BE HEARD:

        Requests to be heard at the hearing must be made by telephone to
    Bill Covey or Peter Sloan at (202) 225-1721 no later than the close of
    business Wednesday, October 8, 2003. The telephone request should be
    followed by a formal written request faxed to Allison Giles, Chief of
    Staff, Committee on Ways and Means, U.S. House of Representatives, 1102
    Longworth House Office Building, Washington, D.C. 20515, at (202) 225-
    2610. The staff of the Committee will notify by telephone those
    scheduled to appear as soon as possible after the filing deadline. Any
    questions concerning a scheduled appearance should be directed to the
    Committee staff at (202) 225-1721.

        In view of the limited time available to hear witnesses, the
    Committee may not be able to accommodate all requests to be heard.
    Those persons and organizations not scheduled for an oral appearance
    are encouraged to submit written statements for the record of the
    hearing. All persons requesting to be heard, whether they are scheduled
    for oral testimony or not, will be notified as soon as possible after
    the filing deadline.

        Witnesses scheduled to present oral testimony are required to
    summarize briefly their written statements in no more than 5 minutes.
    THE 5-MINUTE RULE WILL BE STRICTLY ENFORCED. The full written statement
    of each witness will be included in the printed record, in accordance
    with House Rules.

        In order to assure the most productive use of the limited amount of
    time available to question witnesses, all witnesses scheduled to appear
    before the Committee are required to submit 300 copies, along with an
    IBM compatible 3.5-inch diskette in WordPerfect or MS Word format, of
    their prepared statement for review by Members prior to the hearing.
    Testimony should arrive at the full Committee office, room 1102
    Longworth House Office Building, no later than Tuesday, October 14,
    2003, at 5:00 p.m., in an open and searchable package 48 hours before
    the hearing. The U.S. Capitol Police will refuse sealed-packaged
    deliveries to all House Office Buildings. Failure to do so may result
    in the witness being denied the opportunity to testify in person.

    WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE:

        Please Note: Due to the change in House mail policy, any person or
    organization wishing to submit a written statement for the printed
    record of the hearing should send it electronically to
    hearingclerks.waysandmeans@mail.house.gov, along with a fax copy to
    (202) 225-2610, by the close of business, Friday, October 31, 2003.
    Those filing written statements that wish to have their statements
    distributed to the press and interested public at the hearing should
    deliver their 200 copies to the full Committee in room 1102 Longworth
    House Office Building, in an open and searchable package 48 hours
    before the hearing. The U.S. Capitol Police will refuse sealed-packaged
    deliveries to all House Office Buildings.

    FORMATTING REQUIREMENTS:

        Each statement presented for printing to the Committee by a
    witness, any written statement or exhibit submitted for the printed
    record or any written comments in response to a request for written
    comments must conform to the guidelines listed below. Any statement or
    exhibit not in compliance with these guidelines will not be printed,
    but will be maintained in the Committee files for review and use by the
    Committee.

        1. Due to the change in House mail policy, all statements and any
    accompanying exhibits for printing must be submitted electronically to
    hearingclerks.waysandmeans@mail.house.gov, along with a fax copy to
    202/225-2610, in Word Perfect or MS Word format and MUST NOT exceed a
    total of 10 pages including attachments. Witnesses are advised that the
    Committee will rely on electronic submissions for printing the official
    hearing record.

        2. Copies of whole documents submitted as exhibit material will not
    be accepted for printing. Instead, exhibit material should be
    referenced and quoted or paraphrased. All exhibit material not meeting
    these specifications will be maintained in the Committee files for
    review and use by the Committee.

        3. Any statements must include a list of all clients, persons, or
    organizations on whose behalf the witness appears. A supplemental sheet
    must accompany each statement listing the name, company, address,
    telephone, and fax numbers of each witness.

        Note: All Committee advisories and news releases are available on
    the World Wide Web at http://waysandmeans.house.gov.

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

                           ***NOTICE--CHANGE IN TIME***

    ADVISORY

    FROM THE
    COMMITTEE
     ON WAYS
    AND
    MEANS

                                                    CONTACT: (202) 225-1721
    FOR IMMEDIATE RELEASE
    October 08, 2003
    FC-9 Revised

                         Change in Time for Hearing on

                     United States-China Economic Relations

                     and China's Role in the Global Economy

        Congressman Bill Thomas (R-CA), Chairman, Committee on Ways and
    Means, today announced that the hearing on United States-China economic
    relations and China's role in the global economy, previously scheduled
    for Friday, October 17, 2003, at 10:00 a.m., in the main Committee
    hearing room, 1100 Longworth House Office Building, will now be held at
    9:00 a.m.

        All other details for the hearing remain the same. (See full
    Committee Advisory No. FC-9, dated October 6, 2003.)

                           ***NOTICE--CHANGE IN DATE***

    ADVISORY

    FROM THE
    COMMITTEE
     ON WAYS
    AND
    MEANS

                                                      CONTACT: 202-225-1721
    FOR IMMEDIATE RELEASE
    October 14, 2003
    FC-9 Revised #2

                         Change in Date for Hearing on

                     United States-China Economic Relations

                     and China's Role in the Global Economy

        Congressman Bill Thomas (R-CA), Chairman, Committee on Ways and
    Means, today announced that the hearing on United States-China economic
    relations and China's role in the global economy, previously scheduled
    for Thursday, October 16 and Friday, October 17, 2003, in the main
    Committee hearing room, 1100 Longworth House Office Building, will now
    be held on Thursday, October 30 at 2:00 p.m., and Friday, October 31 at
    9:00 a.m.

        Witnesses who are scheduled to appear before the Committee are
    required to submit their testimony to the full Committee office, room
    1102 Longworth House Office Building, no later than Monday, October 27,
    2003, at 5:00 p.m., in an open and searchable package 48 hours before
    the hearing.

    WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE:

        Please Note: Due to the change in House mail policy, any person or
    organization that is not scheduled to appear before the Committee and
    wishes to submit a written statement for the printed record of the
    hearing should send it electronically to
    hearingclerks.waysandmeans@mail.house.gov, along with a fax copy to
    (202) 225-2610, by the close of business, Friday, November 14, 2003.

        All other details for the hearing remain the same. (See full
    Committee Advisory No. FC-9, dated October 6, 2003 and No. FC-9
    Revised, dated October 9, 2003.)

        Chairman THOMAS. If our guests could find seats, please. We
    apologize for the delay. As you know, there is activity in
    another House office building, but there apparently is some
    difficulty in some of the witnesses being able to get into the
    building. So, we will begin, and hopefully by the time we get
    to our first panel, the U.S. Trade Representative (USTR)
    spokesperson will be able to be with us at the table.
        Today is the first day of a 2-day hearing on U.S.-China
    economic relations and China's role in the world economy.
    Perhaps the tension and concern about the global economy and
    China's role can be put in its proper perspective, perhaps, as
    we get news such as this morning that we received further
    evidence that the U.S. economy is improving. Apparently our
    gross domestic product (GDP) is up 7.2 percent in the last
    quarter, which is the highest growth in 19 years. The growth
    apparently came from strong consumer spending. I am sure a
    number of consumers were spending on items that were made in
    China, which will be part of the discussion that we are going
    to have.
        Increases in business purchases of equipment, another item
    that we will be discussing, in which China is beginning to play
    an even greater role; and this is a bright spot, strong
    exports, with the hope that increasing exports are going to
    China.
        So, it is relevant with that backdrop to look at the U.S.
    trade with China, our trade balance, and the role that China is
    going to be playing. It is clear to me that recently enacted
    tax cuts originating in this Committee and signed by the
    President have had a strong positive effect on that economic
    growth by spurring that very same spending and investment.
        I want to start this hearing by saying this unequivocally:
    China is an increasingly important economic partner for the
    United States. China is today the United States' fourth largest
    trading partner, sixth largest market for our goods, and we
    must make sure that China keeps its commitments and acts in a
    fair and transparent way as she continues to integrate into the
    global economy. With this emerging prominence comes greater
    scrutiny of China's actions, either as a cause or an effect.
        The goal of this hearing is to examine these issues and try
    to put them in their proper perspective. It means that there
    are going to be problems, as there are with every major trading
    partner, but that we should not begin to think of China as a
    scapegoat for systemic problems in the United States, some of
    which are in our tax code, or for our failure to further
    integrate the global economy.
        In particular, I would like to say that at the end of the 2
    days of this hearing, we were able to explore other policies
    and pursue other avenues to make sure that the United States
    itself can be more competitive internationally, such as
    reducing U.S. tax burden, delivering reliable and affordable
    energy, making sure that we have a climate in the area of
    health care costs and others that keep American employers in
    the United States, and that we create more jobs for more
    Americans while further integrating our trade with China and
    growing our world economy.
        With that, I briefly yield to the Chairman of the
    Subcommittee on Trade, Mr. Crane, prior to recognizing the
    gentleman from New York, Mr. Rangel.
        [The opening statement of Chairman Thomas follows:]
        Opening Statement of the Honorable Bill Thomas, Chairman, and a
            Representative in Congress from the State of California
        Today is the first day of a two-day hearing on U.S.-China economic
    relations and China's role in the global economy.
        China is an increasingly important economic partner for the United
    States. In 2002, China was the United States' fourth largest trading
    partner, seventh largest market for U.S. exports and third largest
    supplier of U.S. imports. As one of the world's fastest-growing
    economies, China is a valuable and growing market for U.S. exports and
    is an important provider of inputs and products for U.S. manufacturers
    and consumers.
        With this increasing prominence, however, comes greater scrutiny of
    China's actions as it further integrates into the global economic
    community. Several concerns have been raised regarding the U.S. trade
    balance with China: 1) the impact of the Chinese currency's peg to the
    U.S. dollar, 2) China's compliance with its WTO accession commitments,
    and 3) the relationship between China and trade, with a particular
    focus on U.S. manufacturing.
        The goal of this hearing is to examine these issues to determine
    what impact they have on U.S. manufacturers, exporters, businesses and
    consumers and to discuss remedies available to deal with real problems
    facing U.S. companies.
        We must make sure that China keeps its commitments and acts in a
    fair and transparent manner as it further integrates into the global
    economy. If there are trade problems with China, these problems must be
    addressed and corrected. That said, however, I also believe that China
    should not be made a scapegoat for other systemic problems plaguing the
    U.S. and global economy. In particular, I want to explore whether there
    are other policies we should pursue to make our companies more
    competitive internationally, such as reducing the U.S. tax burden,
    providing relief on healthcare costs, delivering reliable and
    affordable energy and limiting litigation that cripples growth and
    jobs.

        Mr. CRANE. Thank you, Mr. Chairman.
        Today we start with some excellent news about the recovery
    of the economy, as you have noted, with a GDP growth up 7.2
    percent, which is the highest in two decades. That says to me
    that Congress needs to stay the course in our tax cut and free
    trade legislation. The growth came from strong consumer
    spending, increases in business purchases of equipment, and
    strong exports, which bodes well for the concerns we have about
    our trade balance, particularly with China.
        China has been an important trading partner for the United
    States since the two nations established diplomatic relations
    in 1979. Bilateral trade between the two countries grew from
    only $4.8 billion in 1980 to $147.2 billion in 2002. As noted,
    China is the fourth largest supplier of imports, sixth largest
    market for exports, and overall the United States' fourth
    largest trading partner in 2002. It is estimated that by the
    year 2005, China will have more than 230 million middle-income
    consumers whose combined retail spending will exceed $900
    billion, meaning that China's market will offer tremendous
    opportunities for U.S. exports. Additionally, China is an
    important supplier for imports and products for the U.S.
    market. Although the U.S.-China economic partnership is
    important, it is also essential that China adheres to the
    commitments that it made in joining the World Trade
    Organization (WTO).
        I have read recently that China will soon announce its
    pledge to purchase billions of dollars in U.S. goods in the
    next few years, including airplanes, jet engines, and auto
    parts. While this is beneficial for some U.S. interests, it
    will not replace China's WTO commitments to open its market.
        China must not be permitted to backslide on its pledges as
    there is much that still needs to be done so China becomes a
    fully integrated player in the world economy. We must enforce
    our rights.
        At the same time, we must consider other policy responses
    to problems that can be attributed to the domestic recession,
    slow growth globally, and U.S. tax laws that make our companies
    uncompetitive. We should not resort to protectionism. I am very
    much concerned by some legislative proposals that would impose
    punitive tariffs on China. Such tariffs would invite counter-
    retaliation and would penalize many U.S. interests, including
    U.S. consumers.
        It is my hope that we will leave this hearing with a
    clearer understanding of the issues involved in the U.S.-China
    economic relationship and a better appreciation for what really
    impacts the bottom line for U.S. companies and consumers. Thank
    you, Mr. Chairman.
        Chairman THOMAS. Thank the gentleman. Gentleman from New
    York, Mr. Rangel.
        Mr. RANGEL. Mr. Chairman, I want to thank you for calling
    this meeting and welcome the distinguished guests that we have
    from the Administration, and also yield to Mr. Levin whose
    leadership was necessary in bringing together a bipartisan
    coalition in order to get support to make our trade
    relationship with China permanent. I yield to Mr. Levin.
        Mr. LEVIN. Thank you, Mr. Rangel. Mr. Chairman, I am very
    glad we are having this hearing. We welcome our guests in the
    Administration and those who will come after. I apologize for
    my voice, which I think will last at least through this panel.
        When we put together and passed Permanent Normal Trade
    Relations (PNTR), there were some assumptions, I think, widely
    held. One was that we needed both to engage China, a huge
    country with a growing economy, an important place in Asia and
    the world. We need to engage China, but also to confront it.
    Also a second assumption I think that was widely held, and that
    was that China would not only be potentially a major market for
    American products and American investment, but also it would be
    a major competitor. Surely the latter has been true.
        So, I have joined many in watching China grow. I have also
    watched it act in ways that have increasingly concerned us as
    to its WTO commitments. I would like to chat a bit about--and I
    ask, Mr. Chairman, that my full statement and a statement
    referred to therein be part of the record.
        Chairman THOMAS. Without objection.
        Mr. LEVIN. Let me indicate a few areas of concern. There
    have been many, I just want to pinpoint a few. China has used
    its, quote, administration import licensing rules as a way to
    keep out imports it did not want to come in. It has also used
    fat taxes to discriminate against imports, including U.S.
    semiconductors. It has continued to restrict trading rights
    and, very importantly, there is hard work on this, distribution
    rights effectively limiting trade on U.S. products throughout
    China.
        It has used standards and other technical product
    regulations as non-tariff barriers. It set up barriers to the
    establishment and expansion of U.S. service providers, and that
    was true, for example, in auto financing. Recently it issued a
    draft development policy for the auto industry that is filled
    with potential use of subsidies, of product standards, and so
    forth. My concern has been--that is, to these problems and
    others--that the Administration has relied basically on
    rhetoric that might be called ``job owning,'' and not use of
    methods that are in the regulations. That are in the laws, that
    are within our laws and those of the WTO.
        So, I am afraid up until now that, while the Administration
    may get a passing grade for its rhetoric, I think it gets a
    failing grade for action when it has come to these problems
    with China.
        I want to briefly just remind us of the tools that have
    been available. One is the special safeguard that we labor to
    place within PNTR. It was the broadest safeguard ever put into
    American law to make sure that there would not be surges of
    imports from China that would unduly harm American businesses
    and workers. Up until now, the Administration has refused to
    use that special safeguard, turning down United States
    International Trade Commission (USITC) recommendations in two
    cases.
        There was put into the legislation an annual report by the
    USTR. I have been disappointed by the lack of strength in real
    substance.
        Thirdly, we put into PNTR a requirement that we negotiate a
    special annual review within the WTO. Otherwise there is going
    to be a review of China's commitments only every 4 years. To
    the credit of the Administration, they worked to get this into
    the final accession agreement, but it hasn't been effectively
    used. It is there. It is important. China has said, in response
    to complaints, they won't put anything in writing. In some
    cases, they haven't even verbally responded, and our country
    has been too compliant with that.
        We have a section 301 process that allows us to formally
    inquire into these problems, and that hasn't been used, nor has
    the formal dispute settlement system within WTO.
        I want to close by saying a word, and we are going to talk
    about this--about the currency manipulation. The report came
    out today, I think it was, the formal report, and I have read
    it quickly. It talks about a number of countries, including
    China and Japan. As to Japan, it has no recommendation. It has
    no proposal of action. It was only a few months ago that the
    New York Times reported this. By spending trillions of yen to
    buy dollars in the foreign exchange market, Japan has limited
    the yen's rise against the dollar this year to no more than 2.3
    percent. This rigging of the currency market by Japan hurts
    American manufacturers and their workers. The references in the
    report--and I am almost done, Mr. Chairman--and that is why I
    think there has been much too much reliance on rhetoric and
    there has been no reliance on the effective use of these
    mechanisms that are already in place.
        So, I look forward to hearing the testimony and I hope this
    hearing will move the United States to more effective action.
    Thank you.
        [The opening statement of Mr. Levin follows:]
    Opening Statement of the Honorable Sander M. Levin, a Representative in
                      Congress from the State of Michigan
        Over the past several years, the U.S. trade and investment
    relationship with China has grown significantly. We often think about
    China only as a potential market. But this is a narrow view, we must
    also recognize that China is a competitor--for jobs, investment, and
    production. China's accession to the WTO helped address both of those
    facets of the relationship--China agreed to open its markets to U.S.
    goods and services and at the same time it agreed to be bound by a
    thorough set of rules establishing acceptable terms of competition with
    the rest of the world.
        I have taken an active interest in ensuring that China plays by the
    rules--that it complies with its WTO commitments and that U.S.
    manufacturers and producers have a fair shake in China. Over the past
    several months I have become increasingly concerned that China is not
    complying with its WTO commitments and is in fact trying to give itself
    an unfair advantage.
        I have also become concerned that the Bush Administration is not
    effectively using the tools available to it to maximize the pressure on
    China. In the 2004 currency manipulation report issued today by the
    Treasury Department, it talked about ``serious engagement'' with China.
    This type of phrase is often used as an excuse for a lack of real
    action and progress. There are tools and institutional frameworks
    available for engaging and pressuring China, and the Bush
    Administration is not using all of them effectively. The Bush
    Administration may get a passing grade for rhetoric, but it gets a
    failing grade for action when it comes to trade and related economic
    issues with China.
    China Not Living Up to WTO Commitments
        A few weeks ago, I had a chance to speak on China's WTO compliance
    at some length. I ask unanimous consent that my earlier comments be
    submitted to the record as part of my statement today. To briefly
    summarize the points in these comments:

           China has used its quota administration and import licensing
    rules as ways of keeping out undesired imports.
           China has used VAT taxes to discriminate against imports,
    including of U.S. semiconductors.
           China has continued to restrict trading rights and distribution
    rights, effectively limiting trade in U.S. products throughout China.
           China has used standards and other technical product regulations
    as a non-tariff barrier.
           China has set up barriers to establishment and expansion to keep
    out U.S. service providers, including in the auto financing sector.
           China recently released a draft ``Development Policy for Auto
    Industry'' setting forth a proposed industrial policy that would use
    subsidies, product standards, technology transfer requirements, import
    barriers and other tools of state control to advantage domestic
    production of autos and auto parts.

        China has moved toward compliance in some important respects, but
    in others, there is non-compliance and bending of the rules in support
    of what is essentially a mercantilist industrial policy to the
    detriment of U.S. workers, farmers, and businesses. It is necessary for
    America to adopt a more active approach.
    Bush Administration's Failure to Act
        It is remarkable that in the face of China's non-compliance, the
    Bush Administration has refused to use all of the tools that the U.S.
    bargained for.
        As part of the China PNTR deal, we included a special safeguard so
    that U.S. industries would not be injured by surges of imports from
    China. But, the Bush Administration has denied relief to both U.S.
    industries which the independent ITC found to be injured by Chinese
    imports.
        The China PNTR bill also required the USTR to report annually on
    China's WTO compliance. To date, the annual report has not been used
    effectively as part of a comprehensive strategy to pressure China to
    come into compliance with its WTO commitments.
        The China PNTR bill also called for a special annual review in the
    WTO of China's commitments--the idea here being that the U.S. could
    work with other countries to bring multilateral pressure to bear on
    China. Unfortunately, China has blocked effective use of this
    specially-negotiated review, refusing to provide written (and sometimes
    any) answers to questions or giving vague and evasive answers. The Bush
    Administration has essentially acted as if resigned to continuing
    uncooperativeness by China.
        The Bush Administration has also failed to use other tools at its
    disposal. U.S. law establishes a ``Section 301'' process which creates
    a formal way in which USTR can bring pressure on China, with the threat
    of additional action should China fail to comply with its trade
    obligations. The Section 301 mechanism has been very useful in the past
    to open foreign markets. USTR has not used the Section 301 tool against
    China.
        Nor has USTR initiated formal dispute settlement consultations with
    China in the WTO or brought any WTO dispute settlement cases against
    clear violations of the rules by China.
        Today the Treasury Department issued its semi-annual 3004 report on
    currency manipulation. To date, the Treasury Department has given a
    free pass in this report to countries like Japan and China that
    maintain undervalued currencies in order to gain a trade advantage. For
    the first time, this report stated that China's currency policy was
    inappropriate and should be changed. The report did not, however, come
    out and state what needs to be stated--that China's currency is
    undervalued, which hurts U.S. manufacturers. The report also gave a
    free pass to Japan once again--despite the fact that, unlike China,
    Japan does not have a currency peg to explain its massive
    interventions.
        The Treasury Report also notes the creation of a new ``Technical
    Cooperation Program'' between the U.S. and China. U.S. manufacturers
    have been complaining about China's undervalued currency for years now.
    This issue does not require study and delay; it requires action.
        The U.S. has many tools with teeth available to deal with the
    various trade problems we have with China. The Administration has
    failed to use these tools, however, instead preferring to rely on
    rhetoric. The failure of the Administration to take concrete actions,
    however, has left a vacuum, which is being filled not only by the
    rhetoric of the Administration, but by a growing chorus of voices. If
    we take on these problems with the tools available to us now, we can
    make progress on trade and related economic issues with China. If we
    are content with rhetoric, we will not help U.S. manufacturers, farmers
    and workers, and the growing chorus of voices may result in situations
    that cause more serious problems in the future.

        Chairman THOMAS. Thank the gentleman for his comments. Our
    first panel consists of the Honorable John B. Taylor, who is
    the Under Secretary for International Affairs at the U.S.
    Department of the Treasury; Dr. N. Gregory Mankiw, who is
    Chairman of the Council of Economic Advisers; and Ambassador
    Josette Shiner, who is the Deputy Trade Representative, Office
    of the USTR.
        I want to thank you all for coming. This gives us a pretty
    good broad cross-section of the Administration. Any written
    testimony you have will be made a part of the record, and you
    can address us in any fashion you see fit in the time that you
    have. Why don't we start with the Department of the Treasury as
    the earlier created department, and then move across from my
    left to right, your right to left. Nothing intended by that.

     STATEMENT OF THE HONORABLE JOHN B. TAYLOR, UNDER SECRETARY OF
      TREASURY FOR INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF THE
                                TREASURY

        Mr. TAYLOR. Thank you very much, Mr. Chairman and Ranking
    Member Rangel, for inviting us to testify on this very
    important subject. Our economic relations with China are an
    important part of our overall economic strategy. The goal of
    that strategy is to strengthen the current economic recovery in
    the United States and to establish conditions that will lead to
    a long expansion in future years.
        The tax cuts, which began in this Committee and which were
    enacted into law this summer, is an essential part of that
    policy, as are the President's proposals for tort reform,
    regulatory reform, and health care reform. Even with these
    policy reforms in the United States, there are significant
    barriers to economic growth in other countries, and these
    barriers affect the United States. That is why the
    international component of our economic strategy is so
    important. The strategy has been to urge countries to remove
    the rigidities and barriers that exist, wherever they exist,
    and to encourage pro-growth strategies that benefit the United
    States and the world economy.
        This international strategy is built on bilateral
    relationships like our relationship with China. It also has a
    multilateral foundation. Our overall economic strategy is
    showing progress, as today's announcement of 7.2 percent growth
    in the third quarter indicates. Global growth is improving,
    too.
        Despite this progress, we need to do more. That is why we
    have launched, for example, a new agenda for growth with the G-
    7 countries, and that is why we started up a new group for
    growth between the United States and Brazil. That is why we
    started up several new relationships in economic matters with
    China.
        Exchange rate policy also has a bearing on growth and
    economic stability. Earlier today, the Department of the
    Treasury issued its latest report on international economic and
    exchange rate policies. This report examines exchange rate
    policies in major countries around the world.
        Secretary Snow testified this morning on this report. The
    report reiterated our view that flexible exchange rates are
    desirable for large economies in our international financial
    system. The report documents that a number of countries
    continue to use paid exchange rates or intervene substantially
    in the foreign exchange market. The Administration strongly
    believes that a system of flexible market-based exchange rates
    is best for major economies. For this reason, the
    Administration is aggressively encouraging our major trading
    partners to adopt policies that promote such exchange rates.
        For nearly 10 years now, the Chinese have maintained a
    fixed exchange rate to their currency relative to the dollar.
    The rate has been pegged at about 8.28 yuan per dollar for this
    entire period. China, in addition, has significant controls on
    capital flows. However, with its rapid growth, which has been
    referred to already, and its substantial foreign exchange
    reserve, China has an opportunity and is in a position to show
    leadership on the important goal of exchange rate flexibility
    and capital controls. If these relaxations took place, it would
    allow China to open the nation to capital flows and reduce
    imbalances, and we have been urging China to move in this
    direction.
        We have also urged the Chinese to move forward in two other
    areas, reductions in barriers to trade and the removal of
    restrictions on capital flows. China's restrictions on capital
    flows are one of the major rigidities interfering with the
    market forces. The authorities understand this, we have worked
    with them, and they have begun to reduce these barriers to
    financial markets.
        President Bush recently met with President Hu, and he
    discussed each of these economic issues and discussed the
    importance of reducing barriers to trade, to removing the
    restrictions on capital, and to moving to a flexible market-
    based exchange rate.
        Secretary Snow traveled to Beijing this summer. He met with
    Premier Wen, with the Vice Premier Huang. He met with the
    Central Bank Governor Zhou and Finance Minister Jin. This visit
    of Secretary Snow, we believe, has achieved significant
    progress including new policy announcements by the Central
    Bank, reducing restrictions on foreign firms managing their
    foreign exchange, significantly liberalizing provisions to
    allow Chinese travelers to take foreign currency out of the
    country, examples of reductions on restrictions on capital
    flows.
        The United States will continue to urge the Chinese to make
    rapid progress in these areas. We intend to continue both
    technical work and high-level talks on this subject with the
    Chinese. We have just established a new U.S.-China technical
    cooperation program in the financial area that will help China
    develop its financial markets infrastructure, including the
    foreign exchange market. The Chinese have agreed to interact
    with the G-7 financial officials on talks about economic
    issues.
        In sum, I am pleased to report that our economic strategy
    is showing progress. Global economic growth has accelerated,
    led by an even stronger acceleration of growth in the United
    States. Our efforts to engage in financial diplomacy are
    generating constructive responses, though, as I indicated, more
    needs to be done. Active engagement with China and other
    countries is paving the way toward freer markets. This
    Administration's effort to raise growth in the United States
    and abroad and thereby create jobs at home is succeeding. Thank
    you very much.
        [The prepared statement of Mr. Taylor follows:]
    Statement of the Honorable John B. Taylor, Under Secretary of Treasury
           for International Affairs, U.S. Department of the Treasury
        Chairman Thomas, Ranking Member Rangel, Members of the Committee,
    thank you for giving me the opportunity to testify on economic
    relations between the United States and China and on China's role in
    the global economy.
    International Economic Strategy
        Our economic relations with China are an important part of our
    overall economic strategy. The goal of that strategy is to strengthen
    the current economic recovery and establish conditions that will lead
    to a long economic expansion in the United States. The economic
    expansions of the 1980s and the 1990s were the first and second longest
    peacetime expansions in American history, and with the right policies
    there is no reason to expect that the current expansion will not be as
    long or longer. The Jobs and Growth package enacted into law this
    summer, is an essential part of the policy, as are the President's
    proposals for tort reform, regulatory reform, and health care reform.
        But even with these policy reforms in the United States there are
    barriers to economic growth in other countries. And these barriers have
    ramifications for economic growth in the United States. This is why the
    international component of our economic strategy is so important. The
    strategy has been to urge the removal of rigidities and barriers
    wherever they exist, and to encourage pro-growth and pro-stability
    policies that benefit the United States and the whole world. The
    international strategy is built on bilateral economic relationships,
    including, of course, our relationship with China. It also has a
    multilateral foundation, including the meetings of groups such as the
    G-20, where China is included, or the newly established talks between
    economic officials from China and the G-7.
    Global Economic Recovery
        Thanks to the recent fiscal and monetary policy actions, the United
    States economy is now expanding much more rapidly. Consumer spending is
    growing at a very strong pace, housing remains solid, and business
    investment is picking up. The latest data also show exports to be
    gaining strength compared with the first half of the year. The
    September employment data showed a promising increase in jobs as well.
        Global growth is also improving. There is continuing evidence of
    stronger economic growth in the Japan, Canada, and the United Kingdom.
    An increase in business and consumer confidence in the Euro area is a
    welcome sign that economic recovery is on the way there too. Much of
    Asia seems to have bounded back from the SARS induced slowdown in the
    first part of the year. Growth in China recovered sharply in the third
    quarter following a decline in the second quarter. Growth in other
    emerging markets is also picking up as the number of crises is down,
    capital flows are up, and interest rate spreads are low compared with
    the late 1990s.
    Pressing Ahead on the Global Economic Expansion
        Despite this progress, we need to do more. Last month the G-7
    launched a new Agenda for Growth. For the first time each G-7 country
    will take part in a process of benchmarking and reporting actions to
    spur growth and create jobs. Another example is the new United States-
    Brazil Group for Growth through which we will work together to identify
    pro-growth strategies at the micro as well as macro levels.
        Exchange rate policy also has bearing on growth and stability.
    Earlier today the Treasury issued its latest Report on International
    Economic and Exchange Rate Policies. This report examines exchange rate
    policies in major countries around the world. The Report reiterated our
    view that flexible exchange rates are desirable for large economies.
    However, the report documents that a number of countries continued to
    use pegged exchange rates and/or to intervene substantially in the
    foreign exchange market. The Administration strongly believes that a
    system of flexible, market-based exchange rates is best for major
    economies. For this reason, the Bush Administration is aggressively
    encouraging our major trading partners to adopt policies that promote
    flexible market-based exchange rates combined with a clear price
    stability goal and a transparent system for adjusting the policy
    instruments.
        The move by several large emerging market countries--such as
    Brazil, Korea, and Mexico--to flexible exchange rates combined with
    clear price stability goals and a transparent system for adjusting the
    policy instruments is one of the reasons we are seeing fewer crises and
    greater stability. We emphasize that the choice of an exchange rate
    regime is one where country ownership is particularly important. We
    also recognize that, especially in the case of small open economies,
    there are benefits from a ``hard'' exchange rate peg, whether
    dollarizing, as with El Salvador, joining a currency union, as with
    Greece, or using a credible currency board, as in Bulgaria.
    The Economy of China and its Links to the United States and the Global
            Economy
        Let me now address China's economy. Economic reforms in China have
    increased economic growth and transformed China into a major economy in
    the world, both in terms of total production and in terms of purchases
    and sales of goods with the rest of the world. Yet, with per capita
    income of only about $1,000 per year and with financial, legal and
    regulatory systems in need of reform, China still faces challenges in
    its effort to catch up with developed economies.
        China's global current account surplus was under 3 percent of GDP
    in 2002 and declined to 1.8 percent in the first half of 2003. Despite
    the relatively small overall surplus, China has a large trade surplus
    with the United States. This means, of course, that China has a large
    deficit with the rest of the world. China's bilateral trade surplus
    with the United States was $103 billion in 2002 while China's trade
    deficit with the rest of the world was about $73 billion, leaving an
    overall surplus of $30 billion. Many imports from China are goods from
    other Asian economies that are processed or finished off in China
    before shipping to the United States and other countries. Other East
    Asian economies increasingly send goods to China for final processing
    before they are shipped to the United States. China accounted for 11
    percent of U.S. imports in 2002, up from 3 percent in 1990. Meanwhile,
    the combined share of Japan, Korea and Taiwan in U.S. imports declined
    to 17 percent from 27 percent over the same period. Thus, the total
    share of U.S. imports coming from these four Asian countries has
    remained steady since 1990, actually falling slightly from 30 percent
    to 29 percent.
        U.S. imports from China are about 1 percent of U.S. GDP, or 11
    percent of total U.S. imports. U.S. imports from China have been
    increasing rapidly, between 20 and 25 percent in 2002 and 2003. In
    general, these imports result from China using low-skilled labor to
    assemble and process imported parts and materials originating in other
    countries--mostly from other Asian countries that have traditionally
    exported directly to the United States. Consequently, the share of U.S.
    imports from these other countries has declined just as China's share
    has increased. Asia's share of U.S. imports has declined slightly. Much
    of the increase in U.S. imports from China has come at the expense of
    imports that once came directly from other Asian countries.
        At the same time, U.S. merchandise exports to China grew 21 percent
    in the first 8 months of this year. Growth has been especially rapid in
    recent years for U.S. exports to China of transportation equipment
    (including aircraft engines), machinery, chemicals, and semiconductors.
        The U.S. trade deficit with China should be viewed in the context
    of the overall trade deficit of the United States. The U.S. trade
    deficit is spread across many countries of the world in addition to
    China. For instance, the overall trade deficit reached $468 billion
    last year with 1) the Americas accounting for $105 billion, 2) Western
    Europe $89 billion, 3) Japan $70 billion, and 4) China $103 billion.
    The U.S. overall trade and current account deficit is best understood
    in terms of the gap between investment and saving in the United States.
    If this gap were reduced through an increment in savings, the overall
    deficit could shrink as would the size of the bilateral deficits.
    Increased growth abroad is also crucial to increasing U.S. exports.
    China's Exchange Rate Regime
        For nearly ten years now, the Chinese have maintained a fixed
    exchange rate for their currency relative to the dollar. The rate has
    been pegged at about 8.28 yuan/dollar for the entire period. Thus, as
    the dollar has appreciated or depreciated in value relative to other
    currencies, such as the euro or the yen, the yuan has appreciated or
    depreciated by the same amount relative to these other countries.
        To maintain this fixed exchange rate, the central bank of China has
    had to intervene in the foreign exchange market. It sells yuan in
    exchange for dollar denominated assets when the demand for the yuan
    increases and it buys yuan with dollar denominated assets when the
    demand for the yuan decreases. Recently the central bank has intervened
    very heavily in the markets to prevent the yuan from appreciating.
    Since the end of 2001, dollar buying has been so great that the foreign
    reserves held by the Chinese government have risen by $171 billion to
    $384 billion (as of end-September).
        This accumulation of foreign exchange reserves would tend to expand
    China's money supply, although in recent months the Chinese central
    bank has moved to reign in monetary expansion. Among other measures to
    sterilize reserve accumulation, the central bank has--for the first
    time--begun issuing central bank paper to restrict growth of the
    monetary base. Nevertheless, the broader money supply continues to grow
    very rapidly: M2 climbed 21 percent over the 12 months ending in
    September 2003.
        It is also important to recognize that China still has significant
    capital controls. China's capital controls allow for more inflows than
    outflows, thus bolstering foreign exchange reserves. China is gradually
    loosening some controls, and outflows are likely to grow as new
    channels develop for Chinese to seek diversification and better returns
    than those offered by low domestic interest rates. Indeed, there is
    already significant leakage of capital. A relaxation of controls on
    outflows would reduce upward pressure on the yuan.
    Economic Relations Between the United States and China
        With its rapid growth and substantial foreign exchange reserves,
    China is now in a position to show leadership on the important global
    issue of exchange rate flexibility. China represents one of the largest
    economies in the world, and a flexible exchange rate regime would be a
    good policy for China. It would allow China to open the nation to
    capital flows and reduce macroeconomic imbalances. We have been urging
    China to move to a flexible exchange rate.
        We have also urged the Chinese to move forward in two other areas:
    reductions in barriers to trade and capital flows. In the area of
    trade, it is important for China to fully implement, and even surpass,
    the commitments it made to the World Trade Organization. It is
    important that China continue to open markets to U.S. services,
    agricultural and industrial products, and to effectively enforce
    intellectual property laws.
        China's restrictions on capital flows are one of the major
    rigidities interfering with market forces. The authorities understand
    this and are beginning to reduce barriers to capital flows and develop
    more open and sophisticated capital markets. They are also working to
    strengthen the banking system and liberalize capital flows in order to
    prepare for a more flexible exchange rate.
        Secretary Snow traveled to Beijing last month to urge further
    progress. He met Premier Wen, Vice Premier Huang, Central Bank Governor
    Zhou, and Finance Minister Jin. He met again with the Finance Minister
    and Central Bank Governor last week in Mexico.
        President Bush recently met with President Hu. He discussed each of
    these economic issues. He stressed the importance of reducing barriers
    to trade, of removing restrictions on the transfer of capital, and of
    moving to a flexible, market-based, exchange rate. Recently, both
    Secretary Evans and US Trade Representative Robert Zoellick traveled to
    China to stress the importance market opening, especially in the area
    of trade in goods and services. In an important recent development,
    Vice Premier Huang has accepted an invitation to come to the United
    States to engage in high-level talks with Secretary Snow.
        All of Secretary Snow's meetings have been detailed and candid. He
    stated publicly, ``the establishment of flexible exchange rates, of a
    flexible exchange rate regime, would benefit both our nations as well
    as our regional and global trading partners.'' The Chinese reported
    that they intend to move to a market-based flexible exchange rate as
    they open the capital account. The central bank governor stated
    publicly that reform of the exchange rate regime is a central part of
    their foreign exchange reforms.
        Secretary Snow's visit to Beijing achieved significant progress,
    including new policy announcements by China's central bank; liberalized
    regulations for foreign firms managing their foreign exchange; and
    significantly liberalized provisions to allow Chinese travelers to take
    foreign currency out of the country and to do so more frequently. The
    United States will continue to urge the Chinese to make rapid progress
    in these areas.
        We intend to continue both technical work and high-level talks and
    on this subject. We have just established a United States-China
    Technical Cooperation Program in the financial area that will help
    China develop its financial market infrastructure, including the
    foreign exchange market.
        The Chinese and the G-7 agreed to engage in talks about these
    economic issues. This represents another example of how China, the
    United States and other affected parties can come together to work on
    an issue of vital interest to them all. The first meeting between
    senior officials from the G-7 and China's finance ministry and central
    bank took place in September in Dubai, where the Chinese economy, the
    G-7 economies, and other economic issues, were discussed. Further
    meetings will be scheduled on a regular basis with China, the United
    States and the other G-7 countries. After the Dubai meeting, China's
    central bank representative said that China is moving as fast as it can
    in its reform.
    Conclusion
        I am pleased to report that our economic strategy is showing
    progress: global economic growth is accelerating, led by an even
    stronger acceleration of economic growth in the United States. Our
    efforts to engage in financial diplomacy are generating constructive
    responses, though much more needs to be done. Active engagement with
    China and other countries is paving the way toward freer markets. The
    Administration's effort to raise growth in the United States and
    abroad, and thereby create jobs at home is succeeding.

        Mr. CRANE [Presiding.] Thank you Mr. Secretary. Dr. Mankiw.

      STATEMENT OF N. GREGORY MANKIW, PH.D., CHAIRMAN, COUNCIL OF
                           ECONOMIC ADVISERS

        Dr. MANKIW. Mr. Chairman, Ranking Member Rangel, and
    Members of the Committee, I thank you for the opportunity to
    testify on the subject of trade with China. This is an
    important and often misunderstood topic, and I applaud you for
    focusing light on it.
        In a few minutes I would like to walk you through some of
    the data that describe U.S. trade with China, and I will be
    referring to those charts over to my right.
        China's emergence as a major participant in world trade is
    fairly recent. As chart 1 shows, China's trade with the world
    was modest throughout the 1980s and early 1990s. Since then,
    both exports and imports have grown substantially. China's
    imports of goods are now roughly one-quarter of its GDP, well
    above the share for the United States and Japan.
        China has much to do to open its markets to U.S. goods and
    services. This includes reducing trade barriers and respecting
    intellectual property rights (IPRs). Increased openness is good
    for both China and for the United States. Chinese consumers
    will have increased access to goods from around the world.
    Imports will challenge Chinese firms to improve their
    competitiveness, leading to higher productivity and higher
    wages for workers. As has been widely noted, the United States
    has a substantial bilateral trade deficit with China. This
    deficit should be kept in perspective.
        In chart 2, at the same time that the U.S. trade deficit
    with China increased, the overall U.S. trade deficit with
    countries other than China also increased sharply. China's
    contribution to the overall trade deficit has actually fallen
    slightly in recent years.
        Chart 3 shows that although U.S. export growth has been
    weak over the past 3 years, it would have been even weaker
    without China. Since 2000, U.S. exports to the world, excluding
    China, have fallen; but U.S. exports to China have grown
    rapidly.
        To a large extent, increased U.S. imports from China
    reflect decreased imports of the same goods from other
    countries, as chart 4 shows. In textile and apparel industries,
    for example, China's increased share of U.S. imports has been
    more than offset by decreased imports from Hong Kong. Although
    the share of U.S. goods and imports from China has increased
    since 1990, the total share from the Pacific Rim, including
    China, has actually fallen; that is, imports from China compete
    most directly with imports produced in other Asian countries.
        The challenges faced by U.S. manufacturing firms are
    related first and foremost to the recent business cycle
    downturn. This has been compounded by a long-term trend of
    strong productivity growth in manufacturing. The recent
    recession was the second mildest since 1960, but it has not
    been mild for manufacturers. The large decline in manufacturing
    output stems from the nature of the recession. Unlike previous
    downturns in which household consumption and housing slipped,
    the weakness this time was felt mainly in business investment
    and exports. Both of these are particularly important for
    manufacturing.
        Looking back beyond the recent business cycle, the long-
    term downward trend in manufacturing employment primarily
    reflects substantial gains in manufacturing productivity.
    Manufacturing production more than doubled from 1970 to 2000.
    Manufacturing employment fell from 25 percent to 13 percent of
    total employment. Meanwhile, employment has moved into services
    where productivity growth has been slower.
        When one decomposes the recent declines in manufacturing
    employment, it is hard to see trade with China as having played
    an important role. The five industries that have contributed
    most significantly to manufacturing job losses since July 2000
    are computer and electronic equipment, machinery,
    transportation equipment, fabricated metal products, and
    semiconductor and electronic components. These are exports in
    terms of industry for the United States where imports from
    China are small. This reinforces the fact that U.S. job losses
    are more closely related to declines in domestic investment and
    weak exports than to import competition.
        There is much evidence that the U.S. economy, including the
    manufacturing sector, is starting to pick up momentum, thanks
    in part to the pro-growth tax policy that the Congress and
    President have put in place. We saw evidence of that in this
    morning's GDP report.
        Increased trade can further support higher growth. Trade is
    a win-win, benefiting both the United States and our trading
    partners. It is important, with the economic problems recently
    facing the U.S. economy, not to cause us to retreat to an open
    and growing system of world trade. Thank you.
        [The prepared statement of Dr. Mankiw follows:]
     Statement of N. Gregory Mankiw, Ph.D., Chairman, Council of Economic
                                    Advisers
        Mr. Chairman, Ranking Member Rangel, and members of the Committee,
    thank you for the opportunity to testify on the important subject of
    the relationship between trade with China and the U.S. economy. I will
    also focus on recent developments in manufacturing and on the
    connection between these developments and trade with China.
        To summarize quickly, trade with the world, and with China in
    particular, provides substantial benefits to the U.S. economy. It is
    important that China continues to take steps to strengthen our mutually
    beneficial trading relationship. For example, China needs to continue
    to open its markets to U.S. products and to safeguard U.S. intellectual
    property rights. These actions will further increase the mutual gains
    from our economic relationship with China.
        At the same time, the emerging importance of China in world trade
    has increased competitive pressure on some firms and industries in the
    United States. The Administration is committed to helping affected
    workers and their communities, including through enhanced trade
    adjustment assistance and personal reemployment accounts.
    China's Trade with the World
        China's emergence as a major participant in world trade is fairly
    recent. The volume of China's trade with the world was modest
    throughout the 1980's and early 1990's. Chinese imports and exports
    grew rapidly in the mid-1990's, however, and have increased even more
    dramatically since 2000. The level of Chinese imports and exports of
    goods has roughly doubled over the past five years.
        The recent growth in China's trade has been fairly evenly divided
    between its growth in imports and exports (Chart 1). Although total
    Chinese exports have somewhat outpaced total imports since the early
    1990's, this difference is small compared to the overall level of
    trade. Moreover, imports into China have recently increased slightly
    faster than Chinese exports, causing a reduction in its overall trade
    surplus.

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        China's imports of goods are roughly one-quarter of GDP, well above
    the share for the United States and Japan (for which the comparable
    ratio is around 10 percent). China's increased demand for foreign
    manufactured goods and raw materials has been particularly dramatic.
    Chinese imports of both manufactured goods and raw materials have more
    than doubled over the past seven years. This increased demand has
    boosted exports and growth in many economies, especially in China's
    Asian neighbors and commodity exporters (such as Brazil and Chile).
        The recent increase in Chinese imports has caused China to run
    trade deficits with many countries, including industrial countries such
    as Germany and Sweden. In fact, China's trade deficits with most
    countries are so large that the country has had a trade deficit with
    the world excluding the United States for several years.
        China still has much to do to open its markets to U.S. goods and
    services. Although it imports and trades relatively more (as compared
    to GDP) than some developed economies such as the United States, China
    is less open to the global economy when judged by other measures. In
    particular, China has much to do to ensure that it abides by its WTO
    commitments. This includes continuing to open its markets and
    respecting intellectual property rights. This also involves ensuring
    that imports and foreign firms can compete fairly with domestic
    products in the rapidly expanding Chinese market. Increased openness is
    good for both China and for the United States. For the same reasons
    that we benefit from trade and from openness to the world economy, so
    will China. Chinese consumers will have increased access to a variety
    of products from around the world. Lower import prices will make
    incomes go farther and raise standards of living. Imports will
    challenge Chinese firms to improve their competitiveness, leading to
    higher productivity and thus higher wages and incomes for workers.
    These benefits of trade apply for both the United States and our
    trading partners.
    China's Trade with the United States

        Trade linkages between the United States and China are substantial
    and important to both economies. The United States is China's most
    important export market and accounts for roughly one-quarter of all
    Chinese exports. U.S. purchases of Chinese goods have risen about 40
    percent since 2000, reaching $152 billion (annualized) as of August.
    This year through August, China has been the second largest source of
    U.S. imports, after Canada but ahead of Mexico and Japan.
        This growth in Chinese imports into the United States has resulted
    in imbalanced trade between the United States and China. The U.S. trade
    deficit with China in goods is large and more than doubled between 1995
    and 2000. So far this year, the U.S. has a $125 billion (annualized)
    deficit with China, our single largest bilateral trade deficit.
        It is important, however, to put this deficit with China into
    context. At the same time that the U.S. deficit with China increased,
    the overall U.S. trade deficit with all countries other than China also
    rose sharply (Chart 2). Our trade deficit with the world excluding
    China is almost four times greater than our deficit with China.  In
    fact, China's contribution to the overall U.S. trade deficit has
    actually fallen slightly in recent years. China currently contributes
    about the same fraction of the overall U.S. trade deficit as it did
    about 10 years ago (Chart 2). Trade with China accounts for roughly
    one-fifth of the increase in the U.S. trade deficit since 1997--
    slightly less than the contributions from the Euro area or our partners
    in the North America Free Trade Agreement (NAFTA).

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Moreover, declining exports not rising imports account for the
    recent increase in the U.S. trade deficit. Over the past three years,
    U.S. manufacturing exports have fallen by about 10 percent, while
    imports have remained flat.
        Without China, U.S. export growth would have been even slower.
    Although U.S. exports to the world excluding China have fallen since
    2000, U.S. exports to China have grown rapidly over the same period
    (Chart 3). China was the seventh largest U.S. export market last year,
    ranking after South Korea and ahead of France, and is the sixth largest
    destination for our exports this year through August. Exports to China
    have risen over 55 percent since 2000, to $27 billion in 2003 (through
    August at an annual rate). Among the products that the United States
    exports to China are: $1 billion in oilseeds and grain (roughly 14
    percent of all U.S. exports in this category), $1.3 billion in
    semiconductors and other electronic components, and $1.5 billion in
    transportation products (with statistics for this year through June).

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Increased U.S. imports from China partially reflect decreased
    imports of the same goods from other countries, instead of a net
    increase in the U.S. trade deficit. In other words, our imports from
    China replace imports from other countries rather than add to total
    imports. This pattern is clear for many major products we import from
    China. In the textile and apparel industries, for example, China's
    increased share of U.S. imports since the mid-1990's has been more than
    offset by decreased imports from Hong Kong. For other products,
    including footwear, toys and sporting goods, radios, and cameras, the
    increase in China's share of U.S. imports is roughly offset by a
    decline in imports from the rest of Asia. Indeed, although the share of
    U.S. goods' imports from China has increased since 1990, the total
    share from the Pacific Rim (including China) has actually fallen. This
    means that there has been an even greater decline in the share of U.S.
    imports from Pacific Rim countries other than China (Chart 4). That is,
    imports from China compete most directly with goods produced in other
    Asian countries.

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Note: Pacific Rim countries are Australia, Brunei, China, Hong
    Kong, Indonesia, Japan, Korea, Macao, Malaysia, New Zealand, Papua New
    Guinea, Philippines, Singapore, and Taiwan. 2003 figures are through
    August annualized.

        This is not to say that imports from China have no impact on firms
    in the United States. Chinese imports put pressure on firms competing
    with these imports and with the associated workers and communities.
    This is especially the case for firms that make items that are
    relatively intensive in the use of less-skilled labor, since these are
    goods in which China would be expected to have a comparative advantage.
    This advantage is reflected in the pattern of U.S. imports from China,
    which are mainly consumer goods--some 60 percent of the value of U.S.
    imports in 2003 through August--compared to only 28 percent capital
    goods imports. In contrast, U.S. exports to China and to the world as a
    whole tend to be goods that are made by relatively high-skilled
    workers: 47 percent of U.S. exports to China are capital goods, 35
    percent are industrial supplies, and 10 percent are foodstuffs (foods
    are produced using fewer workers per unit in the United States than in
    other countries). On the whole, this suggests that imports from China
    mainly compete with products from developing countries.
    U.S. Manufacturing Employment and Trade

        The challenges faced by manufacturing firms are related first and
    foremost to the recent business cycle downturn. For workers, this is
    compounded by a long-term trend of strong productivity growth in
    manufacturing that has meant that increased manufacturing output can be
    produced without concomitant growth in manufacturing employment.
    International trade would rank as a third influence--and trade with
    China would be one component of trade.
        While the recent recession was the second mildest since 1960, as
    real gross domestic product fell by less than 1 percent in 2001 from
    its peak at the end of 2000, manufacturers felt the economic slowdown
    first, the most, and for the longest. Manufacturing production began to
    slow in early 2000 and peaked in June of that year. It fell by about
    7\1/2\ percent from June 2000 to December 2001 before it began to turn
    around. And while manufacturing production is now expanding, the number
    of workers is still shrinking.
        A large part of the decline in manufacturing output stems from the
    nature of this recession. Unlike previous downturns in which household
    consumption and housing slipped, the weakness this time was felt mainly
    in business investment and exports. Both of these are particularly
    important for manufacturing.
        The end of the high-tech stock market bubble and the corporate
    governance scandals of the past several years have particularly
    depressed business investment. This can be seen in the fact that the
    industries contributing most to the downturn in manufacturing are those
    primarily associated with the production of business capital goods.
    Computers and electronics, machinery, and metals account for half of
    the swing in manufacturing production from its rapid growth of the late
    1990s to its decline after mid-2000. Nearly all business equipment
    represents manufactured products. In contrast, household expenditure,
    which makes up around two-thirds of final demand, involves a mix of
    goods, services, and structures. Manufacturing was thus particularly
    hard hit as a result of the nature of this business cycle.
        With industrial supplies and capital goods accounting for the bulk
    of U.S. nonagricultural goods exports, slow growth overseas and the
    resulting lackluster demand for U.S. exports has hit the manufacturing
    sector especially hard. Indeed, lower exports of manufactured goods can
    explain the entire decline in overall exports since 2000. While growth
    in the United States has not been satisfactory, we have outperformed
    many of our leading trading partners, notably Japan and major economies
    in Europe.
        Looking back beyond the recent recession, the long-term downward
    trend in manufacturing employment primarily reflects relative gains in
    manufacturing productivity that have not been offset sufficiently by
    increased purchases of manufactured goods. Although manufacturing
    production more than doubled from 1970 to 2000, manufacturing
    employment fell from 25 percent to 13 percent of total employment, as a
    result of gains in productivity. Given the level of manufacturing
    output in 2000, had productivity remained at 1970 levels, the
    manufacturing sector would have gained importance, rising to 38 percent
    of total employment. On the other hand, had trade in manufactures been
    balanced since 1970, with productivity at current levels, the share of
    manufacturing employment would have fallen by nearly as much as it
    actually did.
        Imports from China are one of many factors that influence
    manufacturing employment. The five industries that have contributed
    most significantly to manufacturing job losses since July 2000 are:
    computer and electronic equipment (16.0 percent of all manufacturing
    job losses), machinery (10.8 percent), transportation equipment (10.7
    percent), fabricated metal products (10.7 percent), and semiconductor
    and electronic components (7.5 percent). These are export-intensive
    industries for the United States where imports from China are small.
    This suggests that U.S. job losses are more closely related to declines
    in domestic investment and weak exports than to import competition.
    The Outlook and Policy Responses

        At the same time, it is important to recognize that trade can cause
    dislocation for some workers. The President has proposed a number of
    policies to help people affected by such economic changes. Notably, he
    has supported expanded trade adjustment assistance to help displaced
    workers gain or enhance job-related skills and find new jobs, including
    assistance with career counseling, training, income support during
    training, job search assistance, and relocation allowances. His
    innovative proposal for personal reemployment accounts will provide
    resources to workers most in need to help with the costs of training
    and adjustment. The proposed reemployment accounts would then offer a
    cash incentive for individuals to find work quickly, aligning public
    support with private incentives. The President has also worked with
    Congress to ensure that unemployment insurance benefits are available
    to people in need. These benefits provide important support for
    household incomes during difficult economic times.
        There is a good deal of evidence that the economy is picking up
    momentum after three years of sub-par growth. Recent data suggest that
    conditions in the manufacturing sector may be starting to improve as
    well. Manufacturing production has edged up over the past several
    months. Shipments of capital goods rose strongly in the third quarter
    as a whole despite a small downtick in August, and orders remain above
    shipments, hinting at further growth ahead. The new orders index from
    the Institute of Supply Management's monthly survey of purchasing
    managers is now markedly above the level indicating expansion.
    Moreover, some of the factors that historically have affected firms'
    production decisions are supportive of a further firming in coming
    months--the cost of capital is extremely low by the standards of the
    last decade, and manufacturers' profits have risen substantially since
    the end of 2001.
        Pro-growth tax policy has contributed greatly to the near-term
    recovery and to putting the economy on a better foundation for the
    future. Recent tax changes that give businesses greater incentive to
    invest will help many manufacturing firms, but the key is that the
    whole economy will gain as these initiatives lower firms' cost of
    capital and spur investment. Higher investment today means that
    tomorrow's workers will have more capital to work with. This makes
    workers more productive so that they earn higher wages.
        The President has outlined a six-point plan to maintain the
    economic recovery and to boost long-term growth. This includes making
    health care costs more affordable and predictable; reducing the burden
    of frivolous lawsuits on our economy; ensuring a reliable energy
    supply; streamlining regulations; opening new markets; and enabling
    families and businesses to plan for the future with confidence by
    making the tax cuts permanent.
        The actions he has proposed will boost growth in general, but
    manufacturing will benefit directly as well. The appropriate goal for
    economic policy is to support growth and to raise living standards.
    This stronger growth is good for manufacturing as it is good for the
    entire economy.
        Increased trade can further support higher growth. Trade is win-
    win, benefiting both the United States and all of our trading partners.
    More trade means more choices and lower prices for consumers, and
    bigger markets for firms--in both directions. There is work to be done
    on this front, notably to further open Chinese markets to U.S.
    products, and to ensure that China fulfills its commitments under the
    World Trade Organization agreements, including its commitment to
    safeguard U.S. intellectual property rights. As discussed by my
    colleagues on this panel, the Administration is actively engaged with
    the Chinese to address these important issues.
    Conclusion

        Thank you for the opportunity to testify. I look forward to your
    questions.

        Mr. CRANE. Thank you Dr. Mankiw. Now, Madam Ambassador
    Shiner.

    STATEMENT OF THE HONORABLE JOSETTE SHEERAN SHINER, DEPUTY U.S.
     TRADE REPRESENTATIVE, OFFICE OF THE U.S. TRADE REPRESENTATIVE

        Ms. SHINER. Thank you Chairman Thomas, Congressman Crane,
    Ranking Member Rangel, and Members of the Committee. I welcome
    this opportunity to testify regarding U.S.-China economic
    relations, China's role in the global economy, and our trade
    relationship with China.
        I have just returned from the second of two trips to China
    this month where I delivered the simple message: China must
    increase the openness of its market and treat U.S. goods and
    services in a fair and transparent manner if it wants to
    maintain support of the United States for an open market with
    China.
        To address these areas, we are focused on three fronts:
    ensuring that China meets its WTO commitments and gets the
    fundamentals right as it moves to a rules-based economy;
    ensuring that our businesses and farmers exporting to China are
    treated in a fair and transparent manner; and ensuring that
    China effectively addresses the rampant pirating for domestic
    consumption and export of American ideas and innovations. What
    our producers and manufacturers and farmers want--what they are
    entitled to--are fair and consistent rules and a level playing
    field.
        Last week, Ambassador Zoellick made his fifth trip to China
    as the USTR. Since my appointment in August, I have met with
    top officials in more than a dozen Chinese agencies to address
    outstanding issues and concerns. In addition to many meetings,
    last week Ambassador Zoellick and I met with Vice Premier Wu Yi
    where we emphasized the vital importance of meeting WTO
    commitments and addressing piracy issues.
        I will return to Beijing in 2 weeks to lead the U.S.
    delegation in our second trade dialog with China this year,
    where we will address the range of our bilateral concerns. In
    addition, I will hold specialized meetings there with my
    counterparts to express our concerns regarding IPR enforcement
    and participate in the Ambassador's IPR Roundtable which will
    bring together the U.S. and the Chinese government and private
    sector officials.
        In addition, Ambassador Zoellick, Secretary Snow, and
    Secretary Evans, who has just departed from Beijing, will
    continue to take advantage of additional opportunities to
    engage in a lead-up to Premier Wen Jiabao's visit to Washington
    in December.
        To put the U.S.-China trade relationship in context, it
    should be noted that there are areas of achievement. Many U.S.
    manufacturers, service suppliers, and agricultural exporters
    report that China's large and growing market is their top area
    of growth. Companies such as General Motors import into China
    hundreds of millions of dollars of U.S. goods to meet consumer
    demand there, benefiting American workers and contributing to
    the company's overall strength. Indeed, less than 2 years after
    China's accession to the WTO, China has become our fourth
    largest trading partner and sixth largest market for U.S.
    exports.
        In our trade with China, the United States ran a surplus of
    $1.1 billion in agricultural trade in 2002, and that surplus is
    projected to rise to $3.5 billion in 2003. The United States
    also runs surpluses with China in services trade, which was
    almost $2 billion last year. We have also seen growth over the
    past 3 years in U.S. exports to China of a number of
    manufactured products. Sales of machinery and electrical
    machinery have doubled over that period to $9.6 billion through
    the 12 months ending August 2003. We have also run a surplus in
    iron and steel. We sold nearly $1 billion of iron and steel to
    China in the 12 months through August of this year--an increase
    of well over 400 percent from 3 years ago.
        Despite areas of progress, our deficit with China is our
    largest with any country, and it is growing. There is
    increasing concern in the United States and among our other
    trading partners that there are serious lapses in China's
    enforcement of its WTO commitments. Let us briefly review the
    current status of these issues, where we have made progress,
    and where we need to continue to press.
        On WTO implementation, over the past 22 months China has
    taken many positive and sometimes difficult steps to meet its
    WTO commitments. It has implemented thousands of tariff
    reductions on schedule. It has reviewed and revised thousands
    of laws and regulations and established new transparency
    procedures and many national and sub-national agencies.
        While much progress has been made, China's record of WTO
    implementation is too fraught with inconsistencies, delays, and
    enforcement weaknesses to demonstrate clear progress toward the
    rule of law. We are working with China on specific areas of
    concern, such as agricultural trade barriers, restrictions on
    the right of American firms to import and distribute products
    and services, and identifying the importance of upcoming
    commitments.
        In the area of fairness in market access, China early on
    enacted a series of laws and regulations to protect patents,
    brands, and copyrights that are viewed as trade-related aspects
    of intellectual property rights (TRIPS) compliant by our
    industry. China's conspicuous failure to effectively enforce
    their laws and to enact deterrent penalties has made U.S.
    companies vulnerable to rampant counterfeiting and piracy. This
    is greatly undermining China's credibility as a fair market and
    threatening their own efforts to develop knowledge in
    innovation industries.
        During our meetings, China pledged to address these issues
    at the highest levels and has put Vice Minister Wu Yi in charge
    of a leading group responsible to get this issue under control.
    We consider this an important step, given her standing in the
    leadership, her expertise on trade, and her effectiveness in
    dealing with the severe acute respiratory syndrome crisis when
    charged with bringing that under control. We will be working
    with her directly to identify best practices, vulnerabilities
    in their systems, and to help with training and capacity-
    building as they move to effectively enforce their laws.
        We are aware that many U.S. firms, such as those in
    Congresswoman Johnson's district that are being threatened by
    pirating of their product, feel that they cannot wait for China
    to get the fundamentals right in this area. We know that many
    small- and medium-sized companies such as Zippo lighters do not
    have the resources to effectively investigate violations of
    their brands on the ground in China. To address their immediate
    concerns and yours, we have secured a commitment from our
    counterparts in China to investigate individual cases brought
    to their attention. We urge you to alert us to specific IPR
    problems, and we will work closely with you to address those
    problems with China.
        We also highlighted other fairness concerns by conveying
    the frustrations of many U.S. service providers with China's
    restrictive regulations and U.S. exporters' concerns regarding
    China's apparently discriminatory value-added tax (VAT)
    policies. We have put China on notice that we do not feel that
    some of their VAT programs are WTO-compliant. I will seek to
    determine in November whether we can expect to have our
    concerns addressed.
        On fair and transparent standards and regulations, as it
    implements its WTO requirements, we are urging China to build a
    transparent, open, and fair regulatory environment. In some
    sectors our companies report that they are seeing excellent
    improvements in the development of regulations; but in others,
    companies are frustrated with their attempts. In agriculture,
    we have pressed China to use only science-based sanitary and
    phytosanitary (SPS) measures. We are expressing the importance
    of regulating with technology neutrality, citing areas such as
    the wireless 3G field and the need for a fair approach in areas
    like basic versus value-added telecom services and automobile
    industrial policy.
        In the area of enforcement of our trade remedies, as stated
    already, as a condition of China's entry into the WTO, China
    agreed to two separate China-specific safeguard mechanisms to
    allow WTO Members to cope with market disruptions caused by
    increasing economic integration with China. When our industry
    faces injurious trade with China, the Administration is fully
    committed to enforcing U.S. trade remedy laws and to exercising
    the important rights that the United States has under China's
    WTO accession agreement. To this end, the Administration has
    imposed duties under U.S. antidumping and safeguard laws
    against a range of products from China.
        We have also raised the question of better cooperation on
    international economic issues, including in the WTO. We have
    had frank discussions with China on the progress of the Doha
    Development Agenda and will continue to engage China in an
    effort to promote our common areas of interest. China was a
    Member of the G-21 at a recent WTO Ministerial meeting in
    Cancun, Mexico. However, China also made some constructive
    interventions during those meetings, and as a Member of the
    Asia-Pacific Economic Cooperation (APEC) it has agreed with all
    other APEC Members that WTO Members should build on the Cancun
    text of September 13, 2003, which was a positive development.
        Mr. Chairman, Members of the Committee, thank you for this
    opportunity to testify, and I look forward to your questions.
        [The prepared statement of Ms. Shiner follows:]
     Statement of the Honorable Josette Sheeran Shiner, Deputy U.S. Trade
            Representative, Office of the U.S. Trade Representative
        Mr. Chairman, I welcome this opportunity to testify regarding U.S.-
    China economic relations and China's role in the global economy. I have
    just returned from the second of two trips to China this month, where I
    delivered this simple message: China must increase the openness of its
    market and treat U.S. goods and services in a fair and transparent
    manner, if it wants to maintain support in the United States for an
    open market with China.
        During the last three weeks, I met with my counterpart at the
    Ministry of Commerce and with high-level officials from several other
    ministries to address critical U.S.-China economic and trade issues in
    the run-up to the October 19 meeting between Presidents Bush and Hu. I
    accompanied Ambassador Zoellick to the APEC Ministerial, where we
    bluntly and directly addressed these issues with Executive Vice
    Minister of Commerce Yu Guangzhou. I traveled with Ambassador Zoellick
    to Beijing for a meeting with Vice Premier Wu Yi, where we emphasized
    the vital importance of improving access to Chinese markets for U.S.
    manufacturers, service suppliers, agricultural exporters and their
    workers. And, we met with Governor Bo Xilai from Liaoning Province in
    Northeast China to discuss ways to increase agricultural trade and to
    improve intellectual property rights (IPR) enforcement.
        I will return to Beijing in mid-November to lead the U.S.
    delegation in our second Trade Dialogue with China this year, where we
    will address the range of our bilateral trade concerns. In addition, I
    will hold meetings there with my counterparts to press our concerns
    about IPR enforcement, and participate in the Ambassador's IPR
    roundtable, which will bring together U.S. and Chinese government and
    private sector officials.
        The Administration attaches great importance to improving China's
    openness to U.S. goods and services as a basis for building a healthy
    trading relationship. China's large and growing market offers
    tremendous potential for U.S. manufacturers, service suppliers and
    agricultural exporters. Indeed, less than two years after China's
    accession to the World Trade Organization, China has become our fourth
    largest trading partner and the sixth largest market for U.S. exports.
    We sold $22 billion in goods to China in 2002--up from $9.3 billion in
    1994--and we should exceed last year's figure by more than 20 percent
    in 2003. Perhaps more significantly, exports to China have grown some
    62 percent in the last three years, while U.S. exports to the world
    have declined by 9 percent over the same period. We are working to
    ensure that strong U.S.-China economic and trade ties benefit U.S.
    workers, farmers and ranchers.
        Despite growing U.S. exports, our largest bilateral goods trade
    deficit is with China--and that deficit continues to grow. It stood at
    $103 billion last year and is running at an annualized rate of $125
    billion so far this year. China will represent between 21 and 22
    percent of our overall goods trade deficit with the world this year,
    like last year.
        But while the bilateral deficit is large, it is worth putting those
    numbers into context. It should be noted, for example, that:

          Within the overall goods deficit, the United States ran a
    surplus of $1.1 billion in agricultural trade in 2002, and that surplus
    is projected to rise to $3.5 billion in 2003. The United States also
    runs surpluses in services trade. Last year, the services trade surplus
    with China was just under $2 billion.
          Much of the import increase from China has come at the
    expense of other Asian countries. In fact, when goods imports from
    China, Japan, Korea and Taiwan are combined, they actually represent a
    smaller share of U.S. global goods imports than they did in 1990,
    falling from 29 percent to 27 percent of the U.S. import market.
          China's economy is relatively open to imports. Imports as
    a share of GDP are 22.8 percent in China, 11.2 percent in the United
    States and 7.6 percent in Japan.
          And, as the National Association of Manufacturers and
    others have pointed out, imports are not bad for the U.S. economy.
    Goods that can be produced more efficiently in other countries provide
    a broad range of products to industry and consumers that enhance our
    standard of living.

        The Administration is determined to continue to address market
    access problems that contribute to the deficit. Our markets are
    certainly open to exports from Chinese companies, and we need to ensure
    that China operates with fair, transparent and predictable rules when
    it comes to our companies' access to China's market. That means, most
    importantly, that China must live up to the commitments that it made
    upon joining the WTO. We also need to ensure that China engages in fair
    trade when it comes to its exports to the United States. Our companies
    want, and are entitled to, a level playing field.
        The areas we have been pressing are:

          WTO implementation, including implementation of China's
    obligations to open its agricultural market and provide for full
    liberalization of trading rights and distribution services;
          Fairness in market access, such as providing for
    effective enforcement of intellectual property rights, lifting
    excessive restrictions on financial services firms, and non-
    discriminatory value-added tax policies;
          Fair and transparent standards and regulations, including
    science-based sanitary and phytosanitary measures and technology
    neutrality for new high technology products;
          Better cooperation on the international economic issues,
    including in the WTO; and
          Enforcement of U.S. trade remedies.
    China's Implementation of its WTO Committments
        China's accession to the World Trade Organization on December 11,
    2001 was one of the most anticipated and hotly debated subjects in
    international economics of the last decade. By joining the WTO, China
    committed to a sweeping series of market-opening reforms that will
    require a fundamental shift in China's economy. While China had, for
    over two decades, been moving from a command economy to a more market-
    oriented economy, China's WTO accession was meant to be the crescendo
    to this movement.
        For the United States, accepting China into the WTO served a number
    of purposes. The accession provided an opportunity to negotiate a
    favorable package of tariff cuts and the elimination of many non-tariff
    measures to open China's market to U.S. farmers, manufacturers, workers
    and service providers. China's WTO accession also subjects China to the
    same rigorous trade rules by which the United States and all other WTO
    members operate. The WTO has, for the United States, served as a
    valuable forum at which to address trade concerns with China. While we
    have yet to initiate dispute resolution proceedings against China, the
    United States has frequently used both formal and informal consultative
    mechanisms to achieve progress on many issues of concern to the United
    States. Indeed, the progress we have made toward resolving concerns
    with China's trading practices through such mechanisms is the primary
    reason we have not had to resort to WTO dispute resolution or other
    measures.
        Of course, there are forces in China, as elsewhere, that are
    resistant to the changes wrought by WTO implementation. Despite the
    best of intentions by many Chinese officials, these forces have not
    been unsuccessful in limiting China's progress toward the goals the
    United States and other WTO members foresaw through China's WTO
    accession. As a result, China's market for U.S. goods and services is
    not as open as it should be, our engagement with China in the WTO has
    not been as useful as it should be, and China's record of WTO
    implementation is too fraught with inconsistencies to allow definitive
    statements on Chinese progress toward the rule of law.
        Over the past 22 months, China has taken many positive and
    sometimes difficult steps to meet its WTO commitments. China has
    completed much of the nuts-and-bolts work of WTO implementation by
    reviewing thousands of laws and regulations and making necessary
    revisions to effect its WTO commitments, and by establishing new
    transparency procedures in many national and sub-national agencies. It
    has also reduced tariffs to their committed levels, and has begun the
    process of removing market access barriers affecting a wide range of
    goods and services sectors.
        China's potential as a market for U.S. exports of bulk agricultural
    commodities was a key factor in U.S. support for China's WTO accession
    and grant of Permanent Normal Trade Relations status to China. While
    bumper harvests of some crops in China in 2002 may have limited the
    commercial potential of some U.S. exports, China's attempts to restrict
    certain agricultural imports has been a recurring problem since China's
    WTO accession. The use of--or even the threat to use--questionable GMO
    standards and sanitary and phytosanitary (SPS) measures to restrict
    imports of some products for alleged health and safety concerns has
    frustrated efforts of U.S. agriculture traders, most notably in the
    case of soybeans. In the case of those bulk agricultural commodities
    subject to negotiated tariff-rate quotas (TRQs) in China, the setting
    of sub-quotas, use of burdensome import licensing procedures,
    allocation of TRQs in commercially unviable quantities and a lack of
    transparency in TRQ allocation and management have restricted what
    should be a ready market for U.S. exports, particularly wheat, corn and
    cotton.
        After the efforts of Ambassador Zoellick, Agriculture Secretary
    Veneman and others in the Administration, the commercial impact of
    these potential barriers was contained. U.S. exports of soybeans topped
    $1.2 billion--a record--and cotton sales were already 8-10 times
    greater than in any previous calendar year by July, 2003. In fact, as
    noted earlier, we are actually running a surplus with China in the
    agricultural area, which is projected to triple to $3.5 billion in
    2003. Chinese officials have assured us that systemic problems with
    both GMO and SPS regulation will be addressed, and a negotiated
    settlement to our concerns with China's TRQ system is in progress.
    However, until solutions are successfully implemented, these issues
    will hang like a cloud over the marketplace. These and other emerging
    concerns will require continued vigilance and engagement by the
    Administration in order to ensure fair competition and market access
    for U.S. goods.
        With regard to China's future WTO implementation, the top concern
    of many U.S. industries involves trading rights and distribution
    services. These were key areas for WTO members when negotiating the
    terms of China's entry into the WTO. Within three years after its WTO
    accession, or by December 11, 2004, China agreed to make trading rights
    automatically available, which means that U.S. businesses will be able
    to import and export goods on their own, without having to use Chinese
    trading companies. By that same time, China also agreed to fully open
    up the distribution services sector, which will allow U.S. companies to
    sell their goods freely in China, without being required to turn the
    job over to Chinese wholesalers and retailers or establish a joint
    venture with a Chinese enterprise. In the interim, China agreed to
    progressively liberalize in these areas pursuant to timetables set out
    in its accession agreement. So far, however, while China has begun the
    required liberalization, it has imposed stringent conditions, which
    have greatly limited the number of enterprises eligible to take
    advantage of the intermediate liberalization. China's ``go slow''
    approach also raises concern that China will not complete full
    implementation of its commitments in these areas on a timely basis. The
    Administration is actively engaged with China on these issues--most
    recently in Ambassador Zoellick's meeting with Vice Premier Wu Yi--and
    has made clear its views on the importance of China's full and timely
    implementation of this important commitment.
    Fairness in Market Access
        In our meeting earlier this month with Vice Premier Wu Yi,
    Ambassador Zoellick and I stressed the importance of not just
    predictability and consistency but also fairness in the rules governing
    access to China's market. We explained that China's conspicuous failure
    to effectively address rampant counterfeiting and piracy greatly
    undermines China's credibility as a fair market. We also highlighted
    other fairness concerns by conveying the frustrations of many U.S.
    service providers with China's restrictive regulations and U.S.
    exporters' concerns regarding China's apparently discriminatory value-
    added tax (VAT) policies.
        In the year leading up to WTO accession, China made significant
    improvements to its framework of laws and regulations protecting
    patents, copyrights, trademarks and other intellectual property rights.
    However, the lack of effective IPR enforcement in China is a major
    obstacle toward a meaningful system of IPR protection. IPR problems run
    the gamut, from rampant piracy of film and other entertainment
    products, to sophisticated software and semiconductor products, to
    counterfeiting of consumer goods, electrical equipment, automotive
    parts and pharmaceuticals. IPR infringements not only have an economic
    toll, but they also present a direct challenge to China's ability to
    regulate those products that have health and safety implications for
    China's population and international purchasers of such products. While
    a domestic Chinese business constituency is increasingly active in
    promoting IPR protection for self-interested reasons, the problem is
    immensely widespread. If significant improvements are to be achieved on
    this front, China will have to devote considerable resources and
    political will to this problem, and there will continue to be a need
    for sustained efforts from the United States and other WTO members.
        We understand that Madame Wu Yi will be leading a new and more
    focused effort by China to tackle the IPR enforcement problem.  In the
    view of the Administration, the key to making concrete progress on IPR
    enforcement will be for China to demonstrate a clear commitment to
    fight piracy at the highest levels, to increase deterrent-level
    criminal penalties for IPR violators, to show a willingness to increase
    prosecution and punishment of IPR offenders, to lower thresholds for
    criminal prosecution, to increase resources and devote more training
    for enforcement in all parts of China, and to establish more effective
    communication procedures between relevant officials of China's courts
    and investigative units, the Supreme People's Procuratorate and China's
    lawmaking bodies. I will continue to press our concerns in this
    important area later this month in meetings with my Chinese
    counterparts and with representatives of the U.S. and Chinese private
    sectors.
        In the services area, several sectors have generated concerns,
    particularly regarding China's use of capitalization requirements that
    exceed international norms. The United States and China have had
    reasonably cooperative talks to resolve these concerns in many of the
    affected sectors, but progress has been slow and at times frustrating.
    Other issues, however, such as implementation of China's commitments on
    branching by insurance companies, the United States and China remain at
    odds. In addition, even when we have made progress toward resolving
    concerns with trade-restrictive regulations, as in the case of express
    courier services, we have sometimes had to revisit problematic issues
    in subsequently proposed measures.
        Meanwhile, China has increasingly used VAT policies to encourage
    domestic industrial or agricultural production in a number of sectors.
    In the case of semiconductors, China's policy of providing rebates of
    VAT to domestic semiconductor producers disadvantages U.S. exports and
    raises significant WTO compliance concerns. In the case of fertilizer,
    China exempts from the VAT fertilizers that compete directly with the
    principal U.S. fertilizer export, a practice that is difficult to
    justify under WTO rules. In addition, we also have received reports
    about questionable tax policies used to promote exports of domestically
    produced agricultural goods, including corn. The Administration has
    engaged China on all these practices, and will continue to pursue the
    elimination of discriminatory or trade-distorting VAT policies through
    appropriate channels in Beijing, Washington and Geneva.
    Fair and Transparent Standards and Regulations
        One important incentive behind U.S. support for China's WTO
    accession was the role we foresaw WTO implementation would play in
    promoting transparency and the development of the rule of law in China.
    Indeed, in the first year of its WTO membership alone, China issued,
    modified or repealed more than one thousand laws and regulations to
    conform with WTO requirements. A China that plays by the rules of
    international trade, promotes more accountable government and is
    building a transparent, open and fair regulatory environment is a China
    that all Americans want to see.
        While China has made significant progress in revising its legal
    framework, other problems have persisted. In particular, China has a
    poor record of providing opportunities for public comment on draft laws
    and regulations. In addition, many of the regulatory measures that
    China has adopted have been issued without advance notice and, in some
    cases, have unfairly prejudiced foreign companies and their goods and
    services.
        Since China's accession to the WTO, we have repeatedly engaged
    China on the need for transparency in the operation of its trade
    regime, as China grapples with the fundamental changes required of it.
    And as we have witnessed how China has been implementing its new laws
    and regulations, we have urged China, for example, to use only science-
    based SPS measures. We have also stressed the importance of regulating
    with technological neutrality, citing areas such as the wireless 3G
    field, and the need for a fairer approach in areas such as basic versus
    value-added telecom services and automobile industrial policy, among
    others. We are committed to pursuing these efforts for as long as these
    problems persist.
    Enforcement of Trade Remedies Laws
        The rapid expansion of trade between our two countries has
    inevitably led in some cases to competition between our domestically
    produced goods and Chinese imports. When our industries face injurious
    trade with China, the Administration is fully committed to enforcing
    U.S. trade remedy laws and to exercising the important rights that the
    United States has under China's WTO accession agreement, including our
    ability to continue to apply special methodologies to China under the
    antidumping laws.
        China also agreed to two separate China-specific safeguard
    mechanisms to allow WTO members to cope with market disruptions caused
    by increasing economic integration with China. One such mechanism, the
    product-specific safeguard, was codified as Section 421 of the Trade
    Act of 1974, as amended, and is available until December 11, 2013.
    Since the implementation of Section 421, four petitions have been
    brought requesting import relief. In one case, the International Trade
    Commission found that our domestic producers' market had not been
    disrupted by imports from China. In two other cases, while the ITC
    found market disruption, the President determined that the adverse
    impact on the U.S. economy was clearly greater than the benefits from
    providing import relief. The fourth case is pending preliminary
    determination of market disruption by the ITC. While to date no import
    relief has been granted under Section 421, the President, in his most
    recent determination, reiterated his commitment to using the safeguard
    when the circumstances of a particular case warrant.
        The second safeguard agreed to by China as part of its WTO
    accession package is an additional mechanism specific to textiles, and
    allows WTO members under certain circumstances to invoke limited import
    relief--specifically a 7.5 percent cap on growth in imports of a given
    textile category for up to one year (6 percent for wool products)--
    until December 31, 2008. The Administration is currently reviewing
    three requests under this safeguard mechanism, and initial
    determinations are scheduled for mid-November.
    Broader Cooperation
        As China becomes more integrated into the global economy, it
    becomes more important for the United States and China to work together
    to promote our mutual interests. We have discussed various ways in
    which we can cooperate on international economic and trade issues,
    particularly given our largely complimentary economies, and we have
    generally received constructive responses from China. Of particular
    importance at this time are the Doha Development Agenda negotiations.
    We have had frank discussions with China on the progress of those
    negotiations and will continue to engage China in an effort to promote
    our common areas of interest. I note that China was a member of the G-
    21 at the recent WTO Ministerial meetings in Cancun, Mexico. But, China
    also made some constructive interventions during those meetings, and as
    a member of APEC it has now agreed to build on the Cancun Ministerial
    text of September 13, 2003, which is a positive development.
    Conclusion
        Mr. Chairman and members of the Committee, thank you for providing
    me with the opportunity to testify. I look forward to your questions.

        Mr. CRANE. Thank you. Before we proceed with questions, I
    just got the communication that the alarms that were set off
    with respect to a possible terrorist threat was a Halloween
    prank. A very stupid foolish thing, whoever was guilty of it,
    but apparently it was not serious. So, everyone can relax and
    breathe easy.
        Let me turn to you, Mr. Secretary. The past recession was
    driven by a decline in capital investment, generally a U.S.-
    produced manufactured good. In addition to a weak economy in
    Japan--weak economy, rather, Japan and Europe has slowed down
    the demand for U.S. exports of manufactured goods, and Congress
    passed significant tax relief to encourage business spending.
    The recession has been over for almost 2 years. Are these tax
    cuts working to encourage investment, and is the global economy
    recovering?
        Mr. TAYLOR. Yes. Yes. I think the tax cuts are encouraging
    this recovery. The tax cuts passed in 2001 prevented the
    downturn from becoming worse and got the economy moving again
    in a very difficult period, 9/11 attacks. For example, the
    reduction in stock prices that began in 2000, and the tax cuts
    passed this year are adding to that substantially, and we are
    beginning to see it now in the third quarter with the growth
    rate rising to 7.2 percent.
        Globally, we are also beginning to see some pickups, not as
    substantial as in the United States. We are leading the way,
    but Japan is beginning to increase its growth rate. We see the
    British growth rate rising and some signs of acceleration in
    growth in Europe, but we need to work harder, and that is what
    we have tried to emphasize in the Administration, to have other
    countries around the world remove the barriers to growth. That
    is what we are working on and will continue to work on, sir.
        Mr. CRANE. Thank you. Dr. Mankiw, while the productivity
    gains in the United States have been impressive to a macro-
    economist, they are bad news to millions of unemployed
    Americans. How fast must the U.S. economy grow in order to
    create, say, 2 million jobs? Aren't the productivity gains of
    late somewhat of a double-edged sword?
        Dr. MANKIW. You are right that, in an arithmetic sense, for
    any given output growth, the higher the productivity growth,
    the lower the employment. I think we should think positively of
    higher productivity growth nonetheless, because it means that
    the economy is capable of growing faster. It means that we can
    push on the accelerator and let the economy grow without
    worrying about inflation. Higher productivity growth tends to
    keep down labor costs. It means that there will be higher real
    wages, and indeed throughout this business cycle, real wage
    growth has been strong.
        There are different estimates about what productivity is
    likely to be going forward. It is probably going to be higher
    than it has been historically. Over the past 40 years, it has
    been around 2 percent. It is probably going to be higher than
    that, but it is good news; it means we can let the economy grow
    faster.
        Mr. CRANE. Ambassador Shiner, do you think the China WTO
    compliance issues that have arisen thus far can be handled
    through negotiations with China, either bilaterally or within
    the WTO, or will some issues likely result in WTO dispute
    settlement proceedings?
        Ms. SHINER. Congressman, as you know, we are 2 years into
    China's accession process and we have seen an increase in
    concern among our businesses and our farmers about their
    compliance situation. In the first year, we saw tremendous
    momentum in China as they worked to implement and change
    thousands of laws and regulations. There are a number of areas
    where we are concerned that either the laws and regulations
    that have been implemented are not consistent and not
    effective, and also they are losing some of the momentum in
    other areas.
        We are certainly pressing them and working with them, and I
    hope to get an assessment in November on some of the really
    critical areas that we have pressed. We have seen a gap between
    what they have implemented and what their commitments were and
    whether or not we will see progress there or not. We are
    continually reviewing these, and we are prepared to use the
    tools necessary as we go through it, but of course it is far
    preferable if we can work directly with them to resolve these.
        As I mentioned, in a few areas like the VAT, we think there
    is a serious gap in view on that, and I am not sure we will
    resolve that. Again, we will be taking an assessment in
    November as to where we stand on a number of key areas.
        Mr. CRANE. Thank you, Mr. Rangel.
        Mr. RANGEL. Thank you Mr. Chairman. Mr. Taylor, you
    commented on the recently passed tax cut bill. We have another
    one that left the Committee, $128 billion tax cut bill,
    ostensibly to remove the impediments that we have with the
    European Union and the WTO. Are you familiar with that bill? I
    am certain Ambassador Shiner has worked on it.
        Mr. TAYLOR. I defer to Ambassador Shiner on this issue.
        Mr. RANGEL. The bill is a tax cut bill. It removes tax
    liability for corporations overseas and domestically and takes
    us into debt an additional $60 billion. It is a $128 billion
    tax cut. The Ambassador will be able to tell you that. We were
    at risk for a $4 billion possible tariff from the European
    Union, but in order to resolve that, we got this bigger bill.
        Do you believe the previous tax cuts have been so helpful
    as it relates to our economic recovery? I just want to get your
    view on this $128 billion tax cut. I don't want to believe that
    the Department of the Treasury is unfamiliar with the bill we
    just passed out.
        Mr. TAYLOR. The tax cuts that I was referring to that have
    been passed have been very powerful.
        Mr. RANGEL. I need your help on the one they are about to
    pass.
        Mr. TAYLOR. They have a powerful effect. I would urge any
    of the actions taken in this area are aimed at improving the
    economy the way the tax cuts already have done so. I know these
    tax cuts are not finished.
        Mr. RANGEL. It relieves corporate taxes. Like my friend Mr.
    Crane believes that we shouldn't have any corporate taxes at
    all and that corporations don't pay taxes, that people do. So,
    he welcomes the relief of $128 billion off of people by
    removing it off of corporations. You share that view?
        Mr. TAYLOR. I think if you can find ways to reduce the
    marginal tax rates on activities that are helpful to people in
    the economy--and that includes a lot of the things that
    businesses do, invest in capital, invest in equipment so that
    workers can produce more and earn more--we should be
    encouraging that every chance we get.
        Mr. RANGEL. Did the Thomas bill come across your desk at
    all?
        Mr. TAYLOR. The Thomas bill is being discussed right now in
    this Committee, and we are very supportive of the activities
    going on in this area. I would just urge that whatever comes
    out that we focus on the important things, and that is to
    create jobs and get this economy going.
        Mr. RANGEL. What you are saying, Mr. Secretary--and I
    wanted to get to China--but any tax cuts, you believe, would be
    of great assistance for our economic recovery. I thought you
    would be stunned by the $128 billion.
        Mr. TAYLOR. Congressman, as you know, the efforts to find a
    way to resolve the WTO issue are focusing on ways to make up
    for the revenues in one area with others. We are supportive of
    doing that as close----
        Mr. RANGEL. Make up for what revenues? We never lost
    anything with the WTO.
        Mr. TAYLOR. The bills that you are working on now----
        Mr. RANGEL. We would have saved $60 billion with the WTO
    repair. That is all we had to do there. Instead of that, we are
    coming back and giving tax cuts to both sides overseas and
    here, but you know that.
        I am just saying that since that is done, do you believe
    that with the economy with what it is, that further tax cuts
    would speed up the economic recovery? I get the impression,
    quite honestly, that this Administration believes that tax cuts
    is the answer to economic recovery and that deficits really are
    not on the table at all.
        Mr. TAYLOR. We are seeing right now the impacts of the tax
    cuts that were passed, and they are very powerful and are
    making a difference. This Administration has also made it very
    clear that as the economy recovers, the budget deficits will
    come down, and are projected to come down, and that is an
    important part of our policy as well.
        Mr. RANGEL. Not in our lifetime, but I guess later it will.
    Ambassador, do you find the Thomas bill the solution to the
    problem that you and Ambassador Zoellick have been wrestling
    with with our friends in the European Union?
        Ms. SHINER. We are pleased to see that this issue is
    moving. Our focus really has been on trying to be responsive to
    the foreign sales corporation (FSC) ruling in the WTO and move
    that forward. So, the Department of the Treasury has been the
    lead agency on it, but we are pleased with the efforts with
    this Committee and others, and we hope to get it resolved.
        Mr. RANGEL. I can see why they give you people the title of
    Ambassador rather than just regular Secretaries and Deputy
    Secretaries. Thank you, Mr. Chairman.
        Mr. CRANE. Thank you. Folks, I think we can wait another 5
    minutes, but the bells just went off for a recorded vote on the
    floor. Let me yield first to Mr. Shaw, and we may even be able
    to get one more on the other side of the aisle before we get
    over there and vote.
        Mr. SHAW. I hope I have a chance to get around to a
    question specifically relating to China, but I think that the
    observations and comments by Mr. Rangel deserve a rebuttal from
    this panel, and I will use most of my time in order to do that.
        We are not only in a world economy, but we are in a world
    of competition. We are seeing and we are hearing a lot about it
    from both sides of the aisle here, criticism about our
    corporations and employers leaving this country because they
    find a better business climate in another country.
        So, when you start looking at and going through the--each
    provision of the bill that this Committee passed just a couple
    days ago, you will see that it is more encouraging to stay in
    business in this country by the provisions of this bill; that
    we will become more competitive on a global basis to be the
    home base of employers, which we are now seeing that we are
    losing to such places as Bermuda and Mexico and some of these
    other places.
        A lot of comment was made regarding the simplification of
    the foreign tax credit during the debate. Several observations
    I think we should make on that. One, it was bringing about
    fairness by reducing from nine baskets, a very complicated
    formula, to one which was much more simpler and easier to
    understand. Also it would tell the corporations that do have
    subsidiaries in other countries that they can keep their home
    base here and get a fair shot on the foreign tax credit. That
    is simply a reduction of those taxes based upon the taxes that
    they pay in other countries.
        We know that--and we heard from the Department of the
    Treasury at that particular hearing that so much of the reason
    for having those subsidiaries in other countries was more about
    the laws and the attitudes in those foreign countries than
    about the question of exporting American jobs. I believe that.
        I think it is about time that we look to employers as
    people that should be or companies that should be encouraged to
    expand here in the United States and we--just as cities do and
    just as counties do and just as States do all across this
    country, they encourage through tax laws investment within
    those States. We need to do that by encouraging investment here
    in the United States and growing jobs.
        So, the fact that we are helping employers also means that
    we are helping the employment figures and we are helping
    employees, and that is what we want to do. We want to grow our
    job market, and that is a good thing.
        I now want to just for one moment outline a situation
    pertaining to a constituent of mine that I have talked to Mr.
    Zoellick about, and I even brought it up before the Chinese
    Ambassador, but I get absolutely--it just doesn't seem--
    everybody listens very politely, but it doesn't have any
    effect. I have a longer statement regarding this that I would
    ask unanimous consent to place in the record.
        Mr. CRANE. Without objection.
        [The information follows:]

        Mr. Ambassador, I want to talk to you about a trade dispute
    involving the Revpower Corp., which was owned by my constituent, Mr.
    Robert Aronsson. This matter has been ongoing now for well over a
    decade, and I ask for your help.
        Allow me to briefly state the facts: In December 1989, SFAIC, a
    Chinese state-owned corporation, confiscated a factory owned by
    Revpower. In response, Revpower sought in 1993 and won a $4.9 million
    arbitration award from the Arbitration Institute of the Stockholm
    Chamber of Commerce against SFAIC.
        When Revpower attempted to enforce the award with the Chinese court
    in Shanghai, that court refused to even acknowledge that the suit had
    been filed for 2 years. When the Shanghai court finally adjudicated the
    suit, it was only after SFAIC transferred its assets to its parent
    company, The Shanghai Aviation Industry, that the Court then dismissed
    Revpower's suit on that ground that FSAIC had filed for bankruptcy and
    accordingly there were no assets against which the arbitral award could
    be enforced. Four years later, the Xuhui Bankruptcy Court, found that
    the SFAIC and SAIC ``conspired maliciously'' to evade the enforcement
    of the arbitral award by transferring property from SFAIC to its parent
    SAIC. But by then it was conveniently too late for the Chinese
    government to grant any relief to Revpower.
        As you are aware, China is required to enforce arbitral awards
    under the 1958 New York Convention on Recognition and Enforcement of
    Arbitral Awards. As SFAIC and SAIC were owned by the Chinese government
    at the time of the arbitration award. The Chinese government is bound
    by treaty to enforce and pay this award. Moreover, by failing to honor
    the Revpower award, the government of China ratified the violative acts
    of the Shanghai Court and thus breached its treaty obligations under
    the New York Convention. The net result is that what was initially a
    small commercial dispute has now become a situation whereby the injury
    to the U.S.-owned entity stems directly from the Chinese government's
    willful violation of an international treaty.
        This debt to Revpower by the Chinese government has been
    outstanding now for over a decade, and with interest, now exceeds $11
    million. I contacted the previous Administration about this manner in
    writing on four occasions, with little result. Moreover, I asked your
    predecessor for her personal assurance that the office of the U.S.
    Trade Representative would vigorously pursue this matter with the
    Chinese, during a Ways and Means hearing in 2000, but nothing
    transpired.
        Therefore, Mr. Ambassador, can you appoint a representative in your
    office to look into this matter, with the hopes of resolving this
    problem, instead of just endlessly managing a problem? China is
    ignoring its international treaty obligations, and small American
    businesses are getting financially hurt. I urge you to be aware of the
    overall problem of the Chinese ignoring international arbitral awards.
    I implore you to use your office to work with your Chinese counterparts
    to finally bring closure to this matter. Thank you.

        Mr. SHAW. To summarize, in December 1989, Shanghai Far East
    Aero-Technology Import & Export Corp. (SFAIC), a Chinese-
    owned--state-owned corporation confiscated a factory owned by a
    company by the name Revpower. In response, Revpower sought in
    1993 and won a $4.9 million arbitration award from the
    Arbitration Institute of Stockholm against SFAIC. The Chinese
    courts refused to enforce this award and the officers of the
    state-owned Chinese corporation then proceeded to deplete the
    company of its assets. This was flagrantly done, despite the
    fact that China is required to enforce arbitration awards under
    the 1958 New York convention on recognition and enforcement of
    such awards.
        Ambassador Shiner, you spoke of the rule of law and respect
    of the rule law of other countries, and that is something we
    have to be very much concerned about. I don't know if you have
    any personal information or knowledge of this case. I would
    doubt that you do, but you are shaking your head yes, so maybe
    you do. I hope this will stay on the radar screens in our
    negotiations with China. If you care to comment on that.
        Ms. SHINER. I am aware of the case and will continue to
    follow and work with you to resolve it. I will just say that on
    your earlier point about wanting to keep jobs in the United
    States, I think ultimately the U.S. market will remain
    incredibly strong just because we have the kind of
    infrastructure that we have built over 250 years that provides
    for a fair and judicial system, transparency in our laws, and
    regulations. It is America's strength.
        As we move more into a global economy, more and more
    companies are going to remember why ours is a country you want
    to do business in: because our courts are so responsive. We do
    have a problem in China with the court system. A number of our
    companies report that, and it is one of the issues we will
    continue to press with China.
        Mr. CRANE. Folks, let me tell you we have one 15-minute
    vote on the motion to adjourn, but there will be 5 minutes of
    debate and then three recorded votes after that. So, we will
    have a little time off here, and I hope I can get all of you
    back here after we finish voting. We will stand in recess
    subject to the call of the Chair.
        [Recess.]
        Mr. CRANE [Presiding.] Folks, we are going to be
    interrupted again they say within probably about a half an
    hour. So, while we have at least some Members here, let me
    yield at this point to our distinguished colleague on the other
    side of the aisle who is active in our trade issues, Sandy
    Levin.
        Mr. LEVIN. Thank you. Thank you, Mr. Crane. We appreciate
    your waiting around for us here. You are all busy, important
    people. Let me just indicate as I talk to companies, workers,
    colleagues, I must say what is missing in Washington, and I
    think in your testimony is a sense of urgency. Let me just give
    you a few illustrations. Dr. Mankiw, you--one of you talked to
    Mrs. Johnson about what was happening in her district. There's
    been a similar dynamic in other districts. When you say trade
    is win/win; you can't say that to companies and workers that
    have been displaced.
        I don't know why we use that language. You can favor
    expanded trade, feel the need to shape it, and not say it is
    win/win. I think that is especially relevant because I went
    over your five sectors, Dr. Mankiw, and it is interesting, when
    you look at what China has exported to the United States, that
    after toys, the next three are in the five sectors you
    mentioned: office machinery and computers, telecom and sound
    recording equipment, and electrical machinery.
        So, more and more the competition from China is in the
    higher tech, the higher value added products. So, while it is
    true that productivity accounts for a lot of what we have seen,
    I think everybody has to expect that competition with China is
    going to be increasingly in those five sectors you mentioned.
    Isn't that true? That is the trend line, isn't it, away from
    footwear and toys being number one and two, and away more than
    anything else?
        Dr. MANKIW. Let me respond to several things you said. I
    think when I say trade is win/win, I mean that allowing for
    free trade can sort of raise both countries' levels of economic
    prosperity, but you are absolutely right that the adjustment to
    that does cause workers to suffer some dislocations. I do talk
    about that in the written testimony as well. There are a
    variety of policies the Administration has pursued to address
    that issue. We have institutions like unemployment insurance,
    trade adjustment assistance, and the President has proposed
    personal reemployment accounts. The purpose of these kind of
    things is to help workers make the transition from certain
    industries to other industries, so that we can take advantage
    of what economists call the gains from trade, something that
    economists have understood really since Adam Smith.
        Mr. LEVIN. How about shaping the terms of trade themselves?
    If you tell workers we will see you at the unemployment office,
    and we won't try to shape the terms of trade so there is some
    kind of balance; and if I might, just because the green light
    does turn to yellow, let me give you another example. I just
    did. Currency. Secretary Taylor, I must confess, anybody
    reading this report that came out today is going to--I think
    most people would be very disappointed.
        As to Japan, you say the Japanese have stated that their
    intervention is carried out when excess volatility or
    overshooting is observed in the markets. Then you say you are
    actively engaged. They may say that, but aren't they rigging
    the market? When they spend trillions of dollars of yen to buy
    dollars, they are--it isn't just to react to excess volatility
    or overshooting. Isn't that true? Why do you say--why are you
    so soft?
        With China, you just say it is not appropriate, but not
    anything you will do about it. What is the hesitation to say to
    Japan, stop intervening to keep your yen at a position that you
    gain a major export advantage? Why not say that?
        Mr. TAYLOR. We are engaged in discussions all the time with
    Japan, and as this hearing has indicated, as we indicated with
    China----
        Mr. LEVIN. Why not say it in this report?
        Mr. TAYLOR. The report is a factual description of the
    interventions that have occurred. It is--they are given there,
    the numbers are given there. There is a statement about what
    the Japanese, how the Japanese describe it.
        Mr. LEVIN. How about how we describe it?
        Mr. TAYLOR. It is a statement about our engagement with
    them which is substantial and active and will remain so.
        Mr. LEVIN. Okay. So, how do you describe it--and then my
    time is up. How do you describe the Japanese intervention in
    the market?
        Mr. TAYLOR. Well, it is described in the report. It is
    factually described, and it is a way which I think is the best
    way to do it. What we have done is focus on the things that
    Japan needs to do to grow more rapidly so it creates global
    growth and that is--those are financial issues. For example,
    reforming the banking sector, for example, creating more
    liquidity. That will create growth in Japan and help jobs in
    the United States. Just if I could say one thing on China, very
    specific, in your opening remarks, sir, you mention this auto
    financing issue.
        One of the things that we have just accomplished in our
    talks with China is--and this is an October issue, is they have
    agreed on the auto finance to regulations issued to allow non-
    bank institutions to provide auto financing. So, that is a very
    specific thing they have done in response to the discussions we
    have had with them. It is urgent, and it goes to the kind of
    issues that you are raising.
        So, I think if you are looking at the progress we are
    making in our talks, they are substantial and they are specific
    and they are--we are making progress using the approach that we
    are taking now.
        Mr. LEVIN. There is so much left undone. You don't give a
    sense of urgency to people who want to hear it. Thank you.
        Mr. CRANE. Mr. Houghton.
        Mr. HOUGHTON. Thank you very much, Mr. Chairman. Sorry
    again for the delay. Just a couple of points. I wonder whether
    we aren't being softies in this country. The other countries
    seem to be blocking off or not allowing Chinese goods to come
    into their country, and we seem to be the open sesame. We seem
    to be the place where the exports go to make up the difference.
    I always remember, Mr. Levin and I were talking about the
    Japanese situation, where something like 25 or 30 percent of
    Third World exports came into our country, and only 6 percent
    came into Japan. I wonder if the same phenomena isn't at work
    here with China, that we are opening up our markets. We are not
    demanding very much for it, and the others are really closing
    their markets. Can you comment on that?
        Ms. SHINER. If I could comment. First of all, on the
    percentage of GDP attributable to imports, it is very
    interesting to note that China, it is about over 22 percent of
    their GDP is attributable to imports, ours about 11 percent,
    Japan about 7.6 percent. So, we are right about in the middle
    of that. Part of the reason that we import more than Japan does
    right now is our growth in this country has been much higher.
    Japan's economy has been very flat. If you look at the history
    of China's accession into the WTO, for example, it was the
    United States who really wrote into the accession agreement all
    of the tough provisions. We were the leaders in that.
        We have been the ones who are really monitoring this most
    effectively. I just had meetings in Japan where we had a
    dialogue on their concerns and our concerns, and we were way
    ahead in monitoring and enforcing and working with China across
    the board on these issues. So, I don't really find that there
    are other countries in the lead on this. At the WTO and others,
    it is often us driving these. On IPR, it is the United States
    driving this issue globally. We are absolutely the leaders on
    enforcement of IPR. So----
        Mr. HOUGHTON. I guess what I was getting at, maybe I didn't
    express myself clearly, that China has a negative trade balance
    with many countries. Not so with us. Why is that?
        Ms. SHINER. With the United States?
        Mr. HOUGHTON. No, well. Not the United States.
        Ms. SHINER. They are current accounts basically.
        Mr. HOUGHTON. Yes. Right. In other words their exports are
    coming in here but they are not going to other countries, or if
    they are, they are being offset with imports. Why is that
    phenomena? Why are we so unusual here?
        Ms. SHINER. It is very interesting. If you look at the
    percentage of our imports from northeast Asia, China, Japan,
    Korea and Taiwan, it is less today than it was in 1990. What
    you have seen in many, many products is a shift from us
    importing from Taiwan and Korea and Japan in a number of
    product lines going to China, but the overall numbers are
    actually I think it was 27 or 29 percent in 1990, now it is 27
    percent.
        So, we are actually not importing that much more. I think
    our real problem is that the export opportunities for the
    United States have been very slow because of slow global
    growth. So, our key trading partners like Japan need to grow
    more.
        Mr. HOUGHTON. So, what you are saying is that the European
    countries, or other countries dealing with China, have a
    balanced in and out so there is not a big difference the way it
    is in the United States because of their exports. Where we fall
    down is because we don't have similar proportional exports; is
    that right?
        Ms. SHINER. Well, Europe also has a trade deficit. I don't
    have the figures right here with China. Their numbers are
    different than ours, but the effect or the size of it is quite
    impactful for them also. We need to close our deficit with
    China.
        Mr. HOUGHTON. Now that is a given. That is a given, but I
    just don't understand the phenomena that the disproportion
    between imports and exports with China for the United States is
    so dramatically different than it is in most other countries.
        Ms. SHINER. Well, right now we are buying the worlds'
    goods. The growth in our economy has benefited the countries
    that are doing this because we have a lot of the consumer
    demand. So, in Congressman Levin's district is the headquarters
    of K-mart. We have Wal-Mart, and you look in those stores, they
    are filled with these goods that benefit our consumers, but it
    also creates a problem when our other trading partners aren't
    also buying key U.S. goods because of slow growth.
        Mr. HOUGHTON. Thank you, Mr. Chairman.
        Mr. CRANE. Ms. Dunn.
        Ms. DUNN. Thank you very much, Mr. Chairman. Are you
    hearing me through this microphone? Let me try this one. Thank
    you. I am sorry I missed the earlier part of this hearing due
    to all sorts of things, including a markup in another
    Committee. I am sorry. I apologize if I am asking you to repeat
    yourself. I am interested in pursuing the line of questioning
    having to do with IPR enforcement.
        A few years ago when I first went to China, and I am in a
    district where I represent Microsoft, there was something close
    to 99 percent piracy of intellectual property. I am wondering
    how China is doing on its way to acceding to the WTO in that
    area. In the additional agreements that we have drawn up with
    China, how are they performing? I might ask anybody who is
    involved, but particularly the Ambassador.
        Ms. SHINER. I had reported earlier in my opening statement
    that we have made, I think, some real progress in this area in
    this sense. When I was in China we have been raising this
    issue, and they have told us and we have met with Vice Premier
    Wu Yi that she will be in charge of a leading group on IPR
    enforcement. This is significant because we think a necessary
    condition for them getting on top of this problem, not
    sufficient, but necessary is high level attention and a
    commitment from the top to get this done.
        So, we feel her involvement with this will be very
    important and we have met with her on this. In IPR, there is
    kind of three levels we are working on. One, we have rampant
    IPR violations throughout Asia and around the world. So, one
    question, one area we are working with all our trading partners
    there is to look at best practices and to work with those
    countries that have gotten on top of this problem and to share
    those best practices with our trading partners in Asia.
        So, for example, we have been working with our industry and
    it turns out that Hong Kong has really turned a negative spiral
    on IPR around and gotten on top of their situation with very
    innovative measures. I will be going to Hong Kong in 2 weeks to
    study their methodology and then proceed on to Beijing for a
    day of discussions and negotiations on IPR issues, where we
    will be talking about these best practices and recommending
    efforts they can take to get on top of this situation.
        In addition, we have been reviewing their laws and there
    are a number of areas, especially in the area of penalties,
    deterrent penalties, that are deficient. So, we are working
    with them to make recommendations and seek improvements in
    those areas. In addition, this problem takes place at the
    provincial level. So, part of what we are doing is working also
    on the provincial level and making the case that if certain
    provinces in China can get on top of this issue it will be a
    comparative advantage for them because right now there are a
    lot of U.S. companies that don't want to do business there
    because they are afraid their property will be stolen.
        So, we had discussions with a governor of a province in
    northeast China about this and suggested that they really set a
    model and a pace in China for others to be able to emulate. So,
    we feel we have got to work on the national level there, on the
    legal level and on the provincial level to get on top of this.
        In addition, to making the case that if they can't get on
    top of the problem, we will have to take stronger action.
        Ms. DUNN. What would that action involve?
        Ms. SHINER. There are, as you know, a number of tools that
    are available to us--enforcement measures--and we would be
    looking at what would be most appropriate. We do feel that with
    Vice Premier Wu Yi's attention to this, that we have really got
    some traction now and some possibility to work with them across
    the board on getting on top of this situation.
        Ms. DUNN. Thank you very much. That will be of great
    interest to me as we pursue their accession to the WTO. Thank
    you, Mr. Chairman.
        Mr. CRANE. Ms. Tubbs Jones.
        Ms. TUBBS JONES. Thank you, Mr. Chairman. We only have 5
    minutes so I am going to try and ask short questions to get
    short answers, if that is possible. I have recently been
    visiting businesses in my Congressional District after my
    appointment to the Committee on Ways and Means, including those
    in the northeast Ohio region. I visited Central Brass that
    makes little faucets. This company went from some 480 employees
    with three shifts down to 80 employees with one shift. I asked
    the man what he thought his biggest problem was, and he said
    China. I went to visit Rockwell Automotive, which is a
    multinational company doing very well and doing--enjoying the
    whole international relationship.
        Then I went to Goodyear, which I am sure you know is the
    last remaining American manufacturer of tires. Tell me--let me
    start with Mr. Shiner, what should I be telling the--not Mr.
    Shiner, Ms. Shiner, the Honorable Shiner. I should be telling
    the man at Central Brass about what you are doing to assure
    that a little company like Central Brass should be able to stay
    in business while we are doing business with China.
        Ms. SHINER. I find with the issue of trade with China we
    really have to take it company by company, and I am willing to
    work with you to figure out the case of each of those companies
    that you have mentioned. I am not sure, because I haven't
    looked at those cases, what the import figures are, what we are
    facing. I will tell you this, if there are unfair trade
    practices involved, we will act on those.
        So, what I would suggest is that I follow up with you on
    those cases and we figure out what is at work there.
        Ms. TUBBS JONES. That would be wonderful. In response to
    Ms. Dunn's question, you said there are tools for enforcement,
    and we are going to figure out which would be the most
    appropriate. What is the most severe tool that you could use
    against a company that is operating inappropriately from the
    Chinese government? What is the most severe tool?
        Ms. SHINER. Well, we have the ability to bring cases in the
    WTO, to pursue that. We also have the ability, if there are
    unfair trade practices involved, to block imports.
        Ms. TUBBS JONES. What has our record been with cases in the
    WTO?
        Ms. SHINER. Overall? Not regarding China?
        Ms. TUBBS JONES. Let's talk about China.
        Ms. SHINER. Okay. Since their accession was only 2 years
    ago, we haven't pursued any cases in the WTO. What we have done
    is work across the board with our transitional review mechanism
    (TRM) in the WTO to bring up cases where we have enforcement
    issues and to work with them to implement them. So, we are
    working in the committees, the regular committees at the WTO to
    pursue those cases.
        Ms. TUBBS JONES. Our record has not been very good, has it?
    A yes or no?
        Ms. SHINER. I think we are early in this relationship. We
    are coming up to the 2-year anniversary. I do want to say----
        Ms. TUBBS JONES. You know what? I really appreciate your
    response, but I would like to go to Dr. Mankiw, if you don't
    mind.
        Ms. SHINER. Okay.
        Ms. TUBBS JONES. You said in order to improve or increase
    jobs in the United States, we need to push the accelerator.
    What do you mean by pushing the accelerator, sir?
        Dr. MANKIW. The economy has just recently gone through a
    very difficult business cycle, a series of adverse shocks that
    included the end of the high tech bubble, the corporate
    governance scandals, 9/11, and slow growth abroad, which has--
    --
        Ms. TUBBS JONES. Okay. I know all that, but what is the
    ``pushing the accelerator''?
        Dr. MANKIW. Well, the tools, the standard tools for
    stimulating the economy are monetary and fiscal policy, and
    over the past few years, we have seen monetary and fiscal
    policy acting hand in hand. The Federal Reserve's series of
    interest rates cuts and a series of tax cuts that the President
    proposed and the Congress passed are----
        Ms. TUBBS JONES. So, I have--in Cleveland, Ohio since 2001
    we have lost 50,000 jobs. In the State of Ohio since January
    2001 we have lost 150,000 jobs. When we push the accelerator,
    what can I tell these people who are unemployed and who don't
    expect to get any extension of their unemployment what the
    accelerator means? Is it 2 months, 10 years, or 5 months?
        Dr. MANKIW. Well, I think today we saw some of the effects
    of the monetary and fiscal stimulus.
        Ms. TUBBS JONES. What does the accelerator mean in months?
    What do I tell my constituents, in 10 months you are going to
    have a job?
        Dr. MANKIW. I think what you can tell them is that the
    Congress and Administration and the Federal Reserve are acting
    to get the economy going after a series of adverse shocks.
        Ms. TUBBS JONES. Tell them don't hold their breath, right?
        Dr. MANKIW. Pardon me?
        Ms. TUBBS JONES. Tell them don't hold their breath.
        Dr. MANKIW. No. I think you should tell them that the
    economy is now growing very rapidly. We just saw the best
    quarter for GDP growth in almost 20 years.
        Ms. TUBBS JONES. You can't put it in a monthly term for me
    to help these people who don't have any money.
        Dr. MANKIW. Traditionally there is lag between what we see
    in real GDP, and what we see in the labor market. So, one
    should fully expect by the end of the year to see some robust
    employment growth.
        Ms. TUBBS JONES. Robust employment growth by the end of the
    year, for Christmas?
        Dr. MANKIW. I believe we will, yes.
        Ms. TUBBS JONES. Okay. Thank you, Mr. Chairman.
        Mr. CRANE. Mr. Foley. Oh, I am sorry. Mr. English.
        Mr. ENGLISH. Close call. Thank you, Mr. Chairman. I want to
    thank this panel for testifying. I must say, as I listen to
    some of the concerns from some of my colleagues on the other
    side of the aisle, I have to sympathize with them because I
    think we are at a very difficult time in our trade relationship
    with China. People in northwestern Pennsylvania are
    experiencing the same thing that people in northeastern Ohio
    are. With that in mind, I think it is very important that we
    get to some of the core issues in this conundrum of China
    trade. Mr. Taylor, I think that you touched in your exchange
    with Mr. Levin on the report that was released today on
    international economic and exchange rate policies with regard
    to China.
        As I understand it, while the 1988 Trade Act (P.L. 100-449)
    provides some technical requirements for what you have got to
    find in order to claim there is currency manipulation. It is
    fairly clear that the Department of the Treasury's policy in
    meeting with China, the President's policy in meeting with
    Chinese leaders, and the USTR's policy is that China needs to
    reform its monetary policy. I realize that you came out today
    with the same finding the Department of the Treasury has made
    for the last 10 years. Is it not fair to say that Department of
    the Treasury is on record saying there is a problem with the
    way the yuan is fixed and that until there is a float or some
    other reform of the policy, that this is going to be a
    fundamental problem in our trade relationship with China?
        Mr. TAYLOR. Yes, sir. The report does indicate that this is
    not the kind of policy that we recommend for large economies
    like China, and we are working with them right now to help them
    move off this policy, and they have indicated that they would
    like to move off it in the time lines that they will have to
    determine themselves. We are very actively engaged on this
    issue with them.
        Mr. ENGLISH. Mr. Taylor, last night the U.S. House of
    Representatives passed a resolution on this subject with only
    one dissenting vote. I think it gave the Administration the
    ammunition to go back to the Chinese with a very powerful
    message. Is the Administration going to follow through and
    deliver to the Chinese the message that the Federal government
    is united on this issue?
        Mr. TAYLOR. We will and have. We are going to continue to
    work the way we have and get the progress we are doing at many
    levels. You also mentioned the President, the Secretary of the
    Treasury, the U.S. Trade Ambassador, the USTR, and the
    Secretary of the U.S. Department of Commerce. Everyone is
    engaged on this, and we appreciate your support.
        Mr. ENGLISH. Ambassador Shiner, in your testimony, you say
    that one of the areas the Administration is pressing to move
    forward with improving trade relations with China is in the
    enforcement of U.S. trade remedies. We have heard many
    statements today, and we are going to hear some more tomorrow
    of unfair and possibly illegal Chinese trade practices. You
    touched on this with Ms. Dunn, but clearly, there is some
    evidence of discriminatory tax policies like the VAT, dumping
    violations of IPRs, counterfeiting subsidies, monetary policy,
    and a plethora of technical barriers to trade. In your view,
    and can you be a little more specific in your testimony, which
    trade remedies in the U.S. trade remedy law arsenal would you
    think to be the most appropriate for the violations that we
    have listed here. Some of which I think are included in your
    testimony?
        Ms. SHINER. I think as we look at the range of issues that
    you have addressed for example, on the VAT issues, we have been
    working with China on that. We have made clear our concerns
    about the discriminatory application of the VAT. Hopefully we
    will be able to bridge those differences. In every case, we
    hope to be able to work with them and we are actively engaged
    specifically on that. If not, we have the ability to bring
    cases in the WTO. We are committed to using the tools available
    to us. We have section 301, and we have got antidumping rules
    that we use.
        Mr. ENGLISH. Within the range of options that the WTO
    provides us, would the Administration be open to considering a
    not necessarily China specific, but a strengthening of our
    trade laws in order to clarify some of those remedies and maybe
    make them more effective and more surgical?
        Ms. SHINER. I don't know in the case of China and the cases
    you have raised that we don't feel that the tools would be
    available to address it. I think we feel that on them we have
    not yet come to the point where we are convinced we won't get
    the results that we want. In a number of the issues you raised
    in November, we will be taking an assessment, particularly on
    the VAT issue as to whether or not we are going to make
    progress.
        So, I think we feel we have a range of tools available. We
    negotiated in some special tools in the accession package and
    we are looking at the areas that we have difficulty and
    continuing to press hopefully getting resolution. I will tell
    you that the high level engagements in China, I think, have
    really upgraded these issues across the board.
        Mr. ENGLISH. Well, I thank you and I think it should be
    noted at this point that many of the tools that are in the
    accession package are the result of the efforts of Mr. Levin,
    and I don't believe he is here any longer, but I salute him.
        Ms. SHINER. Yes, he is.
        Mr. ENGLISH. Thank you.
        Mr. CRANE. Mr. Foley.
        Mr. FOLEY. Thank you very much, Mr. Chairman. In the U.S.
    General Accounting Office (GAO) report, it speaks almost
    specifically to the problem. The comprehensive scope and
    complexity of Chinese, WTO accession agreement presents two
    main challenges for successfully monitoring and enforcing
    China's compliance. First, the broad scope of the agreement
    which covers numerous aspects of China's trade regime and
    market access commitment for goods and service make it
    difficult to determine if each commitment has been fully
    implemented. I am sitting here with my phone and I see the
    battery is made in China. The phone's made in China. On July
    4th they hand me a flag to wave made in China. You ask yourself
    a basic question. Are we afraid to enforce the basic tenets of
    some of these agreements with China? Now, specifically, I
    understand China's in violation of WTO commitments relating to
    protection of intellectual property. Their criminal law doesn't
    meet the standards laid out in the WTO Agreement on TRIPS. They
    haven't delivered on their promise in their protocol of the
    session to lower the criminal threshold for initiating private
    piracy cases and the prosecution rarely brings criminal
    prosecution. When is the USTR planning to initiate a trip
    dispute settlement case against China.
        Ms. SHINER. Congressman, we are actively engaged with China
    on these issues. We do feel that if we can get results and
    again, we now not even 2 years into this accession process, but
    if we can get the results through those mechanisms that this
    will be the best methodology. If we bring a case it is not
    necessarily going to bring the kind of systemic changes we need
    to see now. So again, I think our current tactics are working
    with Vice Premier Wu Yi. We are getting attention at the top
    level and expect to see the enforcement and upgrading of their
    laws across the board.
        I am going to spend 2 days in China on these issues in
    November. We do feel we are getting much higher level attention
    to it, and if our results are not sufficient, we will need to
    act in a stronger way. Again, even if we bring a case, we are
    going to continue--have to continue--with them to build in the
    kind of best practices and to get the kind of laws that will
    make this happen. So, we do feel that we have made progress in
    getting their attention on these issues. We do feel we are
    engaged we have done some capacity building with them. I feel
    it is important that we are getting involved with our neighbors
    in Asia to work with them on best practices. We take it very
    seriously. We understand the piracy rates. They have agreed to
    work with us on individual cases. We feel that they are putting
    attention we need on this, but if not, we will move where we
    need to.
        Mr. FOLEY. I know Ms. Tubbs Jones mentioned some concerns,
    Ms. Dunn mentioned concerns and the American public is growing
    more impatient because they feel like by the time any of these
    agreements are truly enforced, our own manufacturers will be
    long gone. China does continue to impose heavy barriers to the
    import distribution of American films, music books, and other
    copyrighted goods and services.
        For example, only state-owned companies may publish sound
    recording. Only a handful of Chinese companies designated by
    the government may distribute foreign films. Foreign programs
    are banned on prime time TV. Foreign investment is totally
    prohibited in some sectors and restricted to a minority share
    in others. It is impossible to win the fight against piracy
    unless a lot more legal product is allowed into the market. I
    know in Florida, not just the entertainment industry of which I
    am Chairman of the Entertainment Task Force, but also I am very
    concerned with citrus.
        Every time we talk to them about citrus, they raise a red
    herring about phytosanitary. It seems like we are being
    constantly deluged with their goods, and then we are finding
    fire walls put up against ours. So, I want to be emphatic here,
    and I think my colleagues have been. I know the public is
    getting very leery of picking up every product in their grocery
    store or in their supermarket, their soft goods store and
    finding made in China. So, unless we are going to have a
    legitimate way in which to conduct an oversight of our
    activities with them, there is going to be horrific problems
    here domestically.
        Ms. SHINER. Yes, and you know we have raised this at the
    highest level there. It has been raised across the board there.
    We will continue to do so. They are very clear at this point
    that if we do not see improvements, if we do not see
    improvement across the board systemically, I mean,
    traditionally in the past China has dealt with pressures in
    their trade relationships with big purchases or other things.
    What we have made clear to them is we need systemic across the
    board action.
        China's not a startup, it is a turn-around. This is a
    country that is comprised of state-owned enterprises. They do
    not--they have not had these mechanisms in place. They have
    changed over a thousand laws and regulations in the past 2
    years with the WTO accession. There is much more to be done and
    we have made it clear to them that despite the magnitude of the
    task, we are going to need to see results across the board in
    these areas or else we will have to move to stronger measures.
        It was clear earlier this summer that the honeymoon was
    over as far as a waiting period for them to be able to enact
    all these. It is a massive task. There are, as you just pointed
    out, sweeping concerns across many areas. In a way China,
    because of their own success, is going to be held to a high
    standard very quickly. If they weren't exporting so much to the
    United States it wouldn't matter so much, but a lot is at
    stake. A lot is at stake in every single district here. They
    are very competitive, and so even though their task is massive,
    we are holding their feet to the fire and we need to.
        So, I will tell you that I really do feel that the tone in
    our business community has changed since the summer. There was
    a feeling that it would take them a year to 18 months to get
    their act together on the accession commitments. The tone has
    changed. Our tone has changed also. We hear the urgency of it.
    I will tell you that they are under no misapprehension about
    the level of concern here in the United States and the task at
    hand. We presented to them very clearly the priority areas that
    need to be addressed. We are looking not only at concerns that
    are already in existence, but upcoming deadlines in their
    accession commitment that cannot be missed and making sure that
    those are on track also.
        Mr. FOLEY. Mr. Chairman, would you indulge me for one more
    question?
        Mr. CRANE. No. The time of the gentleman has expired, and I
    would like to yield to Mr. Becerra.
        Mr. BECERRA. I thank the Chairman. I appreciate the
    testimony that we have received, and it is certainly difficult
    given international circumstances, to deal with countries. We
    can't govern in those countries. We can't change their laws. We
    can't ask them to be democratic, and so sometimes it is tough
    even with partners that do a great deal of trade with us and
    where they get a great deal of benefit from American money
    going to buy their products or American products helping them
    continue to build their own infrastructure.
        So, I appreciate what the Administration does, what our
    trade representatives do, what all of our folks do and have
    done for ages to try to give America the best posture it can
    have when it comes to competitive trading. This is where,
    Ambassador Shiner, I have to say that when you mention you are
    trying to hold the Chinese's feet to the fire, quite honestly,
    I don't think you have to do that because I think the Chinese
    Government is doing that to its own people right now.
        When they pay on average industrial northeast China, 60
    cents an hour for their workers, we don't need to hold the feet
    over the fire because those feet are being held over the fire
    by those who are willing to pay people an average of 60 cents
    an hour.
        That is about 2 percent of what we pay American workers in
    the manufacturing sector. So, what that tells us is that they
    get to work for 50 hours. They get to work one person for 50
    hours to just meet the wage that we would pay for one worker
    working 1 hour. There is no way that we could ever compete with
    them on those terms. I don't care how many feet we hold over
    the fire in the Chinese Government, we are never going to be
    able to compete under those terms.
        Perhaps that is why we have a trade deficit simply with
    China that is as we have indicated over $100 billion for this
    coming year. A total global deficit in trade of approaching
    $500 billion and no end in sight. Then we turn to the, what I
    believe are the effects, jobs in the manufacturing sector lost
    in this country, just in the last 3 years, California, my
    State, close to 300,000 jobs in manufacturing.
        Illinois has lost close to 126,000 jobs in the last 3
    years. Michigan, about 127,000 jobs in manufacturing. In New
    Jersey, 63,500 Americans left without a job in manufacturing.
    In North Carolina, 145,000 lost their job in the last 3 years.
    Ohio, close to 152,000 persons in Ohio have lost their jobs in
    the last years in manufacturing. Pennsylvania, more than
    132,000 Americans have lost their jobs in manufacturing.
    Wisconsin, more than 73,000 Americans have lost their jobs in
    manufacturing in the last 3 years. With this economic recovery
    coming in, and perhaps it is there and I know that Mr.--I think
    it is Dr. Mankiw who mentioned that was on its way.
        Let me ask this question: do you believe that these States,
    the Americans in these States that I have mentioned who have
    lost their jobs, will recoup these lost manufacturing jobs any
    time soon? If so, when?
        Dr. MANKIW. I do believe the economy is recovering, and you
    are absolutely right that manufacturing has been hit
    particularly hard in this business cycle. The reasons for
    that----
        Mr. BECERRA. Doctor, let me say, I have a--the hundreds of
    thousands of folks that I just mentioned, the millions, the 2.5
    million who have lost their manufacturing job in the last 3
    years can't ask this question and we have 5 minutes to ask
    questions. So, my question to you is if you could talk to those
    2.5 million Americans who in the last 3 years in this country
    have lost their jobs in manufacturing, can you tell us will
    they recoup their jobs, and if so, when?
        Dr. MANKIW. I think some of them will recoup the same jobs.
    Some of them will recoup other jobs. I think we will see job
    growth soon. I think the data that we saw today was extremely
    promising, and the GDP growth is also a leading indicator of
    job growth. I think we will see a robust job growth going
    forward.
        Mr. BECERRA. Now this is the growth that showed the budget
    deficit was $80 billion less than we had anticipated which is
    good news. So, we are obviously seeing more economic activity.
    That is the good news. The bad news of course is that even
    though the budget deficit is $80 billion less than we thought
    it would be for the fiscal year, it is still going to be a
    record $470 billion in deficit, the largest deficit we have
    seen in the history of this country. So, while it is pretty
    good news that it is not an additional $80 billion on top of
    that, we still have problems.
        In fact, unless things have changed, my understanding is
    that next year we are projecting a budget deficit of close to
    $500 billion in this country, which really straps us in what we
    can try to do to try to encourage the growth of manufacturing
    jobs in this country. So, I guess my appeal to you is that as I
    said at the very beginning, we are somewhat tied in.
        Mr. Chairman, I will close with this final remark if I may.
    I know we are kind of strapped, and I appreciate what you do. I
    think everyone would acknowledge that everyone, whatever the
    Administration stripe is, you fight for American jobs where you
    can, but please use the tools that you have. You mentioned you
    have tools. Use them. I think the Chinese will learn. They know
    how to negotiate. Let them learn, but let's use our tools. I
    thank you very much for all you have done.
        Mr. CRANE. Yes. All right. What I would like to do--you
    have got just one quickie question, do you, Mr. Pomeroy? All
    right. You go forward with yours quickly.
        Mr. POMEROY. Ambassador Shiner, I would just remind you
    that in my view, the WTO, the favored trading status of China
    would not have passed Congress but for the support of rural
    Members. So, we are very eager for aggressive oversight by the
    USTR to make certain China is complying with their WTO
    commitments especially relative to agriculture and our exports
    there. I also have recently learned of the case of, as we
    wrestle with are they embracing rule of law as conventionally
    understood in our country and in our Congress, I have been told
    of the case of Yang Long, a Chinese entrepreneur whose
    automotive company, Brilliance China, was allegedly seized by
    the Governor of a Chinese province without compensating the
    owner. This is very in consistent with the--what we are hearing
    in a more broadly stated efforts of the economic reform
    underway in China. I understand it is working on a draft law to
    address abuse by government entities when they are market
    participants. I would certainly hope that the USTR and other
    U.S. agencies talking to China will encourage them to get on
    top of this situation if they want to encourage investment as
    well as let their own entrepreneurs flourish.
        Mr. CRANE. Mr. Tanner.
        Mr. TANNER. Thank you very much, Mr. Chairman. I will be
    brief. I want to submit some questions for the record, if I
    might.
        Mr. CRANE. Without objection so ordered.
        Mr. TANNER. One of the matters that troubles me greatly is
    our deteriorating financial situation and the amount of money
    we are borrowing. China has increased their purchase of our
    debt 78 percent, and along with Hong Kong, now owns almost $200
    billion worth of our debt. The Japanese own almost $500 billion
    of our debt. There was a really, I thought, astonishing quote
    by Joan Zing, a formal official at the Peoples Bank of China,
    who said the U.S. dollar is now at the mercy of Asian
    governments. If China wants to influence the market, it can.
    That may be an overstatement. It may not. I think we are
    getting into real trouble, and I would like to ask you to
    comment on it briefly.
        I have got some other questions that I will submit for the
    record, but it doesn't take a rocket scientist to realize that
    if they have a large amount of our debt maturing in a
    relatively brief period of time, there would be some influence
    or some leverage that could be exercised that might adversely
    affect a decision our government might otherwise want to make
    with regard to a particular issue in the future.
        Mr. TAYLOR. Congressman, we have a broad deep liquid
    securities market in Treasury securities in the United States.
    It is an attractive vehicle for many, many people around the
    world and in the United States to invest in. We are confident
    of this market at this point in time; do not see or have heard
    of the concerns that you are raising. I would emphasize so much
    that the market is working fine. It is resilient. It is deep,
    and we will continue to make it that way.
        Mr. TANNER. I understand that, but it is not limitless, and
    if you haven't heard of it, it has been in the London Financial
    Times and also other financial papers around. I will be glad to
    share with you what I have read about it.
        [Letter submitted from Mr. Tanner to Secretary of the U.S.
    Department of the Treasury, and Mr. Taylor's response follows:]

                                                       November 7, 2003
    The Honorable John W. Snow
    Secretary
    U.S. Department of the Treasury
    1500 Pennsylvania Ave., NW
    Washington, DC 20420

    Dear Mr. Secretary,

        I am writing regarding testimony given by John Taylor, Under
    Secretary for International Affairs at the U.S. Department of the
    Treasury, during the recent House Ways and Means Committee hearing on
    the United States-China Economic Relations and China's Role in the
    Global Economy. Due to time constraints and a very busy voting
    schedule, I did not have time to fully question the witness
    representing your agency.
        During the hearing, I inquired about the increase in Chinese
    holdings of United States debt. As you know, Chinese holdings
    (including Hong Kong) of U.S. debt have increased from approximately
    $100 billion to $178 billion in only 3 years. I also understand the
    securities purchased by the Chinese mature in a year or less. Since the
    Chinese Central Bank controls such a large volume of U.S. debt, their
    ability to affect our economy seems very real. I think this poses a
    national security threat, because our relationship with Beijing is
    inconsistent at best. Should a diplomatic crisis occur, the Chinese
    government could choose to sell its large share of U.S. securities on
    the open market, and we would be forced to increase interest rates in
    an attempt to attract other purchasers. I don't need to tell you how
    damaging that action would be for our economy.
        Therefore, during the hearing I asked Mr. Taylor what assurance the
    Treasury Department could give us that our economy is not susceptible
    to being held hostage by the Chinese government. Mr. Taylor responded
    by informing me that the U.S. debt market is sufficiently wide and deep
    to handle the demand if the Chinese sold its U.S. debt. Given the time
    limitation we had during the hearing and the brevity of his response, I
    would like to request a more detailed answer to this question.
        In addition to the aforementioned question, I did not have time to
    seek information on another topic. In 2002, outlays by foreign direct
    investors in the United States fell by more than half for the second
    consecutive year. Foreign direct investment in the U.S. fell from $314
    billion in 2000 to $30 billion in 2002. Last year, foreign investment
    in the United States was less than what was invested in France and
    Germany. As a result of this decline, spending for new investments in
    2002 was at the lowest level in decades. Furthermore, China has
    replaced the United States as the largest recipient of foreign direct
    investment. Increasingly, foreign companies and individuals have not
    been willing to make permanent investments in the U.S. economy,
    choosing instead to invest in China and other countries. Therefore, I
    am requesting information on the Administration's plan to increase
    direct foreign investment in the United States and reduce foreign
    central bank purchases of U.S. debt?
        I appreciate the Treasury Department's willingness to testify
    before the Committee and look forward to your response to my questions.
                Sincerely,
                                                         John S. Tanner
                                                     Member of Congress
                                     ______

                                                      December 17, 2003
    The Honorable John Tanner
    U.S. House of Representatives
    Washington, D.C. 20515-4208

    Dear Mr. Tanner:

        I am replying to your letter to Secretary Snow, which followed up
    on your question to me during my recent testimony on United States-
    China economic relations before the House Ways and Means Committee.
    Your letter expressed concern that the Chinese government, holding a
    large volume of U.S. debt, could adversely affect the U.S. economy and
    requested information on how the Administration planned to increase
    foreign direct investment in the United States and to reduce foreign
    central bank purchases of U.S. debt.
        It is important to restate, as I did at the hearing, that the
    United States has a broad, deep and liquid market in Treasury
    securities. Treasury securities are an attractive vehicle in which many
    people from around the world and in the United States invest. We are
    confident of this market and do not view the possibilities that you
    raise as sources of major concern. Chinese holdings of U.S. Treasury
    securities are a small part of the over $3 trillion in public debt
    securities held outside Federal Reserve and U.S. government accounts,
    and total public debt held outside these accounts amounts to only about
    15 percent of the domestic nonfinancial credit market.
        As to your question on foreign direct investment, many factors
    influence foreign investors' decisions about whether to invest in the
    United States in the form of portfolio or direct investment. Foreign
    direct investment to the United States rose dramatically over the last
    decade, from $20 billion in 1992 to a peak of $321 billion in 2000. It
    then declined to $152 billion in 2001 and $40 billion in 2002. It has,
    however, strengthened in the first three quarters of this year to reach
    $87 billion at an annual rate. The recent drop in inward direct
    investment coincided with the slowdown in economic activity in the
    United States and overseas. More specifically, the decrease in direct
    investment in 2002 appears to have reflected financial restructuring
    and write-downs of investments in the wake of the boom in foreign
    investors' U.S. acquisitions between 1998 and 2000, reduced financing
    requirements by U.S. affiliates from their foreign parents, and a sharp
    slowdown in new acquisitions by foreign parents.
        Although direct investment into the United States eased during the
    slowdown, other forms of private foreign investment were robust. Strong
    economic fundamentals and an attractive investment environment continue
    to draw foreign investment to the United States. Decisions on the
    precise form that foreign investment in the United States should take
    are usually best left to the marketplace.
        We appreciate hearing your concerns.
                Sincerely,
                                                         John B. Taylor
                              Under Secretary for International Affairs

        Mr. CRANE. I thank you, and I want to express appreciation
    to our panel for your patience. We apologize to you for running
    late like this. With that, this panel may be excused, and we
    will recess subject to the call of the Chair.
        [Recess.]
        [Questions submitted from Mr. Neal to Mr. Taylor, and his
    response follows:]

        Question: There are a growing number of reliable reports indicating
    that the Chinese currency, the Yuan, is undervalued by 15% to 40%.
    These reports include the statutory ``2004 report'' by the Department
    of the Treasury, released last Thursday, October 30. However, the
    Treasury Report stops short of noting the correlation between China's
    currency manipulation and harm, including massive manufacturing job
    losses, to the U.S. economy as a result.
        Does Treasury not share the widely held view that China has a
    substantially undervalued currency, giving it an unfair price advantage
    of between 15% and 40% over U.S. products and services, in turn making
    the trade deficit worse and harming U.S. manufacturers and workers? If
    so, why doesn't the Administration support legislation introduced in
    this House and in the Senate that would press China to end its currency
    manipulation? In the alternative, what specific actions beyond
    ``technical assistance'' is the Administration prepared to take to
    address this serious problem? In particular, does the Administration
    support using WTO rules as appropriate to press China and certain other
    trading partners to end their currency manipulation practices and
    become fair players in the global trading system?
        Answer: It is difficult to say what the level of any particular
    exchange rate should be, but we feel strongly that exchange rates
    should be market determined. We share your concerns and are
    intensifying our interactions with Chinese officials to ensure that
    they introduce significant flexibility in their exchange rate regime.
    In various recent meetings, Chinese officials have agreed that they
    need to make this change. They point to weaknesses in their financial
    system to justify an additional adjustment period, but we are taking a
    number of steps to accelerate their resolution of the situation.
        In particular, the first of a series of Technical Cooperation
    Program teams will travel to China in late February. The Treasury
    Department and other U.S. Government agency specialists will work
    directly with China's central bank on a range of topics linked to
    exchange rate flexibility.
        Secretary Snow has also engaged directly the number-two official in
    China's cabinet, Vice Premier Huang, who supervises financial and
    exchange rate matters. Secretary Snow met with Huang in Beijing last
    year, and Huang has accepted Secretary Snow's invitation to come to
    Washington soon to continue action-oriented discussions.
        Finally, within a month or two at the latest--once necessary
    background checks are completed--Secretary Snow will announce the
    appointment of a new Senior Treasury Attache in Beijing to be his
    personal emissary to top Chinese leaders on this subject.
        We feel that this diplomatic approach is the one most likely to
    succeed, and President Bush has made clear also that we intend to press
    China to meet all of its WTO commitments. We appreciate your interest
    and support in this effort.

        Mr. CRANE. [Presiding.] We don't have all of our colleagues
    back here yet, but we will try to get started to accommodate
    you folks, and we appreciate your patience in sticking it out.
    We will proceed in order. So, Dr. Holtz-Eakin, you can proceed
    first, followed by Dr. Yager and then Dr. Rogowsky.

          STATEMENT OF DOUGLAS HOLTZ-EAKIN, PH.D., DIRECTOR,
                      CONGRESSIONAL BUDGET OFFICE

        Dr. HOLTZ-EAKIN. Mr. Chairman, thank you, and Members of
    the Committee. The Congressional Budget Office (CBO)
    appreciates the chance to join in the discussion today. You
    have our written testimony submitted for the record. It is
    fairly long and quite detailed. I will not pretend at this late
    hour to go through all the details of the testimony, but will
    be happy to answer questions as the time arises.
        Let me instead merely point out some of the key bottom
    lines that the testimony wishes to make. If you look at the
    current setting, three broad facts stand out as items of
    interest. The first is that the Chinese have pegged their
    currency at 8.28 yuan to the dollar for nearly a decade, even
    during periods of the Asian financial crisis, when other
    countries depreciated their currency relative to the yuan. At
    the same time, the United States is running a roughly $100
    billion bilateral trade deficit with China. While that is only
    20 percent of the overall U.S. current-account deficit, it is a
    deficit that has risen rapidly in the past several years, and
    we have seen a decline of 2.8 million jobs in the manufacturing
    sector.
        There is a temptation by many to draw a causal linkage from
    the currency to the bilateral trade deficit to the U.S.
    manufacturing jobs picture. Indeed, there are pieces of
    legislation before both the House and the Senate at this time
    that would appear to suggest this causal link and that go
    further and offer up a policy alternative, which is to use the
    prospect of some sort of trade sanctions--perhaps, a tariff--
    against China's imports as a lever to have either a free float
    or revaluation of the Chinese currency.
        The bottom line, after walking through both the empirical
    foundation of that kind of a linkage and an analysis of those
    policy options, is that, first, it is very difficult to make an
    empirical case that trade per se or trade with China in
    particular can be identified as the source of a large
    quantitative job loss in U.S. manufacturing. I can return to
    the details of that as the Committee sees fit.
        Second, the efficacy of the policies that have been
    mentioned in some of the legislation really depend on the kinds
    of goals that the Congress might have in mind. For example, to
    the extent that the goal is to raise manufacturing employment
    in the United States, these types of policies would have small
    effects at best and would be temporary. If, instead, the
    primary objective would be to reduce the bilateral trade
    deficit with China, there would be the possibility that that
    bilateral trade deficit would be reduced; however, it would
    come at the expense of a larger trade deficit with other
    trading partners. In general, if the objective is to lower the
    U.S. multilateral trade deficit, the bilateral currency
    valuation between the

    United States and China plays a very small role in the overall
    determination of the current-account deficit, and for that
    reason, it would have a small effect at best.
        Third, it may be the case that revaluing the Chinese
    currency would affect China's overall current-account balance.
    It is close to balance now, but China is running a sustained
    capital-account surplus, and it may be the case that a
    revaluation would be the beginning step toward what I think is
    a general consensus of the desirability and likelihood that
    China will have a more flexible exchange rate policy in the
    long run and will move toward more open capital markets at the
    same time.
        So, with those highlights, let me close there and thank the
    Committee for the chance to be here. I look forward to
    answering your questions.
        [The prepared statement of Dr. Holtz-Eakin follows:]
    Statement of Douglas Holtz-Eakin, Ph.D., Director, Congressional Budget
                                     Office
        Mr. Chairman and Members of the Committee, thank you for inviting
    me to testify on the relationship among patterns in manufacturing
    employment; U.S. trade with China; the exchange value of China's
    currency, the Yuan; and legislative proposals linking increases in the
    Yuan's value with potential trade sanctions by the United States.
    The Perceived Problem and the Proposed Legislation
        Since 1994, China has maintained a fixed rate of exchange of 8.28
    between the Yuan and the U.S. dollar. Today, the United States'
    bilateral trade deficit with China is the largest deficit that this
    nation has with any single trading partner, and U.S. manufacturing
    employment has registered a decline of 2.8 million jobs since July
    2000. Some observers believe that China's exchange rate policy
    artificially holds down the value of the Yuan to the detriment of U.S.
    manufacturing output and employment in both import-competing and
    exporting industries. They contend that allowing or forcing the Yuan to
    appreciate relative to the dollar will have a notable and positive
    effect on manufacturing output and employment in the United States.
        Recent legislative proposals reflect that line of reasoning. H.R.
    3058 and S. 1586 would require increased tariffs or another form of
    barrier against Chinese imports if China did not agree either to allow
    the Yuan to float on foreign currency markets or to revalue it relative
    to the dollar. The specific impact of any such measure would depend on
    the magnitude of the exchange rate change or tariff. Nevertheless, the
    Congressional Budget Office (CBO) has reached the following general
    conclusions regarding the prospects for any such legislation's
    achieving the goals outlined below:

          Increasing U.S. Manufacturing Employment. At best, such
    legislation would increase employment in manufacturing by a small
    amount and for a limited period. It would not have a significant
    permanent effect.
          Reducing the U.S. Bilateral Trade Deficit with China.
    Such legislation might somewhat diminish the trade deficit with China
    but at the expense of increases in the United States' bilateral
    deficits with other countries.
          Reducing the Chinese Multilateral Trade Surplus. Such
    legislation could shrink China's multilateral trade surplus (its
    surplus with all trading partners).
          Reducing the U.S. Multilateral Trade Deficit. Such
    legislation could reduce the multilateral trade deficit of the United
    States by at most a small amount and, depending on the circumstances
    (in particular, if the legislation was paired with corresponding
    measures by China against U.S. exports), might even increase that
    deficit by a small amount.

        Before I turn to CBO's analysis of the specific impacts of the
    proposed measures, it is useful to discuss the context of recent
    economic developments in the United States and China.
    U.S. Manufacturing
        Employment in the manufacturing sector of the U.S. economy stood at
    14.6 million jobs in September 2003, its lowest level since October
    1958 and down from 17.4 million in July 2000 (see Figure 1). Much of
    the decline is probably temporary and related to the recent recession
    and the relatively weak recovery in demand since the recession's end in
    November 2001. Some of that decline, however, reflects a long-term
    downward trend in manufacturing employment. The past three years of
    recession and moderate recovery were particularly hard on employment in
    manufacturing, as the demand for manufactured goods remained weak in
    both the United States and the rest of the world and as virtually all
    of the moderate upturn in demand since the trough of the recession was
    met by extraordinary gains in productivity rather than by increases in
    the number of jobs or work-hours. Because changes in employment are
    dominated by those large cyclical, as well as trend, changes, any
    effect that trade with China has had on U.S. manufacturing employment
    is more likely to be apparent by examining more-detailed industry-level
    data.
    Figure 1.
    Manufacturing Employment

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Sources: Congressional Budget Office; Department of Labor, Bureau
    of Labor Statistics.
        Note: Shaded areas denote recessions as defined by the National
    Bureau of Economic Research.
    Long-Term Influences
        The long-term decline in U.S. manufacturing employment largely
    reflects the strong trend growth of productivity in the manufacturing
    sector and a pattern in consumption spending away from goods and toward
    services. Currently, a worker in manufacturing produces more than he or
    she did ten, or even five, years ago, largely because manufacturers
    have invested in more and better capital goods. Also, as the U.S. and
    other economies have become richer, households are allocating a smaller
    fraction of their consumption to goods, causing a downward trend in the
    goods share of GDP. Those long-term influences suggest that employment
    in the manufacturing sector may not return to prerecession levels even
    after the economy has fully recovered from the 2001 downturn. Indeed,
    the share of total employment in the manufacturing sector has trended
    down strongly for the past 50 years, whereas the rate of growth of
    manufacturing output has been only slightly slower than that of real
    (inflation-adjusted) gross domestic product, or GDP (see Figure 2).
    Figure 2.
    Manufacturing Output and Employment

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Sources: Congressional Budget Office; Department of Labor, Bureau
    of Labor Statistics; Department of Commerce, Bureau of Economic
    Analysis.
        Note: Shaded areas denote recessions as defined by the National
    Bureau of Economic Research.

        Productivity. The long-term growth of productivity, driven by
    investment and new technology, has allowed manufacturers over at least
    the past 50 years to match the pace of overall economic growth without
    corresponding growth in employment. That trend continues today: labor
    productivity in manufacturing (output per hour worked in manufacturing)
    has grown at a surprisingly rapid pace during the past several years.
        Since the peak of the last business cycle in March 2001, labor
    productivity in manufacturing has risen at an average annual rate of
    4.0 percent, faster than its average annual rate of growth during
    previous postwar recessions and the early part of the ensuing
    recoveries (see Figure 3). That rapid productivity growth has allowed
    manufacturers to meet the recent weak demand for their goods with a
    smaller workforce working fewer hours than would have been required if
    productivity had grown more slowly.
    Figure 3.
    Cyclical Behavior of Labor Productivity in Manufacturing

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Sources: Congressional Budget Office; Department of Labor, Bureau
    of Labor Statistics.
        Note: The peak is the end of a business-cycle expansion as defined
    by the National Bureau of Economic Research.

        Shifts in Demand. Further contributing to the long-term decline in
    manufacturing employment has been the shift in demand by consumers
    toward services and away from manufactured goods. As real income has
    risen over time, the demand for services has increased by more than the
    demand for goods. For example, in 2000, 42 percent of consumer spending
    was devoted to goods, down from 53 percent in 1979 and 67 percent in
    1950.
    The Recession of 2001 and Its Aftermath
        The recession and its aftermath have hit the manufacturing sector
    hard. Declines in employment are normal during recessions, but the fact
    that employment has continued to fall as much as it has since the
    recession's official end is unique to this downturn.
        Employment in manufacturing through September 2003 has declined for
    38 consecutive months, with the most recent monthly increase posted in
    July 2000. The magnitude of job losses in the recent recession and
    recovery is comparable to that surrounding the back-to-back recessions
    in 1980 and 1981 to 1982. Indeed, employment has fallen by 16 percent
    since its peak in the second quarter of 2000, compared with losses
    averaging 10.2 percent during and surrounding four previous periods of
    recession.\1\ More than half of the losses since the peak in employment
    have occurred in five industries: computer and electronic products,
    transportation equipment, machinery, fabricated metals, and apparel. At
    the same time, however, employment has declined in all 21 industries
    that make up the three-digit level of manufacturing industries in the
    North American Industrial Classification System (NAICS), and 15 of the
    21 have experienced losses exceeding 10 percent. In fact, all 21
    industries have shown declines even since November 2001.\2\
    ---------------------------------------------------------------------------
        \1\ Those periods of recession are as follows (with ``Q'' used to
    mean ``quarter''): 1969Q3 to 1971Q3, 1973Q4 to 1975Q2, 1979Q2 to 1983Q1
    (which treats the 1980 and 1981-1982 recessions as a single episode),
    and 1989Q1 to 1992Q4. Note that those dates are defined in terms of
    manufacturing output and employment and do not strictly correspond to
    recessions as designated by the National Bureau of Economic Research,
    which maintains the official chronology of U.S. business cycles.
        \2\ NAICS is a newly introduced system of classifying industries,
    created jointly by the United States, Canada, and Mexico. All
    establishments are classified on the basis of the production process
    they use, in contrast to the previous Standard Industrial
    Classification, or SIC, system, in which some establishments were
    classified by using different criteria (such as class of customer).
    ---------------------------------------------------------------------------
        The drop in manufacturing employment since the beginning of the
    recession largely reflects the weak demand for manufactured goods both
    in the United States and among its major trading partners. The demand
    for capital goods remained stagnant in the years following the
    investment surge of the late 1990s. As a consequence, manufacturing
    output fell sharply during the recession, and it has grown more slowly
    in the quarters since the recession ended than it did on average after
    previous downturns (see Figure 4). The weak demand for U.S.
    manufactured goods among the nation's major trading partners reflects
    the tepid pace of their economies' growth. In the past few years,
    foreign GDP has grown only about as fast as U.S. GDP (see Figure 5). By
    contrast, during past U.S. recessions and the early part of recoveries,
    foreign economic growth generally was faster than that of the United
    States, supporting U.S. exports. As shown in Figure 6, U.S. exports
    have been weaker during the 2001 recession and the recovery thus far
    than in most previous recessions. The figure also indicates that
    imports have grown about as fast as they typically have after previous
    recessions, suggesting that the recent increase in the U.S. trade
    deficit is due more to weak growth of exports than to strong growth of
    imports.
    Figure 4.
    Cyclical Behavior of Manufacturing Output

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Sources: Congressional Budget Office; Department of Labor, Bureau
    of Labor Statistics.
        Note: The trough is the end of a recession as defined by the
    National Bureau of Economic Research.
    Figure 5.
    Ratio of Foreign to U.S. Real GDP

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Sources: Congressional Budget Office; Department of Commerce,
    Bureau of Economic Research.
        Notes: Foreign gross domestic product (GDP) is the export-weighted
    GDP of Australia, Belgium, Brazil, Canada, China, France, Germany, Hong
    Kong, Italy, Japan, Mexico, the Netherlands, Singapore, South Korea,
    Taiwan, and the United Kingdom.
    Shaded areas denote recessions as defined by the National Bureau of
    Economic Research.
    Figure 6.
    U.S. Exports and Imports

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Sources: Congressional Budget Office; Department of Commerce,
    Bureau of Economic Analysis.

        The United States' relatively lackluster export performance has
    probably also been influenced by the strength of the U.S. dollar. An
    increase in the value of the dollar raises the price of U.S. exports
    for foreigners and lowers the dollar price of U.S. imports. In the
    absence of other influences, those price changes tend to increase the
    U.S. trade deficit. The dollar appreciated in both nominal and real
    terms against most currencies between 1990 and early 2001, and although
    it has weakened recently, it is still strong relative to its value in
    virtually all of the 1990s (see Figure 7).
    Figure 7.
    U.S. Dollar Exchange Rate

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Sources: Congressional Budget Office; Federal Reserve Board.
        a. The nominal exchange rate is a trade-weighted exchange value of
    the U.S. dollar against 35 foreign currencies.
        b. The real exchange rate is the nominal exchange rate multiplied
    by the U.S. price level relative to the trade-weighted foreign price
    level.

        Employment in the manufacturing sector is likely to pick up
    substantially once the demand for manufactured goods recovers from its
    recent slump. Nevertheless, the trend of long-term decline suggests
    that the level of employment is not likely to return to its postwar
    high of the late 1970s or possibly even to its prerecession level.
    Measurement Issues
        The long-term decline in manufacturing employment is also due in
    part to a structural shift in the organization of work: manufacturers
    have increasingly hired temporary workers and outsourced tasks to
    domestic nonmanufacturing firms that had previously been performed by
    manufacturing employees. Between 1990 (the first year for which data
    consistent with the current definition of the industry are available)
    and 2000, employment at temporary-help services more than doubled (from
    1.2 million jobs to 2.6 million), although it fell sharply during the
    recession. Similarly, historical data that are not strictly comparable
    with the current data nevertheless suggest that the number of temporary
    workers had at least doubled during the 1980s as well.
        Typically, about 30 percent of temporary workers were working at
    manufacturing establishments during the 1990s, according to results
    from periodic special supplements to the Current Population Survey.
    However, for statistical purposes, they were treated as being employed
    by the temporary-help services industry. An implication of that finding
    is that a large part of the decline in manufacturing employment during
    the 1990s, as well as a portion of the decline during the 1980s, might
    be attributable to the increasing use of temporary workers. In
    addition, manufacturers today are increasingly contracting with outside
    firms to provide certain support functions (for example, cafeteria and
    janitorial services and payroll processing) instead of providing them
    internally; that, too, has tended to depress measured employment
    attributable to manufacturing. However, data are not available to
    determine how much (if any) of the decline in manufacturing jobs since
    2000 can be ascribed to those phenomena.
    How Imports from China May Be Affecting Particular Industries
        In 2002, imported goods from China accounted for 10.8 percent of
    the value of all U.S. imports of goods, up from 7.8 percent in 1998. Of
    the increase in the value of all such imports over that period, 22
    percent is attributable to goods from China. To assess the possible
    impact on U.S. manufacturing employment of increased imports from
    China, CBO examined patterns of employment in detail, looking at
    manufacturing industries covered under the four-digit NAICS codes. CBO
    focused on the performance of 25 such industries from 1998 through 2000
    in which Chinese imports were 10 percent of the value of total imports
    and China either accounted for half of the increase in the value of
    imports or increased its imports to the United States in cases in which
    total industry imports fell.\3\ In 2000, those industries together
    employed 5.5 million workers, or roughly 32 percent of overall
    manufacturing employment. Between 2000 and 2002 (based on full-year
    averages), employment in those industries fell by 13.8 percent, or
    753,000 jobs. By comparison, employment in all other manufacturing
    industries fell by 10.2 percent over that period.
    ---------------------------------------------------------------------------
        \3\ The four largest industries meeting those criteria were
    semiconductors and other electronic components; miscellaneous
    manufactured commodities; printing, publishing, and similar products;
    and household and institutional furnishings and kitchen cabinets.
    ---------------------------------------------------------------------------
        The decline in employment for all other manufacturing industries
    could be interpreted as a rough indicator of conditions common to the
    entire manufacturing sector, independent of the impact of trade with
    China. Under that assumption, the additional 3.6 percentage-point
    decline could plausibly be attributable to expanding trade with China.
    That decline translates into a loss of about 200,000 manufacturing
    jobs, or 10 percent of the total job loss in manufacturing between 2000
    and 2002. However, the industries that CBO assessed performed somewhat
    better than the rest of manufacturing between 1998 and 2000. Thus, if
    changes in employment over the full four-year period from 1998 to 2002
    are considered, only about 90,000 additional lost manufacturing jobs
    can be attributed to imports from China.
        Those estimates might be too high or too low, for a number of
    reasons. On the one hand, the overall impact on manufacturing
    employment might be as much as twice the direct effect once one
    accounted for the lost income and concomitant reduction in spending. On
    the other hand, nearly half of the excess manufacturing employment
    losses derived from this exercise were in firms producing
    semiconductors, an industry that has experienced rapid productivity
    growth and depressed demand. The calculations also assumed that all of
    the increase in imports from China came exclusively at the expense of
    domestic producers and were not displacing imports from other
    countries. Finally, although increased imports (from all trading
    partners) will in many instances result in identifiable job losses, any
    effect on overall employment, as noted earlier, will be temporary.
        One industry that has experienced especially large employment
    losses in the past several years is information technology (IT). Since
    early 2001, employment in firms making computers and electronic
    products has shrunk by 470,000 jobs, or roughly a quarter. Much of that
    decline can be traced to the large boom and subsequent decline in the
    late 1990s in businesses' investment in computers and
    telecommunications equipment. But it also appears that some U.S.
    production has been displaced by overseas competitors, including China,
    in recent years.\4\ In 2002, the U.S. trade deficit in IT products
    (defined as computer, electronic, and communications equipment;
    consumer audio and visual equipment; and medical and other instruments)
    increased by $17 billion. Of that amount, $7.2 billion could be
    attributed to the change in trade flows with China.
    ---------------------------------------------------------------------------
        \4\ Rob Valletta, ``Is Our IT Manufacturing Edge Drifting
    Overseas?'' Federal Reserve Bank of San Francisco Economic Letter, No.
    2003-30 (October 10, 2003).
    ---------------------------------------------------------------------------
        That shift reflects several factors. One factor tending to increase
    the United States' trade deficit with China is China's ``expanding role
    as a center for low-cost manufacturing and assembly of standardized IT
    products.'' \5\ Another factor is the particular pattern of demand for
    IT goods over the past several years. China tends to specialize in
    exports of IT consumer goods, for which demand has remained strong,
    whereas U.S. production and exports focus much more on IT products for
    businesses, for which recent demand has been quite weak. A factor
    tending to lower the trade deficit with China is that IT producers in
    the United States have substantially increased exports of intermediate
    products (such as microprocessors) to China. As a result, it is
    difficult to quantify how much of the IT sector's decline in employment
    over the past several years is directly related to trade. However, the
    specific effect is probably small relative to the impact of the slump
    in businesses' investment spending and of continuing advances in
    productivity.
    ---------------------------------------------------------------------------
        \5\ Ibid.
    ---------------------------------------------------------------------------
    Patterns of International Trade
        U.S. imports from China and the bilateral U.S. trade deficit with
    China have grown rapidly over the past decade. However, the vast bulk
    of that growth in imports has displaced imports from other countries
    rather than U.S. domestic production. The primary force driving the
    increase in imports from China is that manufacturers have shifted the
    final assembly of many of their products from other Asian (and perhaps
    a few non-Asian) countries to China. Much of the value of Chinese
    exports continues to consist of parts made elsewhere in Asia. In short,
    the United States' bilateral trade deficit with China represents the
    net balance of trade with many Asian countries that is channeled
    primarily through China.
    U.S.-Chinese Bilateral Trade
        With the growth of U.S. exports to and U.S. imports from China over
    the past decade, China has become one of the United States' most
    important trading partners. Significant U.S. exports to China include
    airplanes, electronic components and equipment, and agricultural
    products and chemicals. Significant imports include electronic
    equipment, toys, footwear, and apparel. The United States' trade
    deficit with China has also grown rapidly and is now the largest
    bilateral deficit that the United States has with any country.
        U.S. Exports to China. Between 1992 and 2002, U.S. exports to China
    increased from $7.5 billion to $22.1 billion, an average annual rate of
    growth of 11.4 percent. More recently, that rate has accelerated,
    averaging 16.5 percent between 2000 and 2002. That rapid growth has
    raised China from the tenth largest U.S. export market in 1997 to the
    sixth largest in 2002. Thus far in 2003, China is surpassing South
    Korea to become the United States' fifth largest export market (see
    Table 1).

                  Table 1. The Largest Markets for U.S. Exports
    ------------------------------------------------------------------------
                                                      U.S.
                                         U.S.       Exports
                                      Exports in      from      U.S. Exports
           Country or Region           2002 in     January to   in 2002 as a
                                     Billions of   July 2003   Percentage of
                                       Dollars    in Billions  Total Exports
                                                   of Dollars
    ------------------------------------------------------------------------
    Canada                           160.8        97.8         23.2
    ------------------------------------------------------------------------
    European Union                   143.7        87.1         20.7
    ------------------------------------------------------------------------
    Mexico                           97.5         54.5         14.1
    ------------------------------------------------------------------------
    Japan                            51.4         30.2         7.4
    ------------------------------------------------------------------------
    South Korea                      22.6         13.9         3.3
    ------------------------------------------------------------------------
    China                            22.1         14.8         3.2
    ------------------------------------------------------------------------
    Taiwan                           18.4         9.4          2.7
    ------------------------------------------------------------------------
    Singapore                        16.2         9.5          2.3
    ------------------------------------------------------------------------
    Australia                        13.1         7.5          1.9
    ------------------------------------------------------------------------
    Hong Kong                        12.6         7.4          1.8
    ------------------------------------------------------------------------
    Brazil                           12.4         6.2          1.8
    ------------------------------------------------------------------------
    Malaysia                         10.3         6.0          1.5
    ------------------------------------------------------------------------
    Switzerland                      7.8          5.0          1.1
    ------------------------------------------------------------------------
    Philippines                      7.3          4.7          1.0
    ------------------------------------------------------------------------
    Israel                           7.0          4.0          1.0
    ------------------------------------------------------------------------
    Memorandum:
    ------------------------------------------------------------------------
    All Countries and Regions        693.3        411.1        100.0
    ------------------------------------------------------------------------
    Source: Congressional Budget Office based on data from the Bureau of the
      Census.
    Note: Numbers given are free-alongside-ship values of total exports.

        Although exports to China have grown rapidly on a percentage basis,
    that growth was from a small base. What matters more from the
    standpoint of demand for U.S. products and jobs in the U.S. export
    sector is the overall dollar value of the growth of those exports. By
    that measure, China ranked fourth among markets that increased their
    demand for U.S. exports from 1992 through 2002 and third from 1997
    through 2002 (well behind Mexico and a bit behind Canada). Thus, even
    with its rapid growth, China is a substantially smaller market than
    Mexico is--less than one-fourth its size--and is not likely to become
    comparable in the near future.
        The largest categories of exports by value in 2002 were airplanes,
    semiconductors and electronic components, electronic equipment (such as
    computers and navigational and medical instruments), soybeans, and
    various fertilizers and chemicals (see Table 2).

        Table 2. The Largest Categories of U.S. Exports to China in 2002
    ------------------------------------------------------------------------
                                                            As a Percentage
              Product Categorya            In Billions of     of All U.S.
                                              Dollars       Exports to China
    ------------------------------------------------------------------------
    Aerospace Products and Parts          3.6              16.4
    ------------------------------------------------------------------------
    Semiconductors and Other Electronic   2.2              9.8
     Components
    ------------------------------------------------------------------------
    Waste and Scrap                       1.2              5.5
    ------------------------------------------------------------------------
    Computer Equipment                    1.2              5.3
    ------------------------------------------------------------------------
    Navigational, Measuring,              1.0              4.6
     Electromedical, and Control
     Instruments
    ------------------------------------------------------------------------
    Soybeans                              0.9              4.0
    ------------------------------------------------------------------------
    Resin and Synthetic Rubbers           0.8              3.4
    ------------------------------------------------------------------------
    Fertilizers                           0.7              3.0
    ------------------------------------------------------------------------
    Other General-Purpose Machinery       0.6              2.7
    ------------------------------------------------------------------------
    Other Basic Organic Chemicals         0.6              2.7
    ------------------------------------------------------------------------
    Meat Products and Meat-Packaging      0.6              2.5
     Products
    ------------------------------------------------------------------------
    Telephone Apparatus                   0.5              2.2
    ------------------------------------------------------------------------
    Other Industrial Machinery            0.5              2.1
    ------------------------------------------------------------------------
    Ventilation, Heating, Air-            0.4              1.6
     Conditioning, and Commercial
     Refrigeration Equipment
    ------------------------------------------------------------------------
    Paper Mill Products                   0.3              1.5
    ------------------------------------------------------------------------
    Metalworking Machinery                0.3              1.4
    ------------------------------------------------------------------------
    Special Classification Provisions     0.3              1.4
    ------------------------------------------------------------------------
    Mining and Oil and Gas Field          0.2              1.1
     Machinery
    ------------------------------------------------------------------------
    Commercial and Service-Industry       0.2              1.1
     Machinery
    ------------------------------------------------------------------------
    Pulp Mill Products                    0.2              0.9
    ------------------------------------------------------------------------
    Electrical Equipment                  0.2              0.9
    ------------------------------------------------------------------------
    Radio and Television Broadcasting     0.2              0.9
     and Wireless Communications
     Equipment
    ------------------------------------------------------------------------
    Pharmaceuticals and Medicines         0.2              0.9
    ------------------------------------------------------------------------
    Pumps and Compressors                 0.2              0.8
    ------------------------------------------------------------------------
    All Other Chemical Products and       0.2              0.8
     Preparations
    ------------------------------------------------------------------------
    Source: Congressional Budget Office based on data from the Bureau of the
      Census.
    Note: Numbers are free-alongside-ship values of total exports.
    a Product categories correspond to five-digit codes of the North
      American Industrial Classification System.

        U.S. Imports from China. As rapidly as the value of U.S. exports to
    China has grown, the value of imports from that country has risen even
    more quickly. From 1992 to 2002, imports increased from $27.4 billion
    to $133.5 billion, for an average annual rate of growth of 17.2
    percent. The average annual rate from 2000 to 2002 was a slower 11.4
    percent--still fast in comparison with imports from other major trading
    partners but probably slowed by the recession in the United States in
    2001, which depressed demand.
        With that rapid growth, China has moved from being the fifth
    largest supplier of U.S. imports in 1997 to the fourth largest in 2002
    (see Table 3). As with exports, the growth's impact on output and
    employment in competing industries in the United States is more closely
    related to the absolute dollar value of the increase in imports than to
    the percentage growth in their value. Similarly, the benefit of import
    growth--lower prices for consumers and businesses that import
    intermediate goods for their production processes--is also more closely
    related to the absolute dollar value of increased imports. By that
    measure, China was the third most rapidly growing supplier of U.S.
    imports from 1992 through 2002 and the second from 1997 through 2002
    (behind the European Union). So far in 2003, China's growth has caused
    it to surpass Mexico to become the United States' third largest source
    of imports.

                 Table 3. The Largest Suppliers of U.S. Imports
    ------------------------------------------------------------------------
                                                      U.S.
                                         U.S.       Exports
                                      Imports in      from      U.S. Imports
           Country or Region           2002 in     January to   in 2002 as a
                                     Billions of   July 2003   Percentage of
                                       Dollars    in Billions  Total Imports
                                                   of Dollars
    ------------------------------------------------------------------------
    European Union                   232.1        144.4        19.3
    ------------------------------------------------------------------------
    Canada                           214.0        131.0        17.8
    ------------------------------------------------------------------------
    Mexico                           136.1        79.7         11.3
    ------------------------------------------------------------------------
    China                            133.5        85.7         11.1
    ------------------------------------------------------------------------
    Japan                            124.6        70.1         10.4
    ------------------------------------------------------------------------
    South Korea                      36.9         21.3         3.1
    ------------------------------------------------------------------------
    Taiwan                           33.5         18.7         2.8
    ------------------------------------------------------------------------
    Malaysia                         24.7         14.4         2.1
    ------------------------------------------------------------------------
    Brazil                           16.7         10.8         1.4
    ------------------------------------------------------------------------
    Venezuela                        15.8         9.4          1.3
    ------------------------------------------------------------------------
    Thailand                         15.7         8.9          1.3
    ------------------------------------------------------------------------
    Singapore                        15.1         9.2          1.3
    ------------------------------------------------------------------------
    Saudi Arabia                     13.9         12.4         1.2
    ------------------------------------------------------------------------
    Israel                           12.6         7.7          1.1
    ------------------------------------------------------------------------
    India                            12.4         7.9          1.0
    ------------------------------------------------------------------------
    Memorandum:
    ------------------------------------------------------------------------
    All Countries and Regions        1,202.4      741.2        100.0
    ------------------------------------------------------------------------
    Source: Congressional Budget Office based on data from the Bureau of the
      Census.
    Note: Numbers are customs-insurance-freight values of general imports.

        The largest categories (in terms of value) of U.S. imports from
    China are various kinds of electronic equipment (for example, computers
    and audio and video equipment), toys, footwear, and apparel (see Table
    4).

        Table 4. The Largest Categories of U.S. Imports to China in 2002
    ------------------------------------------------------------------------
                                                            As a Percentage
              Product Categorya            In Billions of     of All U.S.
                                              Dollars       Imports to China
    ------------------------------------------------------------------------
    Computer Equipment                    12.4             9.3
    ------------------------------------------------------------------------
    Dolls, Toys, and Games                11.1             8.3
    ------------------------------------------------------------------------
    Footwear                              10.6             8.0
    ------------------------------------------------------------------------
    Audio and Video Equipment             9.3              6.9
    ------------------------------------------------------------------------
    Semiconductors and Other Electronic   6.4              4.8
     Components
    ------------------------------------------------------------------------
    Household and Institutional           6.4              4.8
     Furniture
    ------------------------------------------------------------------------
    Other Manufactured Commodities        5.0              3.8
    ------------------------------------------------------------------------
    Women's and Girls' Apparel            4.8              3.6
    ------------------------------------------------------------------------
    Small Electrical Appliances           3.7              2.7
    ------------------------------------------------------------------------
    Lighting Fixtures                     3.4              2.5
    ------------------------------------------------------------------------
    Other Leather Products                3.2              2.4
    ------------------------------------------------------------------------
    Other Plastics Products               2.8              2.1
    ------------------------------------------------------------------------
    Sporting and Athletic Goods           2.6              2.0
    ------------------------------------------------------------------------
    Radio and Television Broadcasting     2.3              1.7
     and Wireless Communications
     Equipment
    ------------------------------------------------------------------------
    Other Fabricated Metal Products       2.1              1.6
    ------------------------------------------------------------------------
    Telephone Apparatus                   2.1              1.6
    ------------------------------------------------------------------------
    Commercial and Service-Industry       2.0              1.5
     Machinery
    ------------------------------------------------------------------------
    Other Apparel                         1.7              1.3
    ------------------------------------------------------------------------
    Jewelry and Silverware                1.7              1.3
    ------------------------------------------------------------------------
    Apparel Accessories                   1.7              1.3
    ------------------------------------------------------------------------
    Other General-Purpose Machinery       1.6              1.2
    ------------------------------------------------------------------------
    Men's and Boys' Apparel               1.5              1.2
    ------------------------------------------------------------------------
    Navigational, Measuring,              1.5              1.1
     Electromedical, and Control
     Instruments
    ------------------------------------------------------------------------
    Curtains and Linens                   1.4              1.0
    ------------------------------------------------------------------------
    Pottery, Ceramics, and Plumbing       1.2              0.9
     Fixtures
    ------------------------------------------------------------------------
    Source: Congressional Budget Office based on data from the Bureau of the
      Census.
    Note: Numbers are customs-insurance-freight values of general imports.
    a Product categories correspond to five-digit codes of the North
      American Industrial Classification System.

        The United States' Trade Deficit with China. The United States'
    trade deficit with China increased from $19.9 billion in 1992 to $111.4
    billion in 2002, growing at an average annual rate of 18.8 percent (see
    Figure 8). The average annual rate from 2000 to 2002 was a slower 10.4
    percent, but it was still rapid in comparison with the growth rates of
    deficits with other major trading partners. That growth made the trade
    deficit with China in 2002 the largest of any of the United States'
    bilateral deficits (it was the second largest in 1997). So far in 2003,
    it remains the largest (see Table 5). In addition, the United States'
    deficit with China had the second largest dollar increase of any
    deficit with a U.S. trading partner from 1992 through 2002--although
    the increase was just barely smaller than the increase in the deficit
    with the European Union.
    Figure 8.
    The United States' Trade Balance with China, 1989 to 2002
                            (In billions of dollars)

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Source: Congressional Budget Office based on data from the Bureau
    of the Census.
        Note: The trade balance is calculated using free-alongside-ship
    values of total exports and customs-insurance-freight values of general
    imports.

                    Table 5. The Largest U.S. Trade Deficits
    ------------------------------------------------------------------------
                                                   U.S. Trade
                                      U.S. Trade    Deficit      U.S. Trade
                                      Deficit in      from       Deficit in
                Country                2002 in     January to    2002 as a
                                     Billions of   July 2003   Percentage of
                                       Dollars    in Billions   Total Trade
                                                   of Dollars     Deficits
    ------------------------------------------------------------------------
    China                            111.4        70.9         21.9
    ------------------------------------------------------------------------
    European Union                   88.4         57.2         17.4
    ------------------------------------------------------------------------
    Japan                            73.2         39.9         14.4
    ------------------------------------------------------------------------
    Canada                           53.2         33.1         10.4
    ------------------------------------------------------------------------
    Mexico                           38.6         25.2         7.6
    ------------------------------------------------------------------------
    Taiwan                           15.1         9.2          3.0
    ------------------------------------------------------------------------
    Malaysia                         14.4         8.4          2.8
    ------------------------------------------------------------------------
    South Korea                      14.3         7.4          2.8
    ------------------------------------------------------------------------
    Venezuela                        11.4         8.1          2.2
    ------------------------------------------------------------------------
    Thailand                         10.8         5.8          2.1
    ------------------------------------------------------------------------
    Saudi Arabia                     9.1          9.8          1.8
    ------------------------------------------------------------------------
    India                            8.4          5.2          1.6
    ------------------------------------------------------------------------
    Indonesia                        7.8          4.5          1.5
    ------------------------------------------------------------------------
    Israel                           5.6          3.7          1.1
    ------------------------------------------------------------------------
    Nigeria                          5.2          5.7          1.0
    ------------------------------------------------------------------------
    Memorandum:
    ------------------------------------------------------------------------
    All Countries                    509.2        330.1        100.0
    ------------------------------------------------------------------------
    Source: Congressional Budget Office based on data from the Bureau of the
      Census.
    Note: Numbers are based on free-alongside-ship values of total exports
      and customs-insurance-freight values of general imports.

    The United States' Multilateral Trade Balance
        Individual bilateral trade balances, even the United States'
    growing deficit with China, generally are unimportant in and of
    themselves. At most, they have significance only as part of--and only
    to the extent that they affect--the United States' multilateral trade
    balance. Even though the deficit with China is larger than the deficit
    that the United States has with any other country, it accounts for only
    21.9 percent of the nation's trade deficit with the world. Similarly,
    the increase in the trade deficit with China over the past 10 years
    represents only 22.7 percent of the increase in the United States'
    multilateral trade deficit; the corresponding number for the past five
    years is 19.6 percent (see Figure 9). The vast majority of U.S. trade
    and of the United States' trade deficit is with countries other than
    China.
    Figure 9.
    The United States' Trade Balances with China and the World, 1989 to
            2002
                            (In billions of dollars)

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Source: Congressional Budget Office based on data from the Bureau
    of the Census.
        Note: Trade balances are calculated using free-alongside-ship
    values of total exports and customs-insurance-freight values of general
    imports.

        Although many people focus exclusively on international conditions
    to explain the multilateral trade balance, in practice, some of its
    most important determinants have domestic origins. In particular, the
    difference between gross investment in the United States and gross
    domestic saving represents the nation's demand for capital inflows from
    the rest of the world. Those flows of resources into the U.S. economy
    provide funds to finance net imports and also influence the rate of
    exchange between the dollar and other currencies. Thus, changes in the
    bilateral terms between the United States and China that do not alter
    overall U.S. investment or saving decisions will not influence the
    multilateral balance.
        Saving and investment in the United States are determined by a
    complex mix of effects deriving from the business cycle, monetary
    policy, fiscal policy, the regulatory environment for business, the
    taxation of saving and investment, the desire to save for the future,
    and productivity growth. Although the Yuan's exchange rate against the
    dollar could, in principle, influence U.S. saving and investment to
    some extent, one would not expect the effects to be large. Rather, one
    would expect that much of any increase in U.S. imports from China
    resulting from a relatively low value of the Yuan would be offset by
    declines in U.S. imports from other countries--and indeed, that is what
    has happened.
        Marcus Nolan, at the Institute for International Economics,
    estimated in the early to mid-1990s that 70 percent to 80 percent of
    increased U.S. imports from China displaced imports from other
    countries rather than U.S. production. CBO's more recent analysis
    indicates that the comparable figure for 1997 through 2002 was even
    higher. From 2000 through 2002, U.S. imports from China increased by
    $25.2 billion at the same time that imports from Japan fell by $24.5
    billion and total imports from eight other Asian countries fell by
    $24.3 billion (see Figure 10).
    Figure 10.
    Change in U.S. Imports from China and Other Asian Trading Partners,
            2000 to 2002
                            (In billions of dollars)

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Source: Staff of the International Trade Commission in their
    analysis of September 24, 2003, for the Subcommittee on Trade of the
    House Committee on Ways and Means, updating an article by Michael Barry
    titled ``Why Is the U.S. Trade Deficit with China So Big?''
    (International Economic Review, International Trade Commission,
    September/October 2001).

        China has developed as a location of assembly, particularly for
    electronics and machinery; that is, it imports relatively high-value
    parts from other Asian countries and assembles them into finished goods
    for export. It also produces toys and apparel. Those unskilled labor-
    intensive tasks were carried out previously in other Asian (and a few
    non-Asian) countries but are now being performed in China because wages
    there are relatively low.
    China's Exchange Rate Policy
        China maintains a fixed value of 8.28 Yuan per dollar. By itself,
    such a nominal ``peg'' cannot affect the average real exchange rate
    (the exchange rate adjusted for any changes in prices in the respective
    trading countries) over the long term because the policy also causes
    offsetting effects on Chinese domestic prices. Through a policy known
    as sterilization, however, countries can, within limits, reduce the
    offsetting effects on prices and thereby influence the real exchange
    rate--and, consequently, trade flows. China has engaged in some
    sterilization, leading to the possibility of a lower real exchange rate
    for the Yuan. Because of the difficulty in determining the ``correct,''
    or market, value of any currency, considerable disagreement surrounds
    the question of how much (if at all) the Yuan may be undervalued. CBO
    found estimates by various analysts ranging from no undervaluation to
    as much as 40 percent, and considerable uncertainty is associated with
    each estimating approach.
    The Peg Between the Yuan and the Dollar
        China pegs the value of the Yuan to the dollar through the use of
    exchange controls in conjunction with its buying and selling of dollars
    for Yuan. If exporters' earnings and direct inflows of foreign
    investment result in more dollars than are needed to purchase imports,
    China requires that the dollars be turned in to the central bank in
    exchange for Yuan at the prescribed rate. The central bank then invests
    the dollars in various assets. At a later time, if a shortage of
    dollars develops, those assets (referred to as foreign exchange
    reserves) can be sold for dollars and the dollars provided to importers
    (or any others with a legally recognized need) in exchange for Yuan at
    the prescribed rate.
        Over the past three years, that policy has caused China's central
    bank to purchase a large and rising number of dollars. The bank's
    reserves increased by $10.9 billion in 2000, $46.6 billion in 2001,
    $74.2 billion in 2002, and $103.7 billion in the four quarters ending
    with the second quarter of 2003. Roughly one-third of the reserves that
    were accumulated in 2001 and 2002 are invested in U.S. Treasury debt.
        Effects on the Real Exchange Rate. Exports and imports are
    influenced by the real exchange rate. Thus, if a change in Chinese
    policy halved the value of the Yuan relative to the dollar but at the
    same time led to a doubling of domestic prices (in Yuan) in China,
    Chinese exports would continue to have the same dollar price and
    therefore would not change (all else being the same). The change in
    policy would have caused a change in the nominal exchange rate, but it
    would not have affected the real exchange rate.
        By itself, China's policy of pegging the Yuan to the dollar would
    have no effect on the average real exchange rate over time. When the
    Chinese central bank uses Yuan to purchase excess dollars at the
    prescribed rate, it keeps the value of the Yuan from rising relative to
    the dollar. However, that policy also increases the supply of Yuan. If
    nothing is done to offset that increase, the growth in the money supply
    will ultimately result in higher domestic prices in China. The higher
    prices will then offset the effect that the decline in the value of the
    Yuan will have on the dollar prices of Chinese exports. Those prices
    will therefore remain unchanged--as will the ratio of the price in Yuan
    of Chinese imports to the price of Chinese domestic production. Hence,
    price-based incentives to purchase exports and imports will be
    unaffected.
        If the central bank ``sterilizes'' its purchase of dollars by
    removing an offsetting quantity of Yuan from circulation, it can for a
    time avoid growth in the money supply and inflationary pressures and
    thus affect the real value of the Yuan relative to the dollar. However,
    the duration and effectiveness of sterilization are not unlimited, and
    consequently, neither is the ability to keep the real exchange rate
    from rising in the face of sustained purchases of foreign currency in
    exchange for domestic currency. China has in recent years engaged in
    some sterilization by, among other things, issuing central bank
    paper.\6\ Nevertheless, its money supply has begun to grow more
    rapidly. M2, a broad measure of the money supply, grew by 12.3 percent
    in 2000, 15.0 percent in 2001, 19.4 percent in 2002, and 20.6 percent
    in the four quarters ending with the second quarter of 2003--a pace of
    money creation that is likely ultimately to put upward pressure on
    prices.
    ---------------------------------------------------------------------------
        \6\ See the statement of John B. Taylor, Undersecretary of the
    Treasury for International Affairs, ``China's Exchange Rate Regime and
    Its Effects on the U.S. Economy,'' before the Subcommittee on Domestic
    and International Monetary Policy, Trade, and Technology of the House
    Committee on Financial Services, October 1, 2003.
    ---------------------------------------------------------------------------
        The Implications of China's Accumulation of Reserves. The
    substantial reserve accumulation associated with the pegging of the
    Yuan to the dollar has implications for both the United States and
    China. As noted earlier, a substantial fraction of China's reserves are
    invested in U.S. Treasury debt, raising the specter of a rise in U.S.
    Treasury yields and a fall in the dollar relative to other currencies
    should the Chinese sell a large sum of Treasury securities to buy
    assets denominated in other currencies. However, the combined holdings
    of China and Hong Kong represent only about 4 percent of outstanding
    U.S. Treasury securities.\7\ Thus, any sale of dollar assets by China
    could spur a notable rise in U.S. interest rates only if that sale
    triggered a broader shift against dollar-denominated assets. A broad
    fall in the dollar relative to other currencies would help improve the
    U.S. trade balance, although at the expense of lower prices received
    for U.S. exports and higher prices paid for U.S. imports. China has
    strong reasons to avoid such a scenario: it would result in a capital
    loss on those assets for the Chinese as well as foreign exchange losses
    when they traded their dollars for other currencies.
    ---------------------------------------------------------------------------
        \7\ China owned $102 billion, and Hong Kong $48 billion, in U.S.
    Treasury securities at the end of 2002. (Outstanding Treasury
    securities at the end of 2002 totaled $3.64 trillion.) China owns other
    dollar-denominated assets as well, but their inclusion is unlikely to
    change significantly the results of CBO's calculations. The effects on
    the yields of the types of securities involved would probably not be
    large if China were to sell them. The decline of the dollar relative to
    other countries' currencies would be increased somewhat as China
    exchanged the dollars for other currencies.
    ---------------------------------------------------------------------------
        Many economists note that the U.S. Treasury debt in which a
    substantial component of China's reserves is invested currently earns a
    very low rate of return and that those resources might be more
    productively invested in the Chinese economy. However, it is likely
    that not all of the investment inflows will be invested in China. To
    the extent that the reserves have resulted from inflows of funds
    speculating on a revaluation of the Yuan, they will be needed when
    speculators undertake to reverse their positions.
    Is the Yuan Undervalued?
        The premise of the legislative proposals before the Congress, as
    reflected in their findings, is that the Yuan is substantially
    undervalued. That premise is by no means universally accepted, because
    determining the right value for any currency is difficult (at best).
        China's large trade surplus with the United States is not a good
    indicator of proper or improper valuation of the Yuan because it leaves
    out not only trade with other countries but also trade in services and
    income on foreign investments. The current-account balance--a broad
    measure of the multilateral trade balance--includes trade in goods and
    services and income on foreign investments between China and all of its
    trading partners. A relatively substantial current-account balance
    combined with a capital-account surplus has led Morris Goldstein and
    Nicholas Lardy of the Institute for International Economics to
    calculate that the Yuan is undervalued by about 15 percent to 25
    percent.\8\
        In the end, the ``correct'' value for the Yuan is revealed by the
    markets when the currency is allowed to float--that is, to be bought
    and sold at market-determined prices with no government intervention.
    However, floating gives the ``right'' value only if the market works
    freely and without institutional distortions, such as controls on
    capital flows. As I will discuss later, some observers believe that if
    China both floated its currency and removed its capital controls, the
    Yuan would depreciate. (As recently as 1998, some other Asian countries
    that were forced to allow their currencies to float experienced
    depreciation.) \9\
    ---------------------------------------------------------------------------
        \8\ See the statement of Morris Goldstein, Institute for
    International Economics, ``China's Exchange Rate Regime,'' before the
    Subcommittee on Domestic and International Monetary Policy, Trade, and
    Technology of the House Committee on Financial Services, October 1,
    2003; Morris Goldstein and Nicholas Lardy, ``Two-Stage Currency Reform
    for China,'' Asian Wall Street Journal, Op-Ed Section, September 12,
    2003; and Morris Goldstein and Nicholas Lardy, ``A Modest Proposal for
    China's Renminbi,'' Financial Times, Op-Ed Section, August 26, 2003.
        \9\ The Asian financial crisis of 1997 and 1998 saw the rapid
    devaluation of the currencies of Thailand, Malaysia, Indonesia, the
    Philippines, and South Korea when circumstances forced those nations to
    allow their currencies' value to float freely in the international
    currency markets. The differences between their circumstances then and
    China's now are significant. However, an important commonality is the
    relatively weak condition of those nations' internal capital markets
    and banking systems, particularly with regard to bad loans, and the
    current state of China's capital market and banking system. See
    International Monetary Fund, International Capital Markets:
    Developments, Prospects, and Key Policy Issues (Washington, D.C.:
    International Monetary Fund, September 1998), Chapter 2.
    ---------------------------------------------------------------------------
        Ernest Preeg of the Manufacturers Alliance and the Hudson Institute
    has performed a calculation that might approximate the exchange rate
    that would result from a float.\10\ He looked at the large accumulation
    of dollars in Chinese reserves and determined how much higher the Yuan
    would have been if China had not accumulated those dollars. He
    concluded that the Yuan is undervalued by 40 percent. His calculation
    essentially ignores the role of the capital controls. It is hard to say
    whether, without those controls, Chinese citizens would hold more or
    fewer dollars than the Chinese government now holds, which is key to
    determining what the exchange rate would be. Furthermore, some
    observers have noted that one reason for the current upward pressure on
    the Yuan is that China is experiencing an inflow of funds by
    speculators hoping to gain from a revaluation that they consider likely
    in the near future. That inflow puts upward pressure on the currency
    that will cease once the Yuan is revalued or allowed to float and
    reaches its market equilibrium value.
    ---------------------------------------------------------------------------
        \10\ Ernest H. Preeg, ``Exchange Rate Manipulation to Gain an
    Unfair Competitive Advantage: The Case Against Japan and China,'' in C.
    Fred Bergstan and John Williamson, eds., Dollar Overvaluation and the
    World Economy (Washington, D.C.: Institute for International Economics,
    February 2003), pp. 273-274.
    ---------------------------------------------------------------------------
        Another approach is to look to history. Morgan Stanley's chief
    economist, Stephen Roach, notes that the trade-weighted average real
    value of the Yuan relative to other currencies is basically in line
    with the values it has had since 1998.\11\ He concludes that the Yuan
    is not undervalued. Roach's analysis could also be taken a step
    farther: the Yuan is not currently out of line with the values it has
    had over the past 15 years (see Figure 11). (Note that a higher value
    of the index indicates a higher real value of the Yuan relative to
    other currencies.) However, it is not necessarily the case that a
    country's real exchange rate should remain constant over time. Under
    certain conditions, if a country experiences more-rapid productivity
    growth relative to its trading partners in its tradable-goods sector
    than it does in its non-tradable-goods sector (which could well be the
    case with China), its real exchange rate could be expected to rise.\12\
    ---------------------------------------------------------------------------
        \11\ Stephen S. Roach, Getting China Right, Special Economic Study
    (Washington, D.C.: Morgan Stanley, September 23, 2003), pp. 2-3.
        \12\ See Maurice Obstfeld and Kenneth Rogoff, Foundations of
    International Macroeconomics (Cambridge, Mass.: MIT Press, 1996), pp.
    210-216.
    ---------------------------------------------------------------------------
    Figure 11.
    Real Effective Exchange Rate Index for the Chinese Yuan
                              (Index, 1995 = 100)

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Source: Congressional Budget Office based on International Monetary
    Fund, International Financial Statistics (various years).
        Note: The real effective exchange rate index is the ratio of an
    index of the Yuan's period-average exchange rate to a weighted
    geometric average of exchange rates for the currencies of selected
    countries and the euro area adjusted for movements in prices. Before
    1994, China effectively had a dual exchange rate, with an official rate
    and a rate that prevailed in a swap market in which exporters,
    importers, and foreign-invested companies traded currencies. The index
    reflects a weighted average of the two exchange rates.

    Likely Effects of the Bills Under Consideration
        How the legislation now being considered might affect the U.S.
    economy would depend on the precise policy options chosen by the
    relevant parties. For the sake of illustration, I will discuss the
    effects of three prototypical choices: China allows the Yuan to float
    in foreign exchange markets and removes capital controls; China
    revalues the Yuan but thereafter continues to maintain a peg at the
    new, higher value; and the United States imposes a large tariff on
    imports from China. Although those policies do not constitute a
    comprehensive catalog of options consistent with the proposed
    legislation, their effects are representative of what one might
    anticipate.
    Floating the Yuan
        Broad consensus exists among analysts that over the long term, a
    movement toward a more flexible Yuan is desirable. Many observers
    caution, however, that immediately removing capital controls and
    floating the Yuan could be risky for China.\13\ A large portion of the
    loans of Chinese banks are currently nonperforming (that is, they are
    not being repaid or borrowers are behind on payments).\14\ If China's
    restrictions on capital outflows were eliminated, Chinese citizens and
    businesses--partly out of a desire for diversification and partly
    because of bank-specific risk--would probably remove some of their
    funds from Chinese banks, leading to an outflow of funds to other
    countries. The outflow, if sufficiently severe, could cause financial
    stress or, in the extreme, precipitate the collapse of some banks. If
    the impact was large enough to induce contractionary pressures in the
    Chinese economy, that could, in turn, reduce the demand for U.S.
    exports.
    ---------------------------------------------------------------------------
        \13\ The Yuan could be floated without liberalizing the capital
    controls, but the controls would significantly distort the resulting
    market exchange rate.
        \14\ On September 22, 2003, the Financial Times reported:
    ``Officially, the non-performing loans in the banking system account
    for just over 20 per cent of total loans. But independent observers,
    such as Standard and Poor's, the rating agency, put the figure at 45
    per cent of GDP. By either measure, China has the weakest banking
    system of any large economy.'' See James Kynge, ``Can China Keep its
    Economy on Track,'' Financial Times, October 22, 2003.
    ---------------------------------------------------------------------------
        In light of those risks, many observers argue that floating the
    Yuan and removing capital controls should be deferred until the Chinese
    banking system has been strengthened and the Chinese central bank is
    able manage inflationary and deflationary pressures. In short, day-to-
    day flexibility in the value of the Yuan should be accompanied by
    strengthening of China's domestic institutions and development of its
    capability to support such a ``mature'' foreign exchange policy.
        Moreover, it is not clear that immediately floating the Yuan would
    even lead to an appreciation of the currency. The large outflow of
    funds occasioned by the liberalization of capital controls might
    actually cause the Yuan to depreciate. Also, as previously indicated, a
    portion of the buildup of reserves may reflect an inflow of funds by
    speculators in anticipation of gains from an expected revaluation.
    Speculators must convert their dollars to Yuan to achieve their aims,
    adding to the surplus of dollars that must be absorbed by the Chinese
    central bank in exchange for Yuan. Once the currency was allowed to
    float and it reached its market value, such speculative activity would
    cease, thereby ending that source of upward pressure on the Yuan.
        The effects on U.S. manufacturing of floating the Yuan would depend
    on what happened to the value of the Yuan and to the Chinese economy.
    Predictions of exchange rate movements in floating markets are
    difficult and prone to error. The effects of exchange rate movements in
    either direction on U.S.-Chinese trade would have only a small effect
    on the U.S. multilateral trade balance and consequently on U.S.
    manufacturing employment. If the Yuan depreciated (as many economists
    think likely) and if financial problems in the banking sector led to
    reduced Chinese growth prospects, the U.S. bilateral trade deficit with
    China could increase. If the Yuan appreciated and major problems in the
    banking sector were avoided, the opposite could happen, but the
    ultimate positive effect on U.S. manufacturing employment would be
    small and mostly temporary.
    Revaluation of the Yuan
        Another possible policy would be a one-time revaluation of the Yuan
    to a higher value relative to the dollar and a subsequent peg of the
    Yuan to the dollar (or perhaps a peg to a basket of currencies, such as
    the dollar, the yen, and the euro) after the revaluation. (Some
    analysts have suggested as well that the Yuan be permitted to fluctuate
    in a modest band around the new value.)
        Revaluing the Yuan would increase the U.S. price of imports from
    China. However, one would expect that the increases in prices paid by
    U.S. purchasers would be substantially less than the targeted
    percentage revaluation of the Yuan. One reason is that firms and their
    workers in China would be likely to absorb part of any increase. For
    most countries, revaluations of exchange rates are usually passed
    through to foreign-currency export prices only incompletely because
    exporters tend to reduce the home-currency prices of their products and
    narrow profit margins in response to such revaluations. To the extent
    that revaluation reduces foreign demand and the consequent reduced
    production yields lower average costs per unit produced, exporters can
    reduce their home-currency price and still maintain an adequate rate of
    profit. Moreover, even if average costs are unaffected, exporters (like
    any other business) are loath to easily give up hard-earned market
    share to currency fluctuations and will often accept some reduction in
    profit margins for as long as possible in an attempt to maintain that
    share.
        A reason more specific to China is that its role as a location of
    final assembly means that only a comparatively small portion of the
    value of its exports derives from value added in China. The remainder
    represents the value of imported inputs that are assembled into
    finished exports. The final price of an export must cover the cost of
    the imported inputs plus the cost (in terms of wages, rent, and
    required return on capital) of the value added in China. However, only
    the value added in China would be made more expensive in dollar terms
    by an appreciation. The same appreciation that raised the dollar price
    of the export for a given Yuan price would also reduce the Yuan cost to
    China of the imported inputs. For that reason, the portion of the price
    of the finished exports accounted for by imported inputs would remain
    unchanged in dollar terms.
        One group of analysts has estimated that only 20 percent to 30
    percent of the value of Chinese exports represents value added in
    China.\15\ If so, even with com-plete pass-through of the extra cost, a
    20 percent appreciation of the Yuan would increase the final dollar
    price of the exports by only 4 percent to 6 percent (20 percent
    appreciation times 20 percent to 30 percent value added). Of course,
    some Chinese exports undoubtedly have less value than 20 percent added
    in China, and others may have considerably more than 30 percent added.
    Hence, the size of a revaluation's effect on price would vary with the
    good exported. Clearly, however, the effect for a large portion of
    Chinese exports would be substantially less than the percentage
    appreciation of the Yuan.
    ---------------------------------------------------------------------------
        \15\ See the statement of Lawrence J. Lau, ``Is China Playing by
    the Rules? Free Trade, Fair Trade, and WTO Compliance,'' at a hearing
    of the Congressional-Executive Commission on China, September 24, 2003;
    Xikang Chen, Leonard Cheng, K.C. Fung, and Lawrence J. Lau, ``The
    Estimation of Domestic Value-Added and Employment Induced by Exports:
    An Application to Chinese Exports to the United States'' (presentation
    to the Institute of Systems Science, Academy of Mathematics and Systems
    Science, Chinese Academyu of Sciences, Beijing, June 18, 2001); and
    Xikang Chen, Leonard Cheng, K.C. Fung, and Lawrence J. Lau, ``The
    Estimation of Domestic Value-Added and Employment Induced by Exports:
    An Application to Chinese Exports to the United States,'' revised
    December 2001. The last of those sources was referenced by Stephen S.
    Roach in testimony before the Commission on U.S.-China Economic and
    Security Review on September 25, 2003, but CBO was unable to obtain the
    document for verification.
    ---------------------------------------------------------------------------
        The ultimate impact of any resulting price increase on the volume
    of U.S. imports from China depends on how competitive China is compared
    with other countries. If the countries that previously assembled the
    products that China now assembles remain close competitors of China,
    then a price increase of plausible magnitude might be enough to induce
    a substantial shift in production from China back to those other
    countries. In effect, the process by which U.S. imports from China grew
    over time would to some extent be reversed. Imports from China would
    decline (or grow more slowly), but imports from the other countries
    would rise. The U.S. multilateral trade balance would increase only
    slightly, with just a small and temporary positive effect on U.S.
    manufacturing employment.
        In practice, China appears to have a substantial competitive margin
    in many products, and the modest price increases that are likely if the
    Yuan is revalued would probably not be enough to shift the pattern of
    production and trade for those goods. Neither would they be enough,
    however, to induce U.S. consumers and businesses to reduce dramatically
    their demand for those products. Again, the U.S. multilateral trade
    balance would increase only slightly, with just a small and temporary
    positive effect on U.S. manufacturing employment.
        A revaluation of the Yuan could also increase U.S. exports to
    China. However, because the value of those exports is only one-sixth
    that of U.S. imports from China, the dollar value of a revaluation's
    effect on exports would be smaller than that of the effect on imports.
    Also, as with imports, the revaluation would not be completely passed
    through to reductions of U.S. export prices denominated in Yuan. In
    contrast to China's exports, U.S. exports have a large percentage of
    domestic value added. Thus, there might be a larger price decline and
    U.S. exports to China would be likely to increase more than they would
    in the absence of the revaluation. However, any improvement in the U.S.
    multilateral trade balance would be modest and the impact on
    manufacturing employment slight and temporary.
        Finally, independent of the extent to which any employment gains
    were to occur, a revaluation would hurt consumers and some trading
    sectors in the United States by reducing prices received for exports
    and increasing prices paid for imports.
    Imposition of a Large Tariff on Imports from China
        The effects on imports from China of imposing a large tariff would
    be greater than the effects of a corresponding revaluation of the Yuan
    because the tariff would effectively apply to the entire value of the
    imports--not just to the value added in China. The tariff would not,
    however, carry any corresponding incentive for U.S. exports to China.
    Viewed strictly from the perspective of the trade balance, the net
    effect of any large tariff would probably be to reduce the United
    States' bilateral trade deficit with China because the value of U.S.
    imports from China is six times as large as the value of U.S. exports
    to that country. Furthermore, as in the case of a revaluation, the
    decline in imports would be replaced mostly by increases in imports
    from other countries, so the effect on the U.S. multilateral trade
    balance would be small.
        Moreover, a tariff raises the possibility of a corresponding
    Chinese policy against U.S. exports--especially if the U.S. tariff was
    ruled illegal by the World Trade Organization. As noted earlier, China
    was the sixth largest U.S. export market in 2002 and is currently the
    fifth largest; it has been the third most rapidly growing market over
    the past five years. When viewed in the larger context of trade
    retaliation, a tariff's net effect--positive or negative--on the
    multilateral trade balance is uncertain.

        Mr. CRANE. Dr. Yager.

       STATEMENT OF LOREN YAGER, PH.D., DIRECTOR, INTERNATIONAL
           AFFAIRS AND TRADE, U.S. GENERAL ACCOUNTING OFFICE

        Dr. YAGER. Mr. Chairman and Members of the Committee, I am
    also pleased to be here today to discuss the challenges
    involved in ensuring that China honors its commitments to the
    WTO. This hearing takes place not only at a time of increasing
    trade between the United States and China, but also at a time
    of increasing concern about broader aspects of the U.S.-China
    relationship. Compliance with the WTO obligations is a central
    feature of China's economic relationship with the United States
    and other WTO Members; however, the mixed record of progress we
    have found in our analysis suggests that ensuring compliance
    will be difficult and will require sustained efforts from all
    the key players to be successful.
        The main point of my testimony today is that Congress
    should expect significant progress from the Federal government
    in monitoring and enforcing China's implementation of its WTO
    commitments during this year; however, progress in these
    efforts may not necessarily translate into progress with regard
    to China's implementation.
        First I will talk about three important factors that should
    bolster Congress's expectations, as well as key observations
    regarding China's implementation. My observations are based on
    a series of studies that we initiated at the request of this
    Committee and the Senate Committee on Finance. That work has
    included a comprehensive analysis of China's commitments, a
    survey of private sector representatives and an examination of
    first-year U.S. compliance efforts. I have also incorporated
    insights from GAO staff who have returned this week from travel
    and interviews with representatives of the private sector as
    well as U.S. agency officials in China.
        The first factor that should bolster expectations is that
    Congress has provided increased resources for monitoring and
    enforcement of China's implementation. As a result, USTR and
    other key agencies have made significant increases in their
    staffing and have made organizational changes to enhance their
    ability to monitor and enforce China's implementation.
        The second factor is that Administration officials assert
    that coordination of monitoring enforcement efforts both within
    the government and with the private sector are coming up to
    speed. Within the government, for example, USTR chairs the
    Subcommittee on China WTO compliance, which serves as one
    formal mechanism for interagency coordination. Additionally,
    agency staff have established a variety of mechanisms to work
    with the private sector which should enable them to take
    advantage of the collective understanding and experience with
    the commitments.
        The third factor is that in the second year of China's WTO
    Membership, U.S. agency officials have more experience with
    China's compliance issues, both in terms of the scope of the
    problems as well as specific issues such as China's
    administration of its tariff rate quotas (TRQs). Further, the
    United States and other WTO Members can improve on the first
    year's disappointing experience of dealing with China
    multilaterally in the WTO. For example, the United States has
    more experience with the WTO's TRM for China, and USTR
    officials have noted their optimism about a more successful and
    effective second year review of China's implementation within
    the WTO.
        Now, everything I have said up to this point refers to U.S.
    monitoring and enforcement efforts, but, of course, that is
    only half the equation. On the other side of the equation is
    China's willingness and capacity to comply with its
    commitments. Let me make a few observations now.
        First, as we have mentioned in our reports, and as I
    mentioned in my written testimony, the enormous scope and
    complexity of the commitments make reform challenging. In
    addition, the general nature of some of the commitments makes
    it difficult to even determine if they have been fully
    implemented. In addition, Chinese implementation requires
    cooperation across the national, provincial and local levels in
    China as well as extensive coordination among various
    ministries and agencies. As many have observed, some of these
    key players may not believe it is in their interest to
    implement parts of the agreement, or, as we have also heard,
    some parts of the government may lack the technical capacity to
    implement the commitments.
        Finally, during our recent work on the ground in China,
    some U.S. firms cited problems about China's uneven
    implementation of reforms across sectors as well as a more
    general concern of a lack of momentum within the Chinese
    government to implement some important commitments. For
    example, some representatives noted concerns about this lack of
    momentum hindering compliance with key commitments on trading
    rights and distribution. These are some of the key commitments
    for the years 2003 and 2004.
        In closing, Mr. Chairman, a sustained approach from several
    key players, including the executive branch, the private
    sector, the WTO and the Congress, is essential to ensuring
    China's compliance this year. There are a number of positive
    factors that should bolster congressional expectations about
    improved compliance, but no one should underestimate the
    difficulty of ensuring that the commitments are effectively
    implemented this year.
        Mr. Chairman, this concludes my testimony, and I would be
    happy to answer any questions.
        [The prepared statement of Dr. Yager follows:]
     Statement of Loren Yager, Ph.D., Director, International Affairs and
                     Trade, U.S. General Accounting Office
        Mr. Chairman and Members of the Committee:
        I am pleased to be here today to discuss our observations on the
    challenges involved in ensuring that China honors its commitments to
    the World Trade Organization (WTO). This hearing takes place not only
    at a time of increasing trade between the United States and China, but
    also at a time of increasing concern about broader aspects of the U.S.-
    China relationship. Although China's implementation of its WTO
    commitments cannot fully eliminate those concerns, compliance with its
    WTO obligations is a central feature of China's economic relationship
    with the United States and other WTO members. However, as we have found
    in our analysis of the first year's efforts to monitor and enforce
    China's compliance with its WTO commitments, the scope and complexity
    of the agreement indicate that ensuring compliance will be difficult
    and will require sustained efforts from all the key players to be
    successful.
        To provide you with an update on these issues, today I will discuss
    (1) the compliance challenges associated with the scope and complexity
    of China's WTO commitments and (2) the efforts to date of each of the
    key players involved in ensuring China's compliance with its WTO
    obligations: the executive branch, Congress, the private sector, and
    the WTO and its members. My observations are based on a series of
    studies that we initiated at the request of this Committee and of the
    Senate Committee on Finance. That work has included a comprehensive
    analysis of China's commitments,[1] our survey and
    interviews with the private sector representatives,[2] and
    our examination of first-year U.S. compliance efforts.[3]
    Before I turn to the specifics on these issues, let me provide a brief
    summary.
    ---------------------------------------------------------------------------
        \[1]\ See U.S. General Accounting Office, World Trade Organization:
    Analysis of China's Commitments to Other Members, GAO-03-4 (Washington,
    D.C.: Oct. 3, 2002).
        \[2]\ See U.S. General Accounting Office, World Trade Organization:
    Selected U.S. Company Views About China's Membership, GAO-02-1056
    (Washington, D.C.: Sept. 23, 2002).
        \[3]\ See U.S. General Accounting Office, World Trade Organization:
    First-Year U.S. Efforts to Monitor China's Compliance, GAO-03-461
    (Washington, D.C.: Mar. 31, 2003).
    ---------------------------------------------------------------------------
    Summary
        The comprehensive scope and complexity of China's WTO accession
    agreement present two main challenges for successfully monitoring and
    enforcing China's compliance with its obligations. First, the broad
    scope of the agreement, which covers numerous aspects of China's trade
    regime and market access commitments for goods and services, makes it
    difficult to determine if each commitment has been fully implemented.
    Similarly, the complexity of the agreement also presents challenges for
    assessing compliance. Specifically, some interrelated commitments are
    phased in at different times, and many commitments are so general in
    nature that it will be difficult to immediately assess compliance.
        A sustained approach from several key players, including the
    executive branch, Congress, the private sector, and the WTO and its
    members, is essential to ensuring China's compliance. Since China's
    accession to the WTO, these actors have undertaken a range of efforts
    to ensure China's compliance: the executive branch has ramped up its
    resources for China monitoring and enforcement; Congress has enacted
    legislation focusing on China's adherence to its obligations; the
    private sector has continued to monitor China's progress and provide
    input on compliance priorities; and the WTO and its members have
    conducted an initial review of China's implementation. These compliance
    efforts encountered various challenges in the first year, thus
    demonstrating the need for a sustained approach to successfully ensure
    that China lives up to its WTO obligations.
    Background
        China became the 143rd member of the WTO on December 11, 2001,
    after almost 15 years of negotiations. These negotiations resulted in
    China's commitments to open and liberalize its economy and offer a more
    predictable environment for trade and foreign investment in accordance
    with WTO rules. The United States and other WTO members have stated
    that China's membership in the WTO provides increased opportunities for
    foreign companies seeking access to China's market. The United States
    is one of the largest sources of foreign investment in China, and total
    merchandise trade between China and the United States exceeded $145
    billion in 2002, according to U.S. trade data. However, the United
    States still maintains a trade deficit with China: Imports from China
    totaled $124.8 billion, while exports totaled $20.6 billion in 2002.
    Through the first half of 2003, exports to and imports from China grew
    about 25 percent compared to the same period in the previous year.
        The U.S. government's efforts to ensure China's compliance with its
    WTO commitments are part of an overall U.S. structure to monitor and
    enforce foreign governments' compliance with existing trade
    agreements.[4] At least 17 federal agencies, led by the
    Office of the U.S. Trade Representative (USTR), are involved in these
    overall monitoring and enforcement activities. USTR and the departments
    of Agriculture (USDA), Commerce, and State have relatively broad roles
    and primary responsibilities with respect to trade agreement monitoring
    and enforcement. Other agencies, such as the departments of the
    Treasury and Labor, play more specialized roles. Federal monitoring and
    enforcement efforts are coordinated through an interagency mechanism
    comprising several management- and staff-level committees and
    subcommittees. The congressional structure for funding and overseeing
    federal monitoring and enforcement activities is similarly complex,
    because it involves multiple committees of jurisdiction. Congressional
    agencies, including GAO, and commissions also support Congress's
    oversight on China-WTO trade issues. In addition to the executive
    branch and congressional structures, multiple private sector advisory
    committees exist to provide federal agencies with policy and technical
    advice on trade matters, including trade agreement monitoring and
    enforcement.
    ---------------------------------------------------------------------------
        \[4]\ For more information on the overall roles and
    responsibilities of U.S. government agencies in monitoring and
    enforcing trade agreements, see U.S. General Accounting Office,
    International Trade: Strategy Needed to Better Monitor and Enforce
    Trade Agreements, GAO/NSIAD-00-76 (Washington, D.C.: Mar. 14, 2000).
    ---------------------------------------------------------------------------
     Scope and Complexity of China's WTO Commitments Present Challenges for
            Ensuring Compliance
        China's accession agreement is the most comprehensive of any WTO
    member's to date, and, as such, verifying China's WTO compliance is a
    challenging undertaking for two main reasons. The first reason is the
    scope of the agreement: The more than 800-page document spans eight
    broad areas and sets forth hundreds of individual commitments on how
    China's trade regime will adhere to the organization's agreements,
    principles, and rules and allow greater market access for foreign goods
    and services. The second reason is the complexity of the agreement:
    Interrelated parts of the agreement will be phased in at different
    times, and some commitments are so general in nature that it will not
    be immediately clear whether China has fully complied with its
    obligations in some cases.
    Scope of Commitments Poses Inherent Compliance Issues
        The comprehensive scope of China's WTO accession agreement
    represents a challenge for the U.S. government's compliance efforts.
    The commitments cover eight broad areas of China's trade regime,
    including import regulations, agriculture, services, and intellectual
    property rights. Within these eight broad areas, we identified nearly
    700 individual commitments that China must implement to comply with its
    WTO obligations. China has also committed to lower a variety of market
    access barriers to foreign goods. These obligations include commitments
    to reduce or eliminate tariffs on more than 7,000 products and
    eliminate nontariff barriers on about 600 of these products.
    Additionally, China made commitments to allow greater market access in
    9 of 12 general services sectors, including banking, insurance, and
    telecommunications.
        The scope of compliance problems raised in the first year of
    China's membership reflects the scope of the agreement itself. Although
    the executive branch's first-year assessment of China's implementation
    of its WTO commitments acknowledged China's effort and progress in some
    areas, the assessment also noted compliance problems in all eight broad
    areas of China's trade regime.[5] In particular, the
    executive branch emphasized problems in agriculture, services, and
    intellectual property rights, as well as a crosscutting concern about
    transparency. Some preliminary assessments of China's second-year
    implementation from the private sector suggest that many of those
    problems persist and that concern about the number and scope of
    compliance issues continues to increase.
    ---------------------------------------------------------------------------
        \[5]\ See U.S. Trade Representative, 2002 Report to Congress on
    China's WTO Compliance (Washington, D.C.: Office of the U.S. Trade
    Representative, Dec. 11, 2002).
    ---------------------------------------------------------------------------
    Complexity of Agreement Presents Additional Challenges for Assessing
            Compliance
        While many of China's commitments were due to be phased in upon
    China's accession to the WTO in 2001, a number of interrelated
    commitments are scheduled to be implemented over extended time frames.
    For example, commitments on trading rights and distribution are not
    scheduled to be fully phased in until the end of 2004 and 2006,
    respectively. As a result, foreign businesses will be unable to fully
    integrate import, export, and distribution systems until that time.
    Additionally, although market access for most goods and services will
    be phased in by 2007, some tariffs will not be fully liberalized until
    2010. (See fig. 1.)
    Figure 1: Summary of Key Phase-in Dates for China's WTO Commitments,
            2001-2016

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Legend
        NTM: nontariff measure
        TBT: technical barriers to trade
        TRQ: tariff-rate quota
        TRM: transitional review mechanism

        The varying nature of China's commitments also complicates U.S.
    government compliance efforts. On the one hand, some of China's WTO
    obligations require specific actions from China, such as reporting
    particular information to the WTO, or lowering a tariff on a product.
    Assessing compliance with these specific types of commitments is
    relatively easy. On the other hand, a significant number of commitments
    are more general in nature and relate to systemic changes in China's
    trade regime. For example, some commitments of this type require China
    to adhere to general WTO principles of nondiscrimination and
    transparency. Determining compliance with these more general types of
    commitments is more difficult and can complicate the dialogueue over
    achieving compliance.
        It is useful to note that many private sector representatives told
    us that implementing these general types of commitments, such as those
    that relate to the rule of law, was relatively more important than
    carrying out specific commitments to increase market access and
    liberalize foreign investment in China. Specifically, China's
    commitments in the areas of transparency of laws, regulations, and
    practices; intellectual property rights; and consistent application of
    laws, regulations, and practices emerged as the most important areas of
    China's accession agreement in our September 2002 survey of and
    interviews with U.S. companies operating in China.[6]
    However, private sector representatives also indicated that they
    thought these rule-of-law-related commitments would be the most
    difficult for China to implement.
    ---------------------------------------------------------------------------
        \[6]\ For a further description of our results, see GAO-02-1056.
    ---------------------------------------------------------------------------
     Sustained Effort from Key Players Required to Ensure China's
            Compliance, but First-year Experience Demonstrates Challenges
        Because China is such an important trading partner, ensuring
    China's compliance with its commitments is essential and requires a
    sustained effort on the part of the executive branch, Congress, the
    private sector, and the WTO and its other members. (See fig. 2.) For
    example, the executive branch has extensive involvement in monitoring
    and enforcing China's commitments, and additional resources and new
    structures have been applied to these tasks. However, the U.S.'s first-
    year experience showed that it takes time to organize these structures
    to effectively carry out their functions and that progress on the
    issues can be slow. In addition to the executive branch's efforts,
    Congress has enacted legislation, provided resources, and established
    new entities to increase oversight of China's compliance. The private
    sector also has undertaken a wide range of efforts that provide on-the-
    ground information on the status of China's compliance efforts and
    input to the executive branch and to Congress on priorities for
    compliance efforts. Finally, the WTO has existing mechanisms as well as
    a new, China-specific mechanism created as a means for WTO members to
    annually review China's implementation of its commitments. Nonetheless,
    despite the involvement of all of these players in the first year, the
    United States will need a sustained--and cohesive--approach to
    successfully carry out this endeavor.
    Figure 2: Multifaceted Approach Essential to Ensuring China's WTO
            Compliance

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

     Key Executive Branch Agencies Have Increased Focus on China's
            Compliance, but First-Year Efforts Demonstrate Challenges
        China's accession to the WTO has led to increased monitoring and
    enforcement responsibilities and challenges for the U.S. government. In
    response to these increased responsibilities, USTR and the departments
    of Commerce, Agriculture, and State have undertaken various efforts to
    enhance their ability to monitor China's compliance with its WTO
    commitments. Agencies have reorganized or established intra-agency
    teams to improve coordination of their monitoring and enforcement
    efforts. Additionally, the agencies have added staff in Washington,
    D.C., and overseas in China to carry out these efforts. For example,
    estimated full-time equivalent staff in key units that are involved in
    China monitoring and enforcement activities across the four agencies
    increased from about 28 to 53 from fiscal years 2000 to 2002, with the
    largest increases at the Department of Commerce. On a broader level,
    USTR has established an interagency group to coordinate U.S. government
    compliance activities. The interagency group, which utilizes the
    private sector to support its efforts, was very active in monitoring
    and responding to issues during the first year of China's membership.
    Nevertheless, it took some time for agencies to work out their
    respective roles and responsibilities in the interagency group.
        Monitoring and enforcing compliance with WTO requirements is a
    complex and challenging task, as shown by our 2002 assessment of the
    U.S. government's efforts to ensure China's compliance with commitments
    regarding administration of tariff-rate quotas (TRQ) [7] for
    certain bulk agricultural commodities.[8] TRQ implementation
    problems in 2002 included concerns about Chinese authorities missing
    deadlines for issuing TRQs on certain bulk agricultural commodities;
    disagreement over whether China's interpretation of its commitments met
    WTO requirements; and questions about whether China's administrative
    practices were in keeping with its obligations. The United States has
    undertaken both bilateral and multilateral efforts to settle these
    complex issues. The large number of U.S. government activities on these
    issues alone, which still are not fully resolved, included at least
    monthly engagements with China and illustrates the extensive effort
    agencies must undertake to identify problems, gather and analyze
    information, and respond to some issues.
    ---------------------------------------------------------------------------
        \[7]\ Under China's TRQ commitments, a specific quantity of certain
    agricultural bulk commodities is to be allowed in at a low duty, while
    imports above that quota face higher tariffs.
        \[8]\ See GAO-03-461.
    ---------------------------------------------------------------------------
    Congressional Focus on China Compliance Issues Has Increased
            Substantially
        Congress has had an active role in overseeing trade relations
    between the United States and China and in setting expectations for
    vigilant monitoring and enforcement of China's WTO commitments. In the
    U.S.-China Relations Act of 2000,[9] Congress found that for
    the trade benefits with China to be fully realized, the U.S. government
    must effectively monitor and enforce its rights under China's WTO
    agreements. To accomplish this, Congress
    ---------------------------------------------------------------------------
        \[9]\ This constituted a major part of the legislation that led to
    China's receiving permanent normal trade relations status. See Pub. L.
    No. 106-286, 114 Stat. 880.

          authorized additional resources at USTR and the
    departments of Commerce and Agriculture;
          called for an annual review of China's compliance in the
    WTO;
          established the Congressional-Executive Commission on the
    People's Republic of China to monitor China's compliance with human
    rights and the development of the rule of law in China;
          established a Task Force on the Prohibition of
    Importation of Products of Forced Prison Labor from China;
          authorized a program to conduct rule of law training and
    technical assistance in China; and
          enacted legislation implementing China's WTO commitment
    allowing WTO members to apply a product-specific safeguard when
    increases in Chinese imports threaten or cause injury to domestic
    industry.

        Congress also required that the executive branch issue several
    China trade-related reports to assist its continuing oversight. These
    requirements included USTR's annual report on China's compliance, which
    is based in part on input from the general public. In addition, this
    Committee, together with the Senate Finance Committee (on a bipartisan
    basis), requested that we continue our work on China-WTO issues and
    report on China's compliance, executive branch efforts, and U.S.
    business views over 4 years. Finally, congressional committees and
    commissions have held at least 35 China-focused hearings since 2001--a
    further indication of congressional involvement in U.S.-China issues.
    Private Sector Plays Key Role in Monitoring China's Compliance
        U.S. businesses operating in China provide valuable assistance in
    monitoring the status of China's implementation of its WTO commitments,
    and, as such, effective coordination between the U.S. government and
    the private sector is essential. For example, industry-specific
    expertise and input from within the private sector are indispensable
    components for determining whether the scores of highly technical laws
    and regulations that the Chinese government issues are WTO compliant
    and being implemented. Further, private sector industry and business
    associations are active in conducting their own analyses and issuing
    reports on China's WTO compliance, providing input to congressional
    committees and commissions, engaging the Chinese on specific WTO
    issues, and representing their members' interests to the U.S.
    government in order to inform the U.S.'s compliance priorities.
    WTO Has General and China-specific Mechanisms to Ensure Compliance
        The WTO's framework of more than 20 multilateral agreements covers
    various aspects of international trade and sets forth the rules by
    which China and other members must abide. Notably, the WTO's dispute
    settlement mechanism is intended to give all WTO members access to a
    formal mechanism for pursuing and resolving WTO-related compliance
    issues with other members, including China. Thus far, no WTO member has
    initiated a dispute settlement case against China, although some
    Members of Congress and private sector groups have urged the U.S.
    government to initiate a case related to China's administration of
    TRQs.
        Another WTO mechanism relates specifically to China. China's
    accession commitments created a Transitional Review Mechanism (TRM), as
    a means for WTO members to annually review China's implementation of
    its commitments for 8 years, with a final review in the 10th year
    following China's accession.[10] Just as establishing the
    TRM was one of the more challenging issues to negotiate with China,
    implementing the TRM process during the first year (2002) also proved
    challenging. Disagreement among WTO members, including China, over the
    form, timing, and thoroughness of the TRM led to a limited initial
    review of China's trade practices. The review did not meet U.S.
    expectations and illustrated the challenges of gaining consensus with
    China and other members within this multilateral forum over
    implementation issues. Although U.S. officials cited benefits from
    participating in the initial review, they expressed disappointment over
    the first-year results. U.S. officials are hopeful that future reviews
    will be more comprehensive. The second-year TRM is under way, but it is
    still too early to determine if the current review will meet U.S. and
    other WTO members' expectations.
    ---------------------------------------------------------------------------
        \[10]\ The TRM is additional to WTO's trade policy review
    mechanism, which provides for a broad review of the trade regimes of
    all WTO members on a scheduled basis. However, WTO members viewed the
    trade policy review mechanism as insufficient to oversee China's
    implementation of its commitments and pursued the TRM.
    ---------------------------------------------------------------------------
    Concluding Observations
        In assessing China's first-year implementation efforts, the
    executive branch, other WTO member government officials, and many
    private sector representatives observed that, despite several first-
    year compliance problems, China had demonstrated a willingness to
    implement its WTO commitments. For example, the executive branch noted
    China's progress in revising the framework of laws and regulations
    governing various aspects of China's trade regime. In the second year
    of China's membership, however, concerns about the number of compliance
    problems have grown, as well as the number of events that have
    potentially interfered with China's implementation of its commitments.
    Specifically, some observers have noted events such as changes in
    China's central government leadership, reconfigurations of key
    ministries, a growing concern about unemployment and labor unrest, and
    the SARS outbreak as possibly temporarily interrupting progress on
    implementation.
        In closing, Mr. Chairman, the theme of my testimony is that a
    cohesive and sustained approach is necessary to monitor and enforce
    China's commitments to the WTO. I believe that this hearing that
    focuses on the key elements of the U.S.-China economic relationship and
    brings together three of the key players is exactly the kind of
    oversight that is necessary to ensure that a cohesive and sustained
    approach is actually carried out.
        Mr. Chairman and Members of the Committee, this concludes my
    prepared statement. I would be happy to answer any questions on my
    testimony that you may have.

        Mr. CRANE. Thank you. Dr. Rogowsky.

    STATEMENT OF ROBERT A. ROGOWSKY, PH.D., DIRECTOR OF OPERATIONS,
              UNITED STATES INTERNATIONAL TRADE COMMISSION

        Dr. ROGOWSKY. Thank you very much, Mr. Chairman. I want to
    thank you and the Committee for the opportunity to share some
    of the knowledge and data the staff at the USITC is developing
    on China. I have provided written testimony for the record. I
    should note to start that the testimony provided is not an
    official commissioned document, and so it does not necessarily
    reflect the views of the Commission as a whole or any
    individual Commissioner.
        In my few moments, I want to highlight several facts that
    are relevant to the issue of America's trade deficit with
    China. The relationship with China is if nothing dynamic. The
    bilateral trade deficit has grown over 900 percent since 1990
    and nearly 24 percent in 2002 alone. From 1996 to 2002, U.S.
    exports to China increased 74 percent, and U.S. imports from
    China increased 144 percent. In 2002, China's first full year
    as a Member of the WTO, U.S. exports to China increased 14
    percent, while U.S. imports increased 22 percent.
        China's imports are moving up the sophistication ladder. In
    1990, only 3 percent of China's exports to the United States
    were non-electrical machinery. Now they are 16 percent.
    Similarly, electrical machinery grew from 12 percent to 20
    percent. United States imports of computers, peripherals and
    parts from China rose 42 percent in 2002, and U.S. imports of
    consumer electronics except televisions increased by 31 percent
    in 2002. This increased competitiveness can be attributed in
    large part to consumer electronic companies based in other
    Asian countries shifting manufacturing to China. It is reported
    that as much as 20 percent of Japan's consumer electronics
    capacity has moved to China. United States imports of telephone
    apparatus expanded 45 percent in 2002 mostly because U.S. and
    European producers have established production facilities in
    China. Also, U.S. imports of games, mostly video games in
    China, nearly doubled in 2002, and that is because a major
    producer moved from Japan to China.
        The U.S. trade data from 2002 showed that imports to China
    are increasing, while imports into the United States from
    almost every other Asian economy have decreased. United States
    imports from China increased $25 billion over the past 2 years.
    Imports from Japan decreased $24 billion. All this was
    predicted in the USITC's 1999 study of China's WTO accession.
    This trend is especially notable for more advanced products. In
    1990, China supplied less than 1 percent of U.S. imports of
    non-electrical machinery and about 3 percent of electrical
    machinery. By 2002, these shares had increased to 13 percent
    and 16 percent respectively. Virtually all this increase came
    at the expense of Japan, whose share of U.S. imports fell to
    less than half of its original level in each sector.
        In contrast to a downward trend for U.S. exports worldwide,
    U.S. exports to China increased to 14 percent in 2002. United
    States imports of semiconductors and integrated circuits to
    China rose 31 percent in 2002. This increase is attributed to
    China's rapidly growing demand for these products in the
    manufacture of telecommunications equipment, computer hardware
    and consumer electronics. According to industry observers,
    about 95 percent of China's semiconductor demand is currently
    met by imports because of difficulties related to protecting
    IPRs and creating wholly owned foreign ventures. However, even
    as their own production of semiconductors grows in China,
    largely fueled by Taiwanese investments, exports of U.S.
    semiconductor manufacturing equipment has followed, growing 63
    percent.
        China, as Napoleon predicted, now awakened, is shaking the
    world. Asia in particular is undergoing dynamic shifts in trade
    flows, investment surges and production patterns. It is not
    surprising. The various perceived problems are structural, or,
    more precisely, they arise from the shifts from one structural
    equilibrium to another. The new equilibrium as yet has not been
    determined. It is this disequilibrium that creates the tension.
    Again, it is not terribly surprising.
        Thank you for this opportunity, and I would be happy to
    answer any questions.
        [The prepared statement of Dr. Rogowsky follows:]
    Statement of Robert A. Rogowsky, Ph.D., Director of Operations, United
                     States International Trade Commission
        The U.S. deficit in merchandise trade with China reached $104.2
    billion in 2002, with U.S. exports totaling $20.6 billion and U.S.
    imports totaling $124.8 billion (figure 1).\1\ The bilateral trade
    deficit has grown 907.7 percent since 1990, and 23.9 percent in 2002
    alone. In terms of total trade, in 2002, China is the United States'
    4th largest trading partner. It recently passed Japan as the United
    States' third largest importer. But as a share of the total U.S. trade
    deficit, the trade deficit with China is larger (20 percent) than the
    shares of the top three trading partners, Canada (13 percent), Mexico
    (9 percent), and Japan (14 percent).
    ---------------------------------------------------------------------------
        \1\ The reported trade data reflect total imports for consumption
    and domestic exports, the definitions used by the U.S. Department of
    Commerce in measuring the trade balance.

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        From 1996 to 2002, U.S. exports to China increased 74.2 percent
    ($8.8 billion), while U.S. imports from China increased 143.7 percent
    ($73.6 billion). In 2002, China's first full year as a member of the
    World Trade Organization, U.S. exports to China increased 14.4 percent
    ($2.6 billion), while U.S. imports increased 22.3 percent ($22.7
    billion). U.S. imports from China have increased in all major
    categories. The largest increases in broad (2-digit HTS) categories of
    imports from China from 2000 to 2002 included electrical machinery
    (25.3 percent), non-electrical machinery (51 percent), toys and games
    (16.6 percent), footwear (11.3 percent), furniture and bedding (37.8
    percent), leather products (15.5 percent), plastic products (29.4),
    precision instruments (22 percent), and other apparel (45 percent)
    (table 1).

                     Table 1. U.S. imports from China, classified by 2-digit HTS chapter, 2000-2003
                                    Ranked by 2002 import level (Billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                                             Change
                                                          2002     2003     Change     Change     Change   2002 YTD-
      HTS     Description      2000     2001     2002     YTD      YTD    2000-2001  2001-2002  2000-2002   2003 YTD
     ----------------------------------------------------------------------------------------------------------------
                                                                                     -------Percent-------
    ----------------------------------------------------------------------------------------------------------------
        85  Electrical          19.4     19.6     24.3      9.7     11.1        1.3       23.7       25.3       14.6
             machinery.....
    ----------------------------------------------------------------------------------------------------------------
        84  Non-electrical      13.4     13.7     20.2      9.2     13.3        2.6       47.3       51.0       45.6
             machinery.....
    ----------------------------------------------------------------------------------------------------------------
        95  Toys, games,        12.4     12.2     14.4      4.8      5.6       -1.4       18.2       16.6       16.8
             sports
             equipment.....
    ----------------------------------------------------------------------------------------------------------------
        64  Footwear.......      9.2      9.8     10.2      4.9      5.4        6.1        4.9       11.3        9.3
    ----------------------------------------------------------------------------------------------------------------
        94  Furniture and        7.2      7.5      9.9      4.6      5.7        4.0       32.4       37.8       24.9
             bedding.......
    ----------------------------------------------------------------------------------------------------------------
        62  Woven apparel..      4.2      4.1      4.5      2.0      2.7       -0.4        7.7        7.2       35.7
    ----------------------------------------------------------------------------------------------------------------
        42  Leather              3.8      4.0      4.4      1.7      2.0        2.8       12.3       15.5       19.5
             products......
    ----------------------------------------------------------------------------------------------------------------
        39  Plastic              2.9      3.2      3.8      1.8      2.1       11.0       16.6       29.4       16.1
             products......
    ----------------------------------------------------------------------------------------------------------------
        90  Precision            2.7      2.7      2.8      1.2      1.4       -0.4        0.8        0.4       22.3
             instruments...
    ----------------------------------------------------------------------------------------------------------------
        61  Knit apparel...      2.0      2.3      2.6      0.9      1.1       11.9       14.8       28.5       30.0
    ----------------------------------------------------------------------------------------------------------------
        73  Iron or steel        1.9      2.1      2.5      1.2      1.6       12.3       19.9       34.6       34.4
             products......
    ----------------------------------------------------------------------------------------------------------------
        87  Motor vehicles.      1.9      1.5      1.9      1.0      1.2      -20.9       25.3       -0.8       20.2
    ----------------------------------------------------------------------------------------------------------------
        63  Other apparel..      1.1      1.2      1.6      0.7      1.1        9.5       37.1       50.2       45.8
    ----------------------------------------------------------------------------------------------------------------
        83  Miscellaneous        0.9      1.0      1.3      0.6      0.7       15.3       29.6       49.5       15.5
             metal products
    ----------------------------------------------------------------------------------------------------------------
        82  Metal tools....      0.9      1.0      1.2      0.5      0.6        8.9       22.0       32.8       22.2
    ----------------------------------------------------------------------------------------------------------------
            Other..........     15.7     16.1     19.1      8.4     10.5        2.8       18.7       21.9       23.8
    ----------------------------------------------------------------------------------------------------------------
    Source: Official statistics of the U.S. Department of Commerce.

        Some specific product categories have shown remarkable growth from
    2000 to 2002. Of the leading 25 import categories (8 digit HTS), ranked
    by largest dollar increase during 2000-2002, 12 showed growth of more
    than 150 percent. All but 5 grew by more than 50 percent, and several
    grew several hundred fold. Sixteen items were electrical or non-
    electrical machinery (table 2).
        Rapid U.S. import growth has continued into 2003. U.S. imports
    during the first 6 months of 2003 are 24.5 percent greater than during
    the first 6 months of 2002. As a new member of the WTO, China became
    eligible for the phase-out of textile quotas imposed by the Multi-fiber
    Agreement and currently undergoing elimination under the Agreement on
    Textiles and Clothing (ATC). Imports of several apparel items showed
    significant increases during 2000-2002, due to the phase out of certain
    quotas.\2\ As quotas end January 2005, many expect this growth to
    increase substantially.
    ---------------------------------------------------------------------------
        \2\ The American Textile Manufacturers Institute estimates that
    imports from China of garments released from quota restrictions on
    January 1, 2001 more than doubled in the following 12 months. Reported
    in EIU Veiwswire, September 15, 2003, p. 1.
    ---------------------------------------------------------------------------
        Even as items such as textiles have grown rapidly, the trends show
    a qualitative change in China's exports and its domestic economy. China
    has traditionally exported labor-intensive, simple manufacture
    products. Since 1990, however, China has increasingly focused its
    exports to the United States on higher value added products. Non-knit
    apparel, 13.8 percent of China's exports to the United States in 1990,
    declined to just 3.6 percent in 2002 (table 3). The relative shares of
    other products have similarly dropped, including those for knit
    apparel; mineral fuels; toys, games, and sports equipment; leather
    products; fish; and footwear. While only 3.1 percent of China's exports
    to the United States in 1990 were non-electrical machinery, this share
    had increased to 16.2 percent of China's exports by 2002. Similarly,
    the share of electrical machinery in China's exports to the United
    States increased from 12.6 percent in 1990 to 19.4 percent (table 2).
    Reflecting China's enhanced production capacity, U.S. imports of
    computer, peripherals, and parts from China rose sharply, advancing by
    $4.4 billion (42 percent) to $14.9 billion in 2002.

                             Table 2. U.S. imports from China, classified by 8-digit HTS, ranked by absolute change during 2000-2002
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                    Percent
                      HTS No.                              Description              2000       2001       2002    2002 Jan.- 2003 Jan.-   Change     Change
                                                                                                                     June       June    2000-2002  2000-2002
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                ----------Million dollars----------                  Percent
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    8521.90.00.................................  Video recording or reproducing      609.9    1,262.1    2,171.8      758.3      781.3    1,562.0      256.1
                                                  apparatus, other than
                                                  magnetic tape-type.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    8525.20.90.................................  Transmission apparatus              300.2      653.0    1,559.7      454.8      776.1    1,259.5      419.6
                                                  incorporating reception
                                                  apparatus (other than
                                                  transceivers) for
                                                  radiotelephony,
                                                  radiotelegraphy,
                                                  radiobroadcasting or
                                                  television.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    9504.10.00.................................  Video games of a kind used          336.0      398.3    1,571.4      347.0      674.1    1,235.3      367.6
                                                  with a television receiver
                                                  and parts and accessories
                                                  thereof.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    8471.60.45.................................  Display units for ADP                99.7      225.2    1,322.9      530.3    1,142.8    1,223.2     1226.4
                                                  machines, with a non-color
                                                  cathode-ray tube or non-CRT
                                                  display type n.e.s.o.i.,\1\
                                                  not entered with the rest of
                                                  a system.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    8473.30.10.................................  Printed circuit assemblies for    1,729.6    1,775.5    2,418.9    1,155.3    1,282.4      689.3       39.9
                                                  ADP machines.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    8471.30.00.................................  Portable digital automatic           11.1       22.5      632.2       50.7    1,468.9      621.1     5614.5
                                                  data processing machines, not
                                                  over 10 kg, consisting of at
                                                  least a central processing
                                                  unit, keyboard and display.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    9403.60.80.................................  Furniture (other than seats &       979.8    1,072.6    1,570.1      686.5      882.7      590.3       60.2
                                                  other than of 9402) of wooden
                                                  (other than bentwood) nesoi.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    8473.30.50.................................  Parts and accessories of the      1,605.0    1,711.7    2,175.2      947.4    1,115.3      570.3       35.5
                                                  ADP machines of heading 8471,
                                                  not incorporating a CRT,
                                                  n.e.s.o.i.\1\.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    6403.99.90.................................  Footwear, outer soles of          1,821.6    2,156.3    2,391.6    1,177.2    1,423.9      570.0       31.3
                                                  rubber/plastics/leather &
                                                  uppers of leather, not
                                                  covering ankle, for women/
                                                  child/infants, n.e.s.o.i.\1\
                                                  over $2.50/pair.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    8525.40.40.................................  Digital still image video           173.8      176.3      637.2      162.7      416.5      463.3      266.6
                                                  cameras.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    9403.50.90.................................  Furniture (other than seats)        358.8      477.4      817.3      347.4      525.5      458.6      127.8
                                                  of wood (other than
                                                  bentwood), of a kind used in
                                                  the bedroom & not designed
                                                  for motor vehicle use.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    8528.12.32.................................  Non-high definition color            12.0       18.6      467.3      157.8      159.2      455.4     3806.8
                                                  television reception
                                                  apparatus, nonprojection, w/
                                                  CRT, video display diag. ov
                                                  35.56 cm, not incorp. a VCR
                                                  or player.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    8471.70.60.................................  ADP storage units other than        768.4      837.6    1,156.3      627.5      503.6      387.9       50.5
                                                  magnetic disk, not in
                                                  cabinets for placing on a
                                                  table, etc., not entered with
                                                  the rest of a system.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    9403.20.00.................................  Furniture (other than seats)        671.4      770.1    1,016.7      537.2      715.7      345.2       51.4
                                                  of metal nesoi, other than of
                                                  a kind used in offices.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    8527.31.60.................................  Radio broadcast receivers           140.1      216.1      462.5      157.2      143.4      322.4      230.1
                                                  combined with sound recording
                                                  or reproducing apparatus,
                                                  n.e.s.o.i.\1\.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    6403.99.60.................................  Footwear, outer soles of          1,561.8    1,620.5    1,865.1      899.2    1,057.7      303.3       19.4
                                                  rubber/plastics/leather &
                                                  uppers of leather, not
                                                  covering ankle, not welt, for
                                                  men, youths and boys,
                                                  n.e.s.o.i.\1\.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    8471.60.62.................................  Other ADP laser printer units       165.1      368.8      466.8      172.7      372.1      301.7      182.7
                                                  not capable of more than 20
                                                  pages per minute, not entered
                                                  with the rest of a system,
                                                  n.e.s.o.i.\1\.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    8471.60.51.................................  Assembled ADP laser printers        152.5      353.8      436.8      223.3       64.1      284.2      186.4
                                                  incorporating at least media
                                                  transport, control and print
                                                  mechanisms, capable of more
                                                  than 20 pages/per minute.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    4202.92.30.................................  Travel, sports and similar          159.7      154.7      429.9      198.1      342.7      270.2      169.2
                                                  bags with outer surface of
                                                  textile materials other than
                                                  of vegetable fibers.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    8509.10.00.................................  Electromechanical vacuum            179.2      337.0      436.4      181.7      228.1      257.2      143.5
                                                  cleaners, with self-contained
                                                  electric motor, for domestic
                                                  uses.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    8471.60.64.................................  Other ADP ink jet printer           338.9      401.0      595.8      184.4      187.5      256.9       75.8
                                                  units not entered with the
                                                  rest of a system,
                                                  n.e.s.o.i.\1\.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    9505.10.25.................................  Articles for Christmas              759.9      893.1    1,007.3      152.3      154.4      247.4       32.6
                                                  festivities, ornaments, not
                                                  of glass or wood.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    9503.70.00.................................  Toys n.e.s.o.i.,\1\ put up in       744.1      779.2      960.7      276.9      273.8      216.6       29.1
                                                  sets or outfits and parts and
                                                  accessories thereof.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    8471.60.61.................................  Other ADP laser printer units        95.8      199.8      305.4      173.1      126.7      209.6      218.8
                                                  capable of more than 20 pages
                                                  per minute, not entered with
                                                  the rest of a system,
                                                  n.e.s.o.i.\1\.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    8519.99.00.................................  Sound reproducing apparatus         712.4      754.9      920.6      369.7      299.9      208.2       29.2
                                                  n.e.s.o.i.,\1\ not
                                                  incorporating a sound
                                                  recording device.
    --------------------------------------------------------------------------------------------------------------------------------------------------------
      .........................................  Other.........................   85,093.7   84,433.2   96,999.9   42,275.5   51,118.0   11,906.2       14.0
    --------------------------------------------------------------------------------------------------------------------------------------------------------
      .........................................  Total.........................   99,580.5  102,069.3  124,795.7   53,204.2   66,236.4   25,215.2       25.3
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Not elsewhere specified or included.
    Source: Official statistics of the U.S. Department of Commerce.

        Prior to 2001, Chinese companies chiefly sold parts and components
    such as monitors;\3\ they now, however, increasingly offer downstream
    products such as computers.
    ---------------------------------------------------------------------------
        \3\ ``CBQ Confirms Plans to Import Computers from China Products to
    Include Personal Computers, Notebook Computers, and Handheld Devices,''
    Business Wire, Aug. 16, 2001.
    ---------------------------------------------------------------------------
        U.S. imports of consumer electronics (except televisions) increased
    by $1.9 billion (31 percent) to $8.2 billion in 2002, reflecting
    China's increasingly competitive position in the production and export
    of consumer electronics worldwide.\4\ This increased competitiveness
    can be attributed in part to consumer electronics companies based in
    other Asian countries shifting existing manufacturing assets to China
    or selecting China as the best location for investing in new production
    capacity.\5\ U.S. imports of telephone apparatus expanded by $1.4
    billion (45 percent) in 2002 to $4.7 billion. Many U.S. and European
    producers of telephone sets and cell phones have established production
    facilities in China to supply local and international markets.
    ---------------------------------------------------------------------------
        \4\ The consumer electronics category includes articles such as
    radios, tape-recorders, loudspeakers, and magnetic heads.
        \5\ One-fifth of Japan's production of consumer electronics has
    reportedly been shifted to China. Japanese companies that have moved a
    considerable share of their manufacturing assets to China include NEC
    and Matsushita. ``Chinese Exports: Japan's Phantom Menace,'' Business
    Week Online, found at http://www.businesweek.com/bwdaily/dnflash/
    jan2002/nf20022011..., retrieved Apr. 2, 2003
    ---------------------------------------------------------------------------
        Even production of simple manufacture products is becoming more
    sophisticated and technologically based. U.S. imports of furniture from
    China rose by $1.8 billion (39 percent) to $6.4 billion in 2002.
    Furniture producers in China, already highly competitive with low labor
    costs, have developed some state-of-the-art production facilities \6\
    and in some instances, partnered with U.S. furniture companies to
    complement U.S. production (e.g., stackable, knock-down furniture, as
    well as wood furniture and parts) or to supply labor-intensive parts
    (such as lathed table and chair legs).
    ---------------------------------------------------------------------------
        \6\ For additional information, see Josephine Spalding, Industry
    and Trade Summary: Furniture and Motor Vehicle Seats, USITC publication
    3382, Jan. 2001.
    ---------------------------------------------------------------------------
        U.S. imports of games (mostly video games) from China nearly
    doubled in 2002, rising by $1.1 billion to $2.7 billion. Most of the
    increase was accounted for by the shift in production of video game
    consoles from Japan to China. U.S. imports of such consoles from China
    grew by $1.1 billion, while U.S. imports from Japan fell by $1.2
    billion. The three dominant producers of video game consoles worldwide
    (two based in Japan and one based in the United States with assembly in
    Mexico) were engaged in intense competition in 2002, leading one
    producer in Japan to seek a price advantage by shifting production to
    China.\7\
    ---------------------------------------------------------------------------
        \7\ Shifts in U.S. Merchandise Trade 2002, USITC publication NO.
    3611, July 2003. p. 3-4.

      Table 3. U.S. imports from China: changing relative shares by sector,
                                1990, 1996, 2002
    ------------------------------------------------------------------------
                                      Share of total imports from  Change in
                                                 China               share
      HTS                           ----------------------------------------
                                       1990      1996      2000    1990-2002
    ------------------------------------------------------------------------
            Increasing Shares......
    ------------------------------------------------------------------------
        84  Non-electrical               3.1%      8.7%     16.2%      13.1%
             machinery.............
    ------------------------------------------------------------------------
        85  Electrical machinery...     12.6%     17.1%     19.4%       6.9%
    ------------------------------------------------------------------------
        94  Furniture and bedding..      1.8%      4.7%      8.0%       6.1%
    ------------------------------------------------------------------------
        90  Precision instruments..      1.0%      2.9%      2.2%       1.2%
    ------------------------------------------------------------------------
            Decreasing Shares......
    ------------------------------------------------------------------------
        62  Non-knit apparel.......     13.8%      6.9%      3.6%     -10.2%
    ------------------------------------------------------------------------
        61  Knit Apparel...........      7.1%      2.9%      2.1%      -5.0%
    ------------------------------------------------------------------------
        27  Mineral fuels..........      4.4%      0.9%      0.3%      -4.1%
    ------------------------------------------------------------------------
        95  Toys, games, and sports     14.1%     14.7%     11.6%      -2.5%
             equipment.............
    ------------------------------------------------------------------------
        42  Leather products.......      5.7%      5.1%      3.6%      -2.1%
    ------------------------------------------------------------------------
         3  Fish...................      2.6%      0.5%      0.5%      -2.1%
    ------------------------------------------------------------------------
        64  Footwear...............      9.8%     12.4%      8.2%      -1.5%
    ------------------------------------------------------------------------
            Other..................     24.1%     23.2%     24.4%       0.3%
    ------------------------------------------------------------------------
            Total..................    100.0%    100.0%    100.0%
    ------------------------------------------------------------------------
    Source: official statistics of the U.S. Department of Commerce

         Import Displacement: Switching to China from the Rest of Asia?
        U.S. trade data show that imports from China are increasing, while
    imports into the United States from almost every other Asian economy
    have decreased during 2000-2002. Figure 2 highlights the most recent
    trend. While U.S. imports from China increased $25.2 billion, imports
    from Japan decreased $24.5 billion. Similarly, U.S. imports from other
    Asian economies decreased significantly, including Taiwan ($8.3
    billion), Singapore ($5.0 billion), Korea ($4.5 billion), Philippines
    ($3.0 billion), Hong Kong ($2.1 billion), Thailand ($1.5 billion), and
    Malaysia ($1.5 billion).

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        This trend is especially true for electrical and non-electrical
    machinery which together constituted 35.6 percent of all U.S. imports
    from China in 2002 (figure 3). In 1990, China supplied 0.7 percent of
    U.S. imports of non-electrical machinery and 3.3 percent of electrical
    machinery. By 2002, these shares had increased to 12.6 percent and 16.1
    percent respectively. Most of this increase came at the expense of
    Japan, whose share of U.S. imports of non-electrical machinery
    decreased from 29.0 to 15.3 percent and its share of electrical
    machinery decreased from 32.7 to 13.0 percent during the same period
    (table 4). While such U.S. imports from China increased $11.7 billion
    during 2000-2002, imports from other Asian economies significantly
    decreased, including Japan ($21.4 billion), Philippines ($2.6 billion),
    Taiwan ($6.2 billion), Singapore ($4.8 billion), Korea ($5.7 billion),
    and Hong Kong ($0.8 billion).

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

       Table 4. U.S. imports of electrical an non-electrical machinery, by
                            source, 1990, 1996, 2002
    ------------------------------------------------------------------------
                                                1990       1996       2002
    ------------------------------------------------------------------------
    Non-electrical Machinery (HTS 84)
    ------------------------------------------------------------------------
    China..................................       0.7%       3.5%      12.6%
    ------------------------------------------------------------------------
    Japan..................................      29.0%      22.8%      15.3%
    ------------------------------------------------------------------------
    Rest of Pacific Rim....................      20.2%      29.2%      25.7%
    ------------------------------------------------------------------------
    Rest or World..........................      50.1%      44.4%      46.4%
    ------------------------------------------------------------------------
    Total..................................     100.0%     100.0%     100.0%
    ========================================================================
    Electrical Machinery (HTS 85)
    ------------------------------------------------------------------------
    China..................................       3.3%       7.7%      16.1%
    ------------------------------------------------------------------------
    Japan..................................      32.7%      21.8%      13.0%
    ------------------------------------------------------------------------
    Rest of Pacific Rim....................      30.8%      34.5%      29.0%
    ------------------------------------------------------------------------
    Rest or World..........................      33.1%      36.0%      41.9%
    ------------------------------------------------------------------------
    Total..................................     100.0%     100.0%     100.0%
    ------------------------------------------------------------------------

        Two related explanations for this trend have been offered. First,
    U.S. importers have switched to Chinese goods due to a significant
    difference in competitiveness resulting from cheaper prices in China
    relative to other Asian countries. Second, Asia's smaller economies
    continue to export to the United States, but indirectly through the
    Chinese mainland by relocating production into China.
        Figure 4 shows the increasing U.S. trade deficit with China during
    1996-2002 and the shrinking trade deficit with the rest of Asia during
    the 2000-2002 period.

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

                           China as an Export Market
        In contrast to a downward trend for U.S. exports worldwide, U.S.
    exports to China increased to $20 billion (14 percent) in 2002 (table
    5). Much of the increase can be attributed to China's WTO accession in
    2001,\8\ which has resulted in, according to industry sources, more
    trade going directly from the United States to China rather than
    transiting through Hong Kong. Some have compared China today to Japan
    of the 1970s and early 1980s, when Japan led regional economic growth
    in Asia. As the largest country in Asia, and the fastest growing
    economy, China has become a vitally important export market as well as
    an important source for many of Asia's economies.
    ---------------------------------------------------------------------------
        \8\ China's WTO accession has led to decreased tariffs and lower
    non-tariff barriers. John N. Paden, ``The World Trade Organization and
    Rule-of-Law in China: A First-Year Assessment,'' Virginia State Bar
    Journal, Spring 2003.

                            Table 5. Leading changes in U.S. exports to China, 2001 and 2002
    ----------------------------------------------------------------------------------------------------------------
                                                                                              Change, 2002 from 2001
                    Sector/commodity                      2001         2002       Absolute           Percent
    ----------------------------------------------------------------------------------------------------------------
                                                            -----Million dollars-----
    ----------------------------------------------------------------------------------------------------------------
    U.S. Exports:
    ----------------------------------------------------------------------------------------------------------------
    Increases:
    ----------------------------------------------------------------------------------------------------------------
    Aircraft, spacecraft, and related equipment             2,429        3,367          938                     38.6
     (ET013)........................................
    ----------------------------------------------------------------------------------------------------------------
    Semiconductors and integrated circuits (ET033)..          946        1,238          291                     30.8
    ----------------------------------------------------------------------------------------------------------------
    Fertilizers (CH016).............................          420          671          250                     59.5
    ----------------------------------------------------------------------------------------------------------------
    Semiconductor manufacturing machinery (MM087A)..          338          551          213                     63.1
    ----------------------------------------------------------------------------------------------------------------
    Decreases:
    ----------------------------------------------------------------------------------------------------------------
    Computers, peripherals, and parts (ET035).......        1,209          892         -317                    -26.2
    ----------------------------------------------------------------------------------------------------------------
    All other.......................................       12,617       13,835        1,218                      9.7
    ----------------------------------------------------------------------------------------------------------------
    Total...........................................       17,959       20,553        2,594                     14.4
    ----------------------------------------------------------------------------------------------------------------
    Note.--Calculations based on unrounded data.
    Source: Compiled from official statistics of the U.S. Department of Commerce.

        The largest increase in U.S. exports to China from 2001 to 2002 was
    in aircraft, spacecraft, and related equipment (hereafter aircraft
    equipment) (table 5), which rose to $3.4 billion, reflecting China's
    continuing effort to expand its civil aviation fleet to service growing
    demand \9\ and its reliance on Boeing as a supplier. Boeing aircraft
    accounted for 72 percent of China's fleet of large (over 100 seats) jet
    aircraft.\10\ In addition, a reduction in average Chinese tariffs from
    10.5 percent to 7.2 percent from 2001 to 2002 on civil aircraft and
    related parts has likely stimulated U.S. exports.\11\
        U.S. exports of semiconductors and integrated circuits to China
    continued to grow in 2002, rising by $291 million (31 percent) to $1.2
    billion. This increase is attributed to China's rapidly growing demand
    for these products in the manufacture of telecommunication equipment,
    computer hardware, and consumer electronics.\12\ According to industry
    observers, about 95 percent of China's semiconductor demand is
    currently met by imports \13\ because of difficulties related to
    protecting intellectual property rights and creating wholly owned
    foreign ventures. These difficulties reportedly create significant
    barriers to foreign firms wishing to establish semiconductor-
    manufacturing facilities in China.\14\
    ---------------------------------------------------------------------------
        \9\ Factors contributing to this growth are the country's vast
    territory, rapid growth in hard currency tourism, expansion in air
    cargo volumes, and an increasingly affluent local population. U.S. &
    Foreign Commercial Service, U.S. Department of Commerce, ``Aircraft,
    Air Traffic Control & Ground Support Equipment, International Market
    Insights, 2002.
        \10\ Boeing Co., found at http://www.boeing.com/companyoffices/
    aboutus/boechina.html#fleet, retrieved Apr. 23, 2002.
        \11\ Department of Commerce, ``Civil Aircraft,'' found at http://
    www.mac.doc.gov/China/Docs/industryfactsheets/civair.htm, retrieved on
    Mar. 28, 2003.
        \12\ U.S. producer Conexant Systems, for example, increased its
    supply of specialized semiconductors for communications applications to
    Legend Groups Ltd., a prominent Chinese computer company, in 2002.
    ``Conexant V.92 Modems Now Shipping in Legend Computers, China's
    Premier PC Manufacturer; Customized V.92 Feature Development Support by
    Conexant Shanghai,'' Business Wire, Mar. 5, 2002.
        \13\ Editor, ``A Wafer-Thin Argument: The Market and a High-Tech
    Dispute,'' The Economist, Apr. 13, 2002.
        \14\ U.S. Department of Commerce, ``Semiconductors and Software,''
    found at http://www.buyusa.gov/china/en/semiconductors.html, retrieved
    on Mar. 27, 2003.
    ---------------------------------------------------------------------------
        However, the Chinese semiconductor industry is expanding.
    Relaxation in 2002 of Government of Taiwan regulations prohibiting
    Taiwanese manufacturers from operating semiconductor plants in China
    contributed to the construction of new facilities in China and a surge
    in U.S. exports of capital equipment for these plants. The regulations
    had been established to stem the outflow of critical manufacturing
    technology from Taiwan.\15\ As a result, U.S. exports of semiconductor
    manufacturing equipment to China rose 63 percent to $551 million.
    ---------------------------------------------------------------------------
        \15\ ``The Greater China High-Tech Highway,'' The McKinsey
    Quarterly, 2002, No. 4, found at http://www.forbes.com/2002/10/11/
    1011mckinsey.html, retrieved May 7, 2003.
    ---------------------------------------------------------------------------
        China has also been developing its own production capacity for
    computers, peripherals, and parts, spurred on, in part, by increased
    foreign investment. Investors from Taiwan, the United States, the EU,
    and Japan have been drawn to China both to reduce manufacturing costs
    and to supply the emerging domestic market in China. Manufacturers in
    China often have the advantage of a larger supplier base, lower energy
    costs, and tax incentives, in addition to lower cost labor.\16\ This
    growth of the Chinese computer industry resulted in a decline in U.S.
    exports to China of computers, peripherals, and parts of $317 million,
    or 26 percent, in 2002.
    ---------------------------------------------------------------------------
        \16\ Ralph Watkins, ``Mexico Versus China: Factors Affecting Export
    and Investment Competition,'' Industry Trade and Technology Review,
    U.S. International Trade Commission, USITC publication 3534, July 2002,
    p. 19.
    ---------------------------------------------------------------------------
        Two aspects of China's export growth are: (1) the record inflows of
    foreign direct investment into the mainland; and (2) the amount of
    exports from China generated by foreign firms. International investors,
    particularly from other parts of Asia, invest in the mainland to take
    advantage of abundant labor, low wages, and growing infrastructure. A
    result of this investment is that in 2001, for the first time, over
    half of China's exports sold in international markets-about $275.0
    billion-were produced by firms with foreign investment, either joint
    ventures or wholly-owned foreign companies.\17\
    ---------------------------------------------------------------------------
        \17\ Nicholas Lardy, ``The Economic Future of China,'' speech to
    the Asia Society, Houston, Apr. 19, 2002. Found at Internet address:
    http://www.asiasociety.org, retrieved Aug. 22, 2003.
    ---------------------------------------------------------------------------
        China's rapid economic growth, rapid growth in trade, and
    investment inflow have resulted in China becoming a global center for
    low-cost manufacturing-not only for labor intensive products like
    apparel, toys, and shoes, but increasingly for electronics, machinery,
    and information technology. China has become the third largest producer
    of information technology hardware, and about half of this output in
    the Chinese mainland is being produced by Taiwanese companies.\18\
    ---------------------------------------------------------------------------
        \18\ See USITC, U.S.-Taiwan-FTA: Likely Economic Impact of a Free
    Trade Agreement Between the United States and Taiwan, publication 3548,
    October 2002, p. 2-5.

    ---------------------------------------------------------------------------

        Mr. CRANE. Thank you for your testimony. I would like to
    throw a question out to any and all of you, and anyone who
    wishes to comment on it, please do.
        There are various bills introduced in Congress that condemn
    China for its trade surplus to the United States and its policy
    affixing its currency to the U.S. dollar, and which seek to
    apply sanctions in the form of higher tariffs against Chinese-
    made goods. Will these measures result in a decline in the
    overall U.S. trade deficit, and will they increase U.S.
    manufacturing jobs?
        Dr. HOLTZ-EAKIN. Well, Mr. Chairman, as we made an attempt
    to detail in a fair amount at length in our written testimony,
    it is the case that the determinants of the U.S. current-
    account deficit are in large part domestic in character. That
    reflects not only the exchange rate between the United States
    and China, but also the pattern of saving, the opportunities
    for investment, and international capital flows. If one
    considers the vast array of influences and hones in on those
    particular policies and their impact on one exchange rate, it
    is unlikely that policies directed at the dollar/yuan exchange
    rate will have any significant effect on the U.S. current-
    account deficit. For the same reason, in our analysis, we
    walked through the potential sources of the decline in
    manufacturing employment and tried to isolate the component
    that might plausibly be related to Chinese trade in particular.
    It is difficult to make a very compelling empirical case that
    that is a big influence, and for that reason, changing simply
    the relative price of the currency would have a minimal effect
    on U.S. manufacturing employment and would likely be temporary
    at best.
        Mr. CRANE. As is often the case, we are trying to isolate
    the different causes in our decrease in jobs, especially
    manufacturing jobs, in the past several years. People become
    very focused on some causes to the exclusion of others. What
    are the top causes of manufacturing job losses, and where does
    trade fall, and specifically trade with China, in this?
        Dr. HOLTZ-EAKIN. I could say a couple of things. I think
    you can point to about five factors that have contributed to
    the overall decline in manufacturing employment. There has been
    a long-term shift in the composition of demand in the United
    States away from goods and toward services. Combined with a
    secular (long term) pattern of productivity improvements that
    have lowered the relative price of manufactured goods, that
    shift has permitted consumers to spend more on services and
    devote less of their budgets to manufacturing, while
    manufacturers have continued to produce a lot of output. That
    productivity growth has allowed them to do it with fewer labor
    inputs, and as a result, we have seen a longstanding trend
    toward less employment in manufacturing, even though
    manufacturing output has held up quite well.
        The trend in less manufacturing employment has been
    amplified by some measurement issues. Many workers that were
    previously counted as part of the manufacturing labor force are
    now counted in temporary help services and other components of
    the labor force. More recently, there has been a fairly
    dramatic impact of the business cycle. One feature of that
    business cycle that stands out is that the cycle is more
    coordinated with those of our trading partners. We see the U.S.
    economy and other major trading partners' economies going down
    at the same time; and, as a result, given the importance of
    manufacturing exports in the United States and of those
    countries as markets for exports, we have seen much weaker
    export growth in this recession and recovery than we see in a
    typical recession and recovery. That stands out as a very
    interesting trade-related component of this recession that has
    been exacerbated by strong productivity growth.
        So, if you go down these four components--the secular trend
    in composition of demand, the productivity improvements, the
    measurement issues, and then the business cycle--only after you
    go through those four will you get to a component that would be
    trade, or China-specific trade.
        Mr. CRANE. Thank you. Mr. Levin.
        Mr. LEVIN. I very much appreciate the professionalism of
    all of you. I think the attempt to just make trade issues de
    minimis only feeds into those who want to make it de maximis.
    For example, let us take apparel and textile, Dr. Holtz-Eakin.
    Hasn't trade been relevant to that dynamic, to the loss of
    jobs?
        Dr. HOLTZ-EAKIN. I think that in apparel and textiles,
    there have been conscious policy efforts on the part of the
    United States to open its markets, and that has increased
    competition. That stands out in our report as one of those
    areas where, in fact, the employment decline has been most
    dramatic. It is not typical, however, of the overall
    manufacturing sector.
        Mr. LEVIN. By kind of resisting disaggregation, you paint a
    picture that isn't believable to those who have been affected,
    and it doesn't help us address the issues. For example, let me
    just ask you about currency in China. Do you have any doubt
    that the way the Japanese have handled currency valuations has
    had some significant impact on manufacturing in the United
    States?
        Dr. HOLTZ-EAKIN. Japan or China?
        Mr. LEVIN. Japan. Not you. Any of the three of you. Dr.
    Yager--either or all of you. Is there any doubt that that has
    been one of the factors?
        Dr. HOLTZ-EAKIN. As a broad statement of the impact of the
    dollar/yen or dollar/euro exchange rate, there has been a
    tremendous amount of tension placed on those particular----
        Mr. LEVIN. I mean over the last 10 years. Was there any
    doubt that Japan was controlling currency valuations and was
    determined to have a strong export platform in the automobile
    sector? Is there any doubt about that?
        Dr. HOLTZ-EAKIN. I think there is little doubt that there
    have been active attempts by many governments--including
    Japan--to manage their exchange rates by using different
    policies. Let us stipulate that.
        The larger point is that in tracing the impact of those
    policies on the U.S. labor force and employment, there are
    several steps. The exchange rate is not the only determinant of
    trade. It will be one component. The price-adjusted real
    exchange rate will be more important, and it is difficult even
    when attempting to manage a nominal exchange rate to manage the
    real exchange rate. Inflation is one of the consequences of
    trying to keep your currency low. Finally, it is the absence of
    domestic demand growth in those countries. I would say that the
    disappointing domestic demand growth in Japan and Europe, which
    has led them to focus so much on export growth, had a big
    influence on our ability to export to those markets. Those are
    all empirical adjustments.
        Mr. LEVIN. Japan wasn't in that position 10 or 15 years
    ago, and a car that sold for $35,000 here, the same car sold
    for $50,000 in equivalent yen.
        I think it is a mistake to just cast aside trade issues as
    having an impact on the dynamics within the U.S. economy. What
    you tend to do--your comments about the--your comments, for
    example, it is shifting a bit. Dr. Yager, your comments about
    the WTO compliance is--it is so gentle. We worked hard to get
    an annual review. As you know, it was one of the three pillars
    of our legislation, and we really kept the heat on the
    Administration to get it, and it hasn't worked well. It is
    critical that it work well, and I think kind of going soft,
    which you don't always do, isn't going to propel the
    Administration to really be active vigorously in making that
    process work.
        Dr. YAGER. Mr. Levin, as a matter of fact, we are doing
    another round of the work that we did to oversee compliance,
    and as you know, in the report that we did in March of this
    year, one of the two case studies that we looked into was the
    TRM. In our report we did talk about the frustrations and the
    disappointments that the United States had in trying to get
    progress through that mechanism. We are observing that, and we
    will be traveling to Geneva to look again to see whether that
    process is being used effectively by the U.S. agencies, because
    we do recognize that this is one of those important avenues to
    try to get change in China. As we say in our testimony, we
    really think that pressure from the Congress, pressure from the
    executive branch, from the business community and from the WTO
    is necessary to try to get these fundamental changes in the
    Chinese system.
        Mr. LEVIN. Thank you.
        Mr. CRANE. Mr. Houghton.
        Mr. HOUGHTON. Thank you, Mr. Chairman, and thank you,
    gentlemen, for being here. I missed some of your testimony, Dr.
    Holtz-Eakin, and therefore I may have missed the thrust of it,
    but let me try to feed back what I heard. I heard from you
    gentlemen that tariffs won't work; revaluation of the yuan
    really isn't going to work; that a good part of the blame of
    this terrific imbalance is really in terms of foreigners
    putting money in there and exporting back here. So, the
    question is what is the answer? Here we are. We are dealing
    with this, and if you take a look at the chart, Dr. Holtz-
    Eakin, that you had on one of the pages in here, it is pretty
    scary in terms of the increase and the--here it is, on page 18,
    from 1989 to 2002. You all know this. This is nothing new, but
    we don't want to do stupid things. We want to try to reflect
    what is economically sound, yet at the same time we have a
    different role here where each of us are responsible for about
    700,000 people, and how do you answer something like this? You
    just can't answer by saying U.S. companies are reinvesting, and
    we shouldn't put tariffs. We have got to have some answers to
    this.
        It seems to me that one of the basic concepts of
    international trade is not to beggar thy neighbor. We are
    getting into a situation that is very serious, and the thing
    that I worry about long term is if we don't get our deficit
    down, we continue to be mining these current-account deficits,
    and there is a sort of a worry about the value of the dollar as
    a secondary or reserve currency, these types of things are
    going to come home to roost. We are going to have logical
    reasons for being there, but we don't have any solutions. You
    got to help us along the way, and I don't see that in your
    testimony. Maybe you could help.
        Dr. ROGOWSKY. You lay out a remarkably difficult job,
    because in trade liberalization there will be winners, and
    there will be losers, and how do you explain to the losers what
    has happened, and what cure there might be? What we find, and I
    think these gentlemen will agree, is that there are forces that
    take place that liberalization opens up. How an economy
    responds to those forces is a slow process. It is a difficult
    process to teach.
        You have heard lots of numbers today about the successes
    with China. Exports are growing. In fact, it is a fairly open
    economy relative to Brazil, India and some of our other trading
    partners, but liberalization is a very slow process. It is
    clear that a lot of investment is going into China. A lot of it
    is American investment. A lot of it is Japanese and Taiwanese
    and European. So, there is a shifting take taking place as
    China relies on its comparative advantage, which it is able to
    get into light manufacturing very effectively.
        Mr. HOUGHTON. Could I interrupt a minute, because our time
    is going to run out, and other people want to ask questions. I
    know it is going to be a slow process, and we don't want to
    have a knee-jerk reaction. What is the first step? What do we
    do? What do we do?
        Dr. YAGER. One of the things that we worked on with your
    Committee for some time was trade adjustment assistance.
    Certainly there are people--losers--or people dislocated by
    trade, and I think some of the things that this Committee did
    with the trade adjustment assistance makes it easier for some
    of those people to get retrained and move into a new job. Now,
    the other thing----
        Mr. HOUGHTON. Could I interrupt a minute? So, in effect you
    are saying that--I am going to put words in your mouth, and
    correct me--that the trend is going to continue, and one of the
    things we got to do is to retrain our people for other jobs. Is
    that the answer?
        Dr. YAGER. I think that is one of the components, that some
    of those people can be retrained for new jobs.
        Mr. HOUGHTON. From other jobs which will go in the way of
    the first jobs.
        Dr. YAGER. There is a lot of dislocation in certain
    sectors. When we did our trade adjustment assistance work, it
    clearly was the textile industry that was the one who was
    losing the most jobs--and we understand, as we pointed out in
    our reports, that some of the people who were working in those
    textile plants are difficult to retrain and find new jobs
    because they may be in a plant in a rural area.
        Mr. HOUGHTON. Okay. So, we retrain people. What else do we
    do? We are talking about exchange of goods, not necessarily
    retraining people for other jobs.
        Dr. YAGER. The other component that you can do and I think
    this Committee has been doing has been trying to ensure that
    the market for U.S. exports is open. So, ensuring that China
    complies with its commitments, whether it is in the
    agricultural area or in high-tech sectors, to ensure that that
    market is open so that the United States can produce those
    goods that it is most competitive at producing. That is the way
    we get to a higher standard of living, and it could be through
    productivity growth and exports, and making sure those markets
    are open for U.S. goods is an important component of it as
    well.
        Mr. CRANE. Mr. Becerra.
        Mr. BECERRA. Thank you, Mr. Chairman, and thank you to the
    panelists for their testimony. If I could continue on the
    questioning that just occurred. Dr. Yager, let me make sure I
    heard you correctly. Retraining and creative adjustment
    assistance, assistance to those employees, workers who are
    dislocated, may be one of the ultimate answers we have for the
    trade dislocation that occurs. I heard you say that, right?
        Dr. YAGER. I think that is one component of a policy, yes.
        Mr. BECERRA. This is my 11th year. I have never seen a
    retraining program that has ever left an American worker who
    has lost a job in the manufacturing field and had to be
    retrained as a result of trade dislocation ever get another job
    that has paid him or her at least the wage that he or she had
    in that manufacturing sector. Can you name any workers who have
    been retrained and are earning more money than they had before
    they lost their manufacturing jobs?
        Dr. YAGER. One of the things that we observed with those
    people who lost work and then came back into the workforce,
    there was a generally lower wage paid to those people upon
    reentry. Some of that lower wage was due to the fact that they
    were new in a firm or industry, and some people were able to
    make up that difference in their new occupation, but they do
    start off at a lower wage level.
        Mr. BECERRA. Right now we are continuing to lose
    manufacturing jobs, and we have lost 2.5 million manufacturing
    jobs in the last 3 years. That is the quote I have been using.
    I looked at Dr. Holtz-Eakin's numbers, and it is 2.8 million
    jobs in the last 3 years. So, 300,000 additional jobs lost in
    manufacturing over the last 3 years. Where are these folks
    going to work?
        By the way, we are losing jobs not just in typical
    industrial manufacturing, but in the technology field as well.
    In fact, I think it is Dr. Holtz-Eakin's testimony or someone's
    testimony that we are losing perhaps more jobs in that segment
    of our economy than in other areas where we would think the
    industrial base would lose these jobs.
        So, I think it is real pie in the sky to believe that
    American workers should trust that they will have an
    opportunity to get a decent-paying job should they lose their
    job today because of trade dislocation. Because of that, I hope
    that we all will leave here looking for ways to truly pressure,
    as I believe Dr. Yager said, to pressure the Chinese. Whether
    it is the Administration or Congress, we have to use whatever
    tools we can, and we have to do it in ways that are rational. I
    am not saying we go out there and beat them simply because we
    don't like what they are doing.
        Let me ask this: Dr. Holtz-Eakin, you mentioned a little
    earlier that it is kind of difficult to connect manufacturing
    job losses with our trade with China. Let me ask this: My
    understanding is--and, again, these numbers may be a little
    old. They--the number of job losses may be greater, but my
    understanding is that in the textile and apparel industry in
    this country, we have lost in the last 3 years or so some
    270,000 jobs. At the same time imports of textiles and apparel
    from China exceed U.S. imports from all other countries in the
    world combined. So, China alone sends us more textile and
    apparel than any other country in the world combined, and we
    have lost 270,000 jobs in this country.
        At the same time, I think I said it earlier to the earlier
    panel, the average wage of a Chinese worker in northeastern
    China where they are very industrialized, is about 60 cents an
    hour. Tell me again that there is no connection between what
    China pays its workers; the fact that it has grabbed a whole
    bunch of that apparel and textile product and sending it now to
    us compared to any other place in the world, and there is no
    connection?
        Dr. HOLTZ-EAKIN. Let me take it in two pieces. First, my
    statement is about the broad pattern of manufacturing
    employment, not particular industries or companies. So, I do
    want to distinguish between those two kinds of assertions.
    Second, even if you look at just apparel, to look at the
    Chinese imports in isolation is potentially misleading because
    it could be the case--and the record suggests that those
    imports from China displaced other imports from other
    competitors. So, it may be the case that we would have lost
    jobs in the apparel industry anyway as a result of trade
    pressures.
        Mr. BECERRA. I agree with you. I think China has displaced
    Korea or some other country in terms of the country now
    exporting those textiles to us, but China gets to replace Korea
    because it is paying 60 cents an hour for its workers, where
    Korea is paying $2 or $3. We will never get those jobs back
    because we are never going to return to the days where we pay
    $2 to $3 to our worker for that type of work and will never
    compete with those countries if we allow those countries to
    continue to have labor rates, wage rates that are so low that
    it will continue to drive American companies abroad to be able
    to compete as they produce. I thank you for the time.
        Mr. CRANE. Mr. English.
        Mr. ENGLISH. I thank you, Mr. Chairman, and I would like to
    spin off, Dr. Holtz-Eakin, on the last gentleman's line of
    inquiry because I think he raises a very important point. There
    are clearly some jobs that we are likely in the global economy
    not to recapture because their placement has largely determined
    why the labor rates are low because they are naturally labor-
    intensive. Are there also not a range of manufacturing jobs
    that are--that are--can be naturally capital-intensive; in
    other words, where you can have two or three American workers
    running a highly mechanized, highly computerized production
    line with a lot of technological value added, and that those
    manufacturing jobs can be just as easily or more easily
    produced under competitive advantage here in the United States?
    Would all the three of you agree with that?
        Dr. HOLTZ-EAKIN. I think there is a lot of truth to that.
    An anecdote that illustrates that is that General Electric (GE)
    produces the low-value-added parts of its computer-assisted
    tomography (CT) scans in China, but they then bring them back
    to the United States and employ 5,000 workers in Wisconsin to
    do the highly technical, high-productivity part of that job.
    Both are in manufacturing.
        Mr. ENGLISH. That is an excellent example because GE, their
    locomotive division is my largest employer, and we make
    locomotive kits for export that are exported globally.
        The problem I have here is that are we not talking about a
    China that has a set of--I think the term ``mercantilist'' is
    not overstating--trade policies that discourages imports,
    discourages even bringing in en masse things that we can
    manufacture more effectively than they can if the natural terms
    of trade are level. The thing that I am frankly concerned about
    is that--this currency issue is maybe the best example, and we
    have had an interesting debate on it today. Manipulating the
    currency is one way that a country can dictate for itself a
    significant price advantage. We can debate how much China does
    it and how much it has actually been done, but I wonder if we
    aren't--unless we insist on a level playing field at least on
    issues that are important relative to the WTO, if we don't
    insist on an adherence to WTO rules, aren't we in effect ceding
    some manufacturing sectors that more naturally are located in
    the United States to countries that are determined--that beggar
    their own consumers and maintain substantial disparities? Is
    that an unfair analysis, or am I missing something?
        Dr. HOLTZ-EAKIN. I will leave that to my colleagues who are
    more knowledgeable than I am about product-specific barriers to
    sales in China. Again, all you can offer is empirical
    magnitudes in the record, and the first is that China's real
    exchange rate adjusted for prices has not dramatically changed
    over time, and as a result, there doesn't appear to be any
    recent innovation in its relative real terms of trade that
    would be important.
        Mr. ENGLISH. Let me, because I have limited time. I don't
    understand why that would be significant, because China, after
    all, has been given an opportunity for many years to manipulate
    its exchange rate. The fact that it has manipulated it to the
    same degree and in the same way for a period of years does not
    really detract from the fact that they have manipulated it
    relative to where the market would land it. We can debate about
    where the market would actually drive the exchange rate, but I
    think the fact that this is a longstanding practice of theirs
    and not an innovation doesn't really make that very
    significant.
        Dr. HOLTZ-EAKIN. That is true going back. Going forward,
    there is broad consensus on two things. China should move to a
    more flexible exchange rate policy and is quite likely to. What
    is open to speculation, and perhaps policy intervention, is the
    transition path and how quickly they will open capital markets
    in the face of their acknowledged weakness in the banking
    sector. How quickly they will float the yuan is something that
    really is on the radar screen.
        Mr. ENGLISH. I appreciate, by the way, the testimony, and I
    know I am out of time. Dr. Rogowsky, I would like to ask you
    questions about why you think China's economy is relatively
    open relative to some of other trading partners. That certainly
    hasn't been the finding of some of our local manufacturers, but
    perhaps we can have that exchange.
        Again, I want to thank all of you for the excellence of
    your testimony, which is far more nuanced than what we have
    heard from many other sources, so I thank you for it.
        Mr. CRANE. Ms. Tubbs Jones.
        Ms. TUBBS JONES. Gentlemen, thank you for having dinner
    with us. The appetizer may not have been so good, but we are
    glad to have you.
        My concern is to be able to speak to the 645,000 people
    that I represent in northeast Ohio and to make it plain, you
    understand what I am saying. Make it plain to them why we have
    lost manufacturing jobs in the United States, and why the
    argument that China's boosting of opportunities for jobs, be it
    in manufacturing, apparel, whatever the heck it is, is not the
    reason we are struggling like we are.
        Now, Dr. Holtz-Eakin went through one, two, three, and four
    reasons why, and I lost where I wrote them down, but none of
    them--what was long-term shift in demand, secular pattern of
    productivity, measuring issues, et cetera, et cetera, which
    everyday people--duh, make it plain in a real short sentence
    how you do not connect the jobs, in our opinion, going to China
    and us not having jobs in the United States.
        Dr. HOLTZ-EAKIN. Sometimes you don't have enough customers,
    and one way that happens is that even within the United States,
    people shift from buying manufacturing products to other
    things. In the absence of customers, it is hard to make a
    business go and to hire people. That is a non-trade thing that
    is a U.S. phenomenon.
        Ms. TUBBS JONES. The reason you don't have customers
    anymore--and I will give you an example. Central Brass in my
    district that makes facets says, I don't have any customers
    because they make what I make here cheaper in China, so they
    are doing what I used to do in the United States in China.
        Dr. HOLTZ-EAKIN. No. My first factor is simply shifts in
    the composition of demand in the United States. People choose
    to buy more services and fewer manufacturing goods than they
    did in the past, and if your customers choose to buy something
    else, it is harder to keep employment.
        Ms. TUBBS JONES. You are saying that people in the United
    States are buying more services, and so people in manufacturing
    jobs have no jobs because we are all buying services instead of
    buying product?
        Dr. HOLTZ-EAKIN. They are shifting to services, and as a
    result, there are fewer jobs in manufacturing.
        Ms. TUBBS JONES. I have to leave you alone for a moment
    because I want to talk to Dr. Rogowsky. Dr. Rogowsky, I
    testified at the USITC on the issue of steel. In other
    countries it appears that there is a policy that allows steel
    companies to be successful, and I mean a broad policy that
    includes more than just the tariff piece. What do you think we
    ought to have, or what should be an additional policy that
    would help steel in the country? I am for tariffs because we
    got to start somewhere. What else we ought to be doing to help
    undergird the steel industry in the United States? If you can't
    answer that question because it is a policy question, I will
    just keep cross-examining you anyway. Go ahead.
        Dr. ROGOWSKY. I will try to keep it confined to the
    parameters that I think I can touch on. The steel industry in
    the United States, like steel industry in every country, is
    problematic. Partly it is because steel all over the world has
    been an industry that is considered to be infrastructure to
    development. So, there has been lots of subsidies and lots of
    protection and lots of help.
        Ms. TUBBS JONES. In other countries other than ours.
        Dr. ROGOWSKY. In other countries and here. As a result,
    there is massive overcapacity in the world. All the countries
    and all the producers are facing this problem. So, there is an
    effort, as you know--the United States is leading this, and it
    is being conducted in part at the Organization for Economic
    Cooperation and Development--to try and negotiate some way of
    handling this large overcapacity problem.
        Given that overcapacity, what do you do in the United
    States? I think in the United States you try to take an
    industry like this and help it modernize to the extent it can
    and help it try to come up to the levels of technological
    productivity that allows it to compete in the world
    marketplace.
        Ms. TUBBS JONES. Real quick. Dr. Yager, GE produces
    something in China, it brings it back to the United States to
    assemble, and do you think this recent tax proposal that
    supports development--manufacturing in foreign countries,
    provides a tax incentive continues to allow GE to have a better
    product or cheaper product by doing it there?
        Dr. YAGER. I have to admit, Ms. Tubbs Jones, I am not
    familiar with it. I did not provide the GE example.
        Ms. TUBBS JONES. Might you think of answering that question
    and answering me at a later date?
        Mr. CRANE. Thank you. I want to thank our panelists. We
    appreciate your patience, and we appreciate your input. We look
    forward to continuing to work with you as we proceed down this
    path. With that, our Committee, with the break here for three
    more votes now, stands in recess.
        [Whereupon, at 6:30 p.m., the hearing was recessed, to
    reconvene on Friday, October 31, 2003, at 9:00 a.m.]

     UNITED STATES-CHINA ECONOMIC RELATIONS AND CHINA'S ROLE IN THE GLOBAL
                                    ECONOMY

                                  ----------

                            FRIDAY, OCTOBER 31, 2003

                         U.S. House of Representatives,
                                   Committee on Ways and Means,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 9:03 a.m., in
    room 1100, Longworth House Office Building, Hon. Rob Portman
    presiding.
                                    ------

        Mr. PORTMAN. Well, good morning. Let's get started. The
    witnesses are here. We will try to get started promptly.
        We do not have any votes scheduled today. That was not the
    case earlier in the week. For that reason, there may not be as
    many Members here before you, but, as you know, all your
    testimony will be made part of the record, and the important
    people are here, which is the staff, and again we do appreciate
    your being here.
        We had a good day of testimony yesterday. We heard from the
    Department of the Treasury, we heard from USTR, we heard from
    Council of Economic Advisers at the White House, we heard from
    CBO, GAO, and the USITC. We were able to discuss important
    issues with regard to our relations with China on an economic
    basis, including the impact of Chinese currency and its peg to
    the U.S. dollar.
        We also learned more about China's WTO accession
    commitments and whether those had been met, or not, and finally
    just discussion about China and trade, with a particular focus
    on U.S. manufacturing.
        We also had some interesting discussion yesterday about
    U.S. competitiveness generally and how that related to our
    economic relationship with China and, for that matter, with the
    rest of the global competitors.
        This morning, we are pleased to have with us a
    distinguished panel of private sector representatives. I will
    introduce the panel and then ask them to each speak within the
    5-minute allotment to leave us plenty of time for questions.
        At the end of the introductions, we will have testimony
    begin; and then before Mr. Kruse testifies I would like to have
    Representative Hulshof to give you a further introduction. You
    are one of his valued constituents, if you would like to do so.
        First we will hear from Douglas DeVos, who is President and
    Co-Chief Executive Officer (CEO) of Alticor, Inc., of Ada,
    Michigan; and, Mr. DeVos, appreciate your being here with us
    today to talk about some of the manufacturing issues. David
    Malpass is here, who is the Chief Global Economist and Senior
    Managing Director of Bear, Stearns and Company in New York. We
    have James Jarrett here, who is Vice President, Legal and
    Government Affairs and Director of Worldwide Government Affairs
    for Intel Corporation in Santa Clara, California. Malcolm
    O'Hagan is here, who is President of the National Electrical
    Manufacturers Association (NEMA), from Rosslyn, Virginia,
    representing people from all around the country. Charles Kruse,
    as I said, is a farmer from Missouri and President of the
    Missouri Farm Bureau in Dexter, Missouri; and, finally, Joseph
    Papovich, who is Senior Vice President International of the
    Recording Industry Association of America.
        Again, gentlemen, glad to have you here. Mr. DeVos, if you
    would please proceed.
        Ms. TUBBS JONES. I did not get a chance to say anything.
        Mr. PORTMAN. Oh, I am sorry. This is an all-Ohio hearing
    this morning. My colleague, Ms. Stephanie Tubbs Jones from
    Cleveland, Ohio, is here with me this morning; and I would like
    to have her give a brief opening statement.
        Ms. TUBBS JONES. Thank you, Mr. Chairman. It is not often
    that two Ohioans have the opportunity to sit next to each
    other, and it is really not often that, as a brand new Member
    of the Committee on Ways and Means, I get to sit in the Ranking
    Member's chair, so I am loving it. I would like to welcome all
    of you to this hearing this morning and look forward to some of
    your comments.
        Although China is home to one of the most ancient
    civilizations, because of increasing trade with the United
    States and globalization the everyday life of the Chinese
    citizen is a lot like that of the average American citizen,
    though the income of most Chinese is far below that of most
    American workers.
        The Chinese communicate using many of the same devices as
    we do. The Chinese eat many of the same fast-food and serve
    many Americans and enjoy many of the same forms of
    entertainment, but our two countries also have many
    differences, which bring us to this hearing held yesterday and
    today.
        In order to maintain success in our future trade and
    economic relationships, the United States must continue to keep
    its market doors open, but China must begin to be more
    expeditious in opening up a market-based economy. It appears to
    me that the United States is on the wrong end of the trading
    spectrum with China.
        In today's market, the yuan is undervalued by as much as 15
    to 40 percent in comparison with the dollar.
        Where does the problem exist? The problem comes into place
    when the United States exports goods to China and is required
    to pay more money in shipping, taxes, and fees because of
    China's lack of a market-based economy, while the Chinese
    businesses pay far less to ship goods to the United States. As
    a result, Chinese manufacturers can compete with the prices of
    U.S. manufacturers, but, because of the exportation costs which
    U.S. businesses must face, U.S. businesses lose an advantage in
    selling overseas.
        All this macroeconomic theory may get lost on some of us
    until we return to our Congressional District, particularly in
    the Congressional District of Ohio. In the last--since 2001, we
    have lost more than 150,000 jobs. In my Congressional District
    itself, we lost more than 50,000 jobs; and my constituents want
    to know where are the jobs going, why are we losing our health
    care and other benefits.
        I hope that those of you in the private sector might be
    able to shed some light on some of the questions that my
    constituents have, as well as some of the questions we asked of
    the Administration in the past day.
        I am pleased to have the panel present to us today, and I
    look forward to your comments. I thank the Chairman for the
    opportunity to give my opening statement.
        [The opening statement of Ms. Tubbs Jones follows:]
          Opening Statement of the Honorable Stephanie Tubbs Jones, a
               Representative in Congress from the State of Ohio
        Although China is home to one of the world's most ancient and
    complicated civilizations, because of increasing trade with the U.S.
    and globalization, the everyday life of a Chinese is a lot like the
    life of an American. The Chinese communicate via the same devices
    Americans communicate by. People communicate by cell phones, e-mail and
    faxes. The Chinese also eat at many of the same fast-food chains that
    serve many Americans, and enjoy many of the same forms of
    entertainment.
        With that being said, it is with great intention that I strive to
    protect the quality of life sharing and the economic relationship that
    exist between the two countries.
        In order to maintain success in our future trade and economic
    relationships, the U.S. must continue to keep its market doors open and
    China must begin to move more expeditiously in opening up a market
    based economy.
        It appears to me that the U.S. is on the wrong end of the trading
    spectrum with China. In today's market, the yuan is undervalued by as
    much as 15 to 40 percent in comparison to the dollar. Where does the
    problem exist? The problem comes into place when the U.S. export goods
    to China and are required to pay more money in shipping, taxes and fees
    because of the lack of a China's market based economy, while the
    Chinese businesses pay far less to ship goods to the U.S.
        As a result, Chinese manufactures can compete with the prices of
    U.S. manufactures, but because of the exportation cost, which U.S.
    businesses must face, U.S. businesses lose interest in selling
    overseas.
        In addition, there is another reason why establishing a Chinese
    market based economy will be extremely vital in helping the U.S.
    manufacturing industries rebound. As the U.S. economy continues to
    struggle, U.S. manufacturing jobs are continuing to be lost. Now what
    role does the Chinese exporters play in this equation? Well . . . I
    think that question has already been answered, the real question is
    what is the role Will the Chinese exporters play in the manufacturing
    industry rebound?
        With the speedy production of goods in China and no place for the
    products to go, there have been talks by Chinese manufacturers on
    grossly lowering the prices of the products and exporting the products.
    So, not only will the exportation fees be less, but the overall cost of
    the product will be too.
        By having this expert panel here today, I hope that the answers
    that I have heard from outside sources, will not be the same answer
    that this panel, that is assembled here will recite.

        Mr. PORTMAN. Thank you, Ms. Tubbs Jones. We appreciate your
    statement. Would any other Members like to make an opening
    statement? Mr. DeVos.

     STATEMENT OF DOUGLAS L. DEVOS, PRESIDENT, ALTICOR, INC., ADA,
                                MICHIGAN

        Mr. DEVOS. Good morning, Mr. Chairman and Members of the
    Committee. My name is, Doug DeVos. I am honored to be here with
    you.
        I am the President of Alticor, Incorporated, the parent
    company of Amway Corporation, which is a global direct selling
    company, Quixtar, Incorporated, which is an E-commerce business
    operating in North America, and the Access Business Group,
    which is a manufacturing and logistics services company, based
    in Ada, Michigan.
        We are happy to be here to talk a little bit today about
    one of our fastest-growing affiliates and strongest, Amway
    (China). I know we have submitted written testimony to the
    record already, so I will try not to dig into too much of that.
    I am sure you have already had that and reviewed it, but there
    are two points I would love to touch base on.
        First of all, Alticor is an organization that does export
    to China and would love to be able to export more in the
    future. In fact, today in the Wall Street Journal, coming in
    here, it says, China is also the world's fastest-growing export
    market. In an otherwise flat year for American exports, U.S.
    shipments to China are up more than 20 percent. Again, a lot of
    facts in a very complex situation.
        Second, there are things that we can do here at home to
    fiscal policy that you and this Committee and Members of
    Congress can do to help us become more competitive.
        By way of a little bit more background, Alticor, our
    revenues are just under $5 billion in our last fiscal year.
    Eighty percent of our revenues come from outside the United
    States. China is our largest single affiliate, and their sales
    there exceed $1 billion at that point. Our exports to China are
    about a quarter of a billion dollars; and Alticor currently
    employs about 4,500 people here in the United States, primarily
    in Michigan and also in California.
        Now while China is a great market for us, it is also a
    challenge. There are certain vulnerabilities that we have faced
    and continue to face there. Therefore, our actions that are
    taken here do have an impact not only on us but certainly on
    other businesses operating in China that could be negative to
    the business environment there. Therefore, there are a couple
    things that we would say that aren't necessarily critical from
    our perspective.
        One of them is indeed currency pay. That is not viewed as
    an issue for us. It is certainly a delicate issue for many. It
    is an issue that is tied to China's transition from a planned
    to a market economy, hugely complex, and therefore it doesn't
    make the list of issues that we deal with.
        Also, tariffs. I know sometimes they are considered in
    trade issues such as this. Our concern is that they begin to
    become retaliatory and then hurt both sides to create a lose/
    lose situation. So, our written testimony dives into those in
    greater detail.
        Now, what we can do? There are things we can do, and that
    is the great part. There is hope for dealing with the issues
    that we face.
        Our country's fiscal policies can have an enormous impact
    on the competitiveness of businesses here and our ability to
    compete all over the world. In fact, there has been some
    international tax rules that you as a Committee have passed. We
    would urge Congress to take action to reduce the tax burden on
    American manufacturing companies so they could effectively
    compete more globally. So, we would urge Congress to move on
    that because we could use the help, as is stated, right here
    and right now.
        Our key point here is that Congress can do more to create
    and preserve jobs in the United States by addressing U.S.
    policy problems than it can to look to others to solve our
    problems.
        Now we know China has some things to do, too. They need to
    implement their WTO commitments. They need to look forward on
    those sorts of things. They need to establish trading rights
    that would enable us as an organization to import more products
    than we currently do; and, like I say, we like to do that.
        Full trading rights would also lead to full distribution
    rights and therefore not only the ability to import products
    there but the ability to operate and distribute products in
    that marketplace.
        The last point I would like to raise is the need for
    ongoing government support in issues such as this. We have been
    supported well by many U.S. agencies in China and indeed in
    other parts of the world. The U.S. Department of State,
    Department of Commerce, and the USTR have been very effective
    in helping us negotiate challenges that we face as a company;
    and we have seen them do that with many other organizations as
    well. Sometimes, as you look at funding for those
    organizations, I know we tend to try to keep our costs low, as
    we do in our businesses, but these organizations are very, very
    effective in following through on the huge level of detail that
    is required to allow businesses to operate fairly in those
    markets. Thank you very much.
        [The prepared statement of Mr. DeVos follows:]
     Statement of Douglas L. DeVos, President, Alticor, Inc., Ada, Michigan
        Mr. Chairman, Members of the Committee: I am Doug DeVos, President
    of Alticor, Inc., the parent company of Amway Corporation, Quixtar and
    the Access Business Group. I am pleased to be able to speak to you this
    morning about one of our most successful affiliates, Amway (China)
    Company Ltd, also known as ACCL. Our company, which is headquartered in
    Ada, Michigan, is a leading manufacturer of cleaning products, personal
    care products, cosmetics and nutritional supplements. We use the direct
    selling method of distribution, which means that we enter into
    contracts with individuals who own their own businesses selling and
    marketing these products for us.
        Alticor's annual revenues are just under $5 billion per year with
    almost 80 percent of that total coming from foreign markets. China is
    currently our largest single market with sales exceeding $1 billion
    annually. Our exports to China, including services and intellectual
    property charges, total almost one-quarter of a billion dollars and
    help to support more than 4500 jobs at our Michigan and California
    facilities.
        I want to stress two points here: We export to China and we hope to
    export more in the future. While China is a very good market for us, it
    may also be the most vulnerable and unstable market in which we
    operate. Any number of actions could ruin our business in China.
    Speaking from our experiences as a major exporter with a large stake in
    the Chinese market, I am here today to discuss actions that the US
    Congress should--and should not--take to help us and other US
    manufacturers become better exporters to China and to the rest of the
    world as well.
        My presentation is in four sections:

          First, I will discuss the issue of China's currency peg
    and the more general topic of currency manipulation in some countries;
          Second, I will comment on efforts in Congress to force
    certain actions on the Chinese government;
          Third, I will outline what I see as the serious
    commercial and economic issue with regard to China, which is full
    compliance with the commitments it made in joining the World Trade
    Organization (WTO);
          Finally, I will focus on those actions that Congress
    could take that will provide meaningful assistance to US manufacturers.
    China's Currency Peg
        China has maintained a fixed exchange rate between its currency--
    the renminbi or RMB--and the US dollar for more than a decade. It held
    the line on this rate even when the value of other Asian currencies
    fell dramatically in the late 1990's, during what was called the
    ``Asian financial crisis.'' In fact, at that time, the US government
    praised China for not devaluing the RMB in order to protect its share
    of export markets. The charge of currency manipulation stems from the
    fact that China has maintained this ``peg'' while the the value of the
    US dollar fell. In other words, the Chinese are not guilty of
    manipulating currency values per se; they are simply following an
    established policy without regard to changes in US policy.
        Yet, the question remains: why does China not permit the RMB to
    float? The key reason may be that China has not completed the
    transition from a planned to a market economy. This transition is under
    way and, in the process, it has become apparent that the banking system
    is terribly flawed. Banks in China hold huge portfolios of non-
    performing loans, most of which are to state-owned enterprises that are
    near bankruptcy. In a rating note published on September 15, Standard &
    Poor's Corporation said that 45 percent of Chinese loans are non-
    performing. Ping Chew, an S&P director, is quoted in Business Week as
    saying: ``We are afraid the banks will go bankrupt.'' [i]
    ---------------------------------------------------------------------------
        \[i]\ Business Week through BusinessWeekonline: September 29, 2003.
    ---------------------------------------------------------------------------
        Professor Joseph E. Stiglitz, a Nobel laureate in economics, warns
    that floating the RMB ``would lead to a host of further problems,
    particularly with the country's shaky banking system.'' [ii]
    The appreciation of the currency against the dollar could wipe out all
    export earnings from profitable firms and leave those that are heavily
    leveraged unable to service any debt. The end result could be a massive
    economic contraction in China.
    ---------------------------------------------------------------------------
        \[ii]\ The Independent, through World Sources, Inc., Emerging
    Markets Data File, October 8, 2003.
    ---------------------------------------------------------------------------
        In a separate paper, Stiglitz also argues that problems in China
    ``would also cause damage to the world's economy.'' [iii]
    China, notwithstanding its image as a major exporter, is also an under-
    appreciated importer of products and services. Stiglitz notes that
    there are currently no signs among the internal indicators in China
    that would point to the need to revalue the RMB and that China barely
    has an overall trade surplus, a fact that argues against the
    appreciation of the RMB.
    ---------------------------------------------------------------------------
        \[iii]\ Agence France Presse, Shanghai, September 17, 2003, from
    the 2003 Forbes Global CEO Conference.
    ---------------------------------------------------------------------------
        Yet, China has demonstrated a willingness to discuss the exchange-
    rate issue with the US Government. These talks, we believe, are both
    appropriate and well timed. We believe that Congress should take no
    action with regard to China while the Administration works with the
    Chinese government to find a mutually satisfactory way to address
    concerns that the RMB is priced at an inappropriate level.
        I am not saying that currency manipulation by some countries is not
    a problem. In fact, we believe that some countries, including several
    other Asian countries, are following policies that can only be called
    manipulative. We support efforts by Congress and the Administration to
    develop the policy tools to address currency manipulation. However, we
    note that blunt tools are never effective in addressing the delicate
    problem of exchange rates.
    The Dangers of Ill-conceived Tariffs
        Of the blunt tools that we believe would harm overall US interests,
    none is more dangerous than the imposition of tariffs on suspected
    currency manipulators. Such a move would be counter-productive and do
    more damage to our economy than anyone could imagine. Simply put, it
    could be as bad as the Smoot-Hawley Tariff of 1930, which was a
    response to worldwide overproduction of agriculture after World War I.
    Although Smoot-Hawley was an effort to help American farmers, it
    prompted protectionist reactions by countries that imported our
    manufactured goods.
        The retaliation to Smoot-Hawley led to countervailing tariffs in
    Europe that cut importation of US manufactured goods by 70 percent
    between 1929 and 1932. Total international trade fell by more than two-
    thirds during that same period [iv] and contributed to the
    depth of the economic collapse that we call the ``Great Depression.''
    ---------------------------------------------------------------------------
        \[iv]\ Timeline of US History. http://future.state.gov/future/when/
    timeline/1921_timeline/smoot_tariff.html.
    ---------------------------------------------------------------------------
        US participation in the WTO is critically important to all US
    companies that seek to export products and services. In that 80 percent
    of Alticor's revenues come from foreign markets, we urge Congress to
    respect fully US commitments to WTO principles and procedures. We--by
    that I mean both our company and our country--benefit by the rules-
    based trading system that the WTO has helped to create. Although the
    WTO does not now offer a vehicle for dealing with currency
    manipulation, we strongly oppose taking any action that would violate
    those principles and thereby leave US exporters vulnerable to WTO-
    approved sanctions or retaliation.
        Instead, we ask that Congress focus on those policies that would
    facilitate our ability to export. We will explain this, first, with a
    discussion of China and then with regard to US policies that would
    enable US companies to export more products abroad.
    China's WTO Implementation Effort
        In joining the WTO, China agreed to make massive changes to its
    legal and economic system. According to some estimates, the WTO
    accession agreement requires the Chinese to change more than 2500 laws
    and regulations.[v] While we have seen progress in some
    areas, China must do more to open its market to imported goods and
    services.
    ---------------------------------------------------------------------------
        \[v]\ US Chamber of Commerce, First Steps: A US Chamber Report on
    China's WTO Progress, September 2002.
    ---------------------------------------------------------------------------
        Yet, I believe that China can and should do more to address the
    problem of market access. I wish I could tell you that China has done
    its part in this regard. The record on implementation is spotty. The US
    China Business Council's report on China's WTO implementation published
    in September warned of several problems regarding protectionism. It
    went on to say:

           ``The inability of government ministries in China to reach
    policy consensus, and the enactment of questionable policies for the
    apparent purpose of protecting domestic interests, have slowed the pace
    of implementation and emerged as serious problems.'' [vi]
    ---------------------------------------------------------------------------
        \[vi]\ US-China Business Council, China's WTO Implementation, An
    Assessment of China's Second Year of WTO Membership. Testimony
    submitted to USTR, September 10, 2003.

        One area stressed by the Council is particularly important to our
    company. We established ACCL and entered China prior to the signing of
    the WTO accession agreement. As a consequence, we are hampered by the
    fact that the foreign investment license limits our business to
    products that we manufacture in China. We can use US raw materials and
    can test-market other products, but only for a limited time. One of the
    critically important WTO commitments is to grant all companies
    operating in China full ``trading rights.'' Once these rights are in
    place, we should be able to add several new US-made products to our
    line.
        These rights will be critically important to those US companies
    that have yet to enter the Chinese market. At present, they can export
    their products to China but may have difficulty marketing and
    distributing them to customers. With full trading rights, restrictions
    on distribution will be lifted and companies that seek to enter the
    market can more effectively sell products that now just sit in
    warehouses.
        Despite the problems, we believe that the Chinese government is
    making a good-faith effort to implement needed reforms. While I urge
    progress on the WTO commitments when speaking to Chinese officials, I
    also ask that US officials have patience with the Chinese as they
    struggle to create new policies in areas where they have little or no
    experience. We spoke earlier of the fragility of the banking sector; it
    is important to realize that, previously, China did not have a system
    of bank examiners. A colleague in the insurance industry recently
    relayed the challenges that China faces in that regard. He said that
    New York City has more insurance examiners than does China.
        China needs help in developing the mechanisms to manage a market
    economy. It needs new banking and insurance laws and it needs to hire
    and train bank examiners and insurance regulators. Congress has
    authorized and appropriated funds to provide technical assistance to
    China as it strives to implement its WTO commitments. I urge Congress
    to continue doing so and to expand these programs, which are vitally
    important to modernizing the Chinese economy and, I would add, to
    improving the understanding in China of our country and the economic
    system that we enjoy. I would also submit that assisting the Chinese in
    developing an effective system to manage commercial banks will do more
    to advance the cause of permitting the RMB to float than will talk of
    tariffs and other retaliatory measures.
        In this vein, let me add that our company has enjoyed great support
    from the Departments of State, Commerce and the US Trade
    Representative. I want to thank them for the support that their
    staffers have given us in our efforts to expand our business in China
    and our exports to China.
        Like you, I have heard the horror stories of companies facing
    problems in China. However, I believe that most of these problems can
    be resolved if the companies get the help that they need from US
    government departments and agencies working in China. It follows that,
    if more US companies are to succeed in China, more support will be
    needed and more funds must be given to these agencies. I urge you to
    support full funding of these agencies so that US companies can succeed
    in China and elsewhere in the world.
    US Policy Changes
        I am proud of the fact that our company manufactures products in
    the United States and ships them around the world. I must confess that
    I am concerned about the state of manufacturing in this country. Too
    many companies in our home State of Michigan have gone out of business
    or have had to downsize in recent years. We went through that very
    painful process a few years ago. I hope to never experience such a
    trauma again. In fact, I would like to find ways to bring those good
    people back to work in our company.
        With this in mind, let me state that the US tax code, in our view,
    imposes a disproportionate burden on US manufacturers in overseas
    markets when compared to our foreign competitors. All of the products
    that our company exports carry the cost of government when sold because
    Alticor's corporate tax payments are built into the cost of the
    product. This remains true if the products are sold overseas.
        In addition, the US tax system adds an extra burden to many
    American multinationals who establish regional distribution, service or
    treasury centers that are designed to efficiently service their foreign
    markets. Many of these companies must pay US tax on foreign-earned
    income that has not yet been repatriated to the United States.
        In a rational trading system, each country should be able to adjust
    for tax policies at the border. Yet, according to the provisions of the
    General Agreement on Tariffs and Trade (GATT), adjustments can be made
    only on a product-specific basis, which is to say that a consumption
    tax such as the European style Value Added Tax (VAT) can be removed but
    a generalized tax such as a corporate income tax cannot.
        As a direct consequence, the WTO has ruled that earlier efforts to
    adjust for this disparity violate trade subsidy rules. The EU has
    published a list of products on which duties will be levied if the
    Congress does not resolve this issue. Almost every product that Alticor
    exports to Europe is on that list. If Congress does not resolve this
    issue, we will likely find ourselves in serious trouble in the European
    market.
        We applaud efforts in Congress to modernize the US tax code. I
    submit to you here today that doing so should be the highest priority
    of everyone who wants to save jobs in this country. The transcendent
    issue is American jobs. For decades, economists and others believed
    that the corporate tax system only burdened shareholders and capital
    generally. It is now clear that the corporate income tax (CIT) is
    contributing to the decline in manufacturing jobs in the United States.
        In support of that statement, I would refer the Committee to two
    papers by Professor Arnold C. Harberger of the University of California
    at Los Angeles. The first, published in 1962, concludes that the
    corporate income tax was borne by ``all owners of capital throughout
    the economy.'' [vii] That analysis focused on the economy as
    it existed when foreign trade levels were a fraction of what they are
    today. In June 1994, Harberger published a new analysis that examined
    the effect of the CIT in a world where trade flows have a significant
    impact on the US economy.[viii] He concluded:
    ---------------------------------------------------------------------------
        \[vii]\ Arnold C. Harberger. The Incidence of the Corporate Income
    Tax, Journal of Political Economy, June 1962.
        \[viii]\ Arnold C. Harberger. The ABCs of Corporation Tax
    Incidence: Insights into the Open-Economy Case, proceedings of a
    symposium sponsored by the American Council for Capital Formation,
    Center for Policy Research. Presented June 8, 1994. Published April
    1995.

           ``[US] labor's wage must fall very sharply in order to absorb
    the tax wedge being inserted into the price structure of that part of
    the corporate tradables sector where final products are substantially
    homogeneous and whose prices are basically set in the world market.
    This wage fall is likely to mean that labor will bear 2 to 2\1/2\ times
    ---------------------------------------------------------------------------
    the full burden of the US CIT.''

        At Alticor, we are a part of the ``corporate tradables sector where
    final products are substantially homogeneous.'' We take care to be as
    efficient as possible and to make products that can be differentiated
    in the marketplace. We must do so to protect the jobs--good, well-
    paying jobs--that we create here in the United States. We know that
    every Member of this Committee and, indeed, every Member of this
    Congress cares deeply about jobs here at home. We have all seen the
    figures: manufacturing jobs in the United States have been disappearing
    at the rate of 12 million per year.
        I came here today to talk about China but my key message is that
    the problem is not with China or its policies. It is with our own
    policies.
        The crisis in the US manufacturing sector is real and the time has
    come for all of us to address it. We believe that US manufacturers can
    become more competitive if we can find ways to reduce the costs that
    our tax system imposes on US businesses. We must find a way--consistent
    with the GATT rules--to reduce the burden that US tax policies place on
    manufacturing and on overseas operations that support US manufacturing.
    Only by doing that can we save jobs here in the United States.
        Thank you for your attention.

        Mr. PORTMAN. Thank you, Mr. DeVos; and thank you for
    keeping your statement to under 5 minutes. That may be a
    record. I hope it will be a good model for the rest of our
    panel this morning. Mr. Malpass.

    STATEMENT OF DAVID R. MALPASS, BEAR STEARNS, NEW YORK, NEW YORK

        Mr. MALPASS. Thank you, Mr. Chairman and Members of the
    Committee. I am not sure I am going to be up to this task of 5
    minutes, but I will endeavor. It is a very complicated issue--
    set of issues that you are dealing with, and I welcome the
    opportunity to address the Committee on it.
        In my view, China's economic policies are solid enough to
    cause its economic and political role in the global economy to
    continue expanding.
        I expect the United States to see a continued decline in
    the share of manufacturing jobs within our economy. That is
    being driven by productivity growth, by globalization, and by
    the 50-year secular process toward services, so this is not
    something new. It has been going on rather steadily for 50
    years.
        Dollar strength in the late 1990s accelerated the loss of
    manufacturing jobs. Remember, the dollar gained 30-percent
    strength in the late 1990s. That caused U.S. businesses to look
    outside the United States for goods and services to maintain
    their competitiveness. However, dollar weakness, now that the
    dollar has moved back to a normal level, would not, in my view,
    recover those jobs or stop future losses.
        As it grows, China will get some of the blame for the U.S.
    job losses, just as Japan and Korea did in earlier decades. The
    United States also benefits, though, from China's economic
    success through lower input costs, new markets for U.S.
    products and cheaper consumer goods.
        In my view, it would be harmful for China to float its
    currency or change its value substantially. This would cause
    deflationary instability in China's rural sector without
    stopping China's export growth. A Chinese reevaluation would be
    counterproductive for the United States in that it would
    actually accelerate the flow of capital technology and
    expertise to China. We have seen this repeatedly.
        When Japan appreciated its currency in the 1980s, what
    happened? Capital and technology and expertise flowed heavily
    to Japan, and their competitiveness lead actually expanded, not
    contracting the way the strong yen advocates had suggested.
        From China's policy standpoint, China should, in my view,
    develop and liberalize its capital and financial markets and
    broaden individual freedoms. China seems to agree with that and
    in some ways is moving in that direction. China I think should
    encourage growth in domestic consumption, and it should reduce
    import tariffs and add to the market orientation of its
    economy.
        From the U.S. side, my view is that to have a healthy
    growth policy, the United States should encourage currency
    stability, less protectionism, lower tax rates, labor
    flexibility, and sweeping International Monetary Fund (IMF)
    reforms to encourage more growth in the developing world.
        I should note we are in a formative part of the
    relationship with China, and it is important for the long run
    that the United States observe some of the changes going on in
    China.
        Part of my testimony is about the growth and the drive for
    growth in China. China's growth rate is likely I think to taper
    in 2004. Our forecast is they will slow from an 8.5-percent
    growth rate down to a 7.8-percent growth rate.
        I would like to note three of the key steps in China's
    economic development. We sometimes forget the massive changes
    going on in China.
        First, it liberalized its agriculture system in 1978. That
    distinguished it from the Soviet Union, which is still today
    having massive problems with agriculture.
        Second, in 1993, China's Vice Premier, Zhu Rongji, pegged
    the currency to the dollar. What this did was to stop inflation
    in China, and it brought low interest that set China apart from
    most other developing countries. One of the problems that
    Africa has and Latin America has is that their currencies
    aren't stable and so they do not invite investment to come into
    their countries in that way.
        Then a third key factor in China's fast growth, one that we
    often forget, is that it has consistently rejected the IMF
    economic model of austerity and currency volatility, which has
    impoverished so many developing countries. China is doing a
    different model that is working better in terms of attracting
    investment and producing fast growth.
        I would like to turn to page 10 in my statement which
    relates to jobs in the United States and in China. On a
    relative basis, the loss of manufacturing jobs in the United
    States has been a consistent trend for over 50 years, including
    job losses to Japan, Korea, and Taiwan. The United States,
    nonetheless, remained the leader in job growth in the developed
    world in those years, so we have to put our job losses in
    context of the United States being the fastest in job growth.
        Like the United States, China has also been losing
    manufacturing jobs recently due to globalization and as the
    world has evolved. Since 1995, China has lost roughly 16
    million manufacturing jobs. That is more than the total U.S.
    manufacturing jobs. As the Committee thinks about these issues
    it helps to put them in a globalization context in which almost
    the entire world is losing manufacturing jobs. The United
    States is part of that. The trend has been going on for 50
    years. The most helpful policy developments both for the United
    States and China are to move more toward market orientation in
    their policies. Thank you, Mr. Chairman.
        [The prepared statement of Mr. Malpass follows:]
        Statement of David R. Malpass, Bear Stearns, New York, New York
        Chairman Thomas, Mr. Rangel, members of the committee. Thank you
    for the invitation to testify on U.S.-China economic relations and
    China's role in the global economy. Throughout my testimony, I will be
    presenting my personal views, which are not necessarily those of my
    employer.
    Summary
          In my view, China's economic policies are solid enough to
    cause its economic and political role in the global economy to continue
    expanding.
          I expect the U.S. to see a continued decline in the share
    of manufacturing jobs, driven by productivity growth, globalization and
    the 50-year secular process toward services.
          Dollar strength in the late 1990s accelerated the loss of
    manufacturing jobs by causing U.S. businesses to look outside the U.S.
    for goods and services. However, dollar weakness now would not recover
    those jobs or stop future losses.
          As it grows, China will get some of the blame for U.S.
    job losses just as Japan and Korea did in earlier decades. The U.S.
    also benefits from China's economic success through lower input costs,
    new markets for U.S. products, and cheaper consumer goods.
          In my view, it would be harmful for China to float its
    currency or change its value substantially. This would cause
    deflationary instability in China's rural sector without stopping
    China's export growth. A Chinese revaluation would be counter-
    productive for the U.S. in that it would actually accelerate the flow
    of capital, technology and expertise to China.
          From China's policy standpoint, China should develop and
    liberalize its capital and financial markets and broaden individual
    freedoms. China should encourage growth in domestic consumption by
    empowering private-sector job creation, reducing import tariffs, and
    adding to the market orientation of the economy.
          As part of healthy growth policy, the U.S. should
    encourage currency stability, less protectionism, lower tax rates,
    labor flexibility, and IMF reform to encourage more growth in the
    developing world.
    China Growing Strongly
        China's economy is growing fast, roughly 8% per year. It enjoys a
    stable currency, low interest rates, a U.S.-led global reflation, and
    an increasingly pro-market policy environment.

          China's growth rate is likely to taper moderately in
    2004, following what is turning out to be a very robust post-SARS
    second half of 2003. Third-quarter real GDP growth registered 9.1%
    year-over-year.
          In 2004, net exports will slow and foreign direct
    investment should ease slightly, but we think domestic private
    consumption will continue rising. Thus, the composition of China's
    growth will shift but remain robust. We note that China's leaders
    remain prepared to use public spending as a support if needed.
          Our forecast is for 7.8% growth in 2004, following
    roughly 8.5% official growth in 2003. Actual growth is likely to be
    stronger than the reported figure, given that much of China's private
    sector economic activity is not fully captured by its statistical
    network.

        I'd like to note three key steps in China's economic development.

          First, China liberalized its agricultural system
    beginning in 1978, a sharp contrast from the Soviet Union.
          Second, in 1993 under Vice Premier Zhu Rongji, China
    adopted a stable currency as a foundation for its economic growth. This
    stopped inflation and brought low interest rates, setting China apart
    from most other developing countries.
          A third key factor in China's fast growth is that it has
    consistently rejected the IMF economic model of austerity and currency
    volatility which has impoverished so many developing countries.
    Putting China's Growth in Perspective
        Though growing fast, China's economy started from a very lowbase.
    China's GDP will reach only about $1.35 trillion in 2003, up $100
    billion from 2002. This compares to a U.S. GDP of $10.9 trillion in
    2003, up $450 billion from 2002. Stated this way, the U.S. grew 4.5
    times more than China in 2003 even though China has five times the
    population.
        Similar comparisons would apply in other areas--China's investment
    growth is faster than U.S. investment growth, but dollar investments in
    the U.S. dwarf those in China; China's exports are growing faster, but
    the U.S. exports more (roughly $700 billion versus $400 billion for
    China.)
        Still, China increasingly sees itself as Asia's leader. It is
    becoming increasingly dominant in the Asian economic and political
    outlook, especially given Japan's shrinking population and economic
    malaise. Meanwhile, its government remains communist, passing
    leadership from one generation to the next without benefit of
    democracy.
        I think it is in the U.S. interest to see China continue to grow
    fast. History shows that countries become more democratic and more
    environmentally conscious as their per capita incomes rise. China has
    joined the World Trade Organization and seems to be playing a
    constructive role with North Korea.
    China Trade
        With strong growth in both consumption and investment, China's
    imports have been growing faster (+40%) than exports (32%). The secular
    trend will be for private consumption to play an increasing role in
    Chinese growth, relative to net exports, government spending or even
    investment.
    Chinese Export and Import Growth

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Source: Bloomberg; Bear, Stearns & Co. Inc.
        China has a large bilateral trade surplus with the U.S. Using U.S
    data, it was $117 billion in the twelve months through August. Using
    China's data (which treats trans-shipments through Hong Kong
    differently), China's bilateral trade surplus with the U.S. was $52
    billion. Under both measures, new records were set in July and August.
    U.S. Trade Balance with China, 12-Month Moving Sum

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: Bloomberg; Bear, Stearns & Co. Inc.

        On a global basis, China's 12-month overall trade surplus has
    fallen to $20 billion from $45 billion in 1998. This puts the trade
    surplus at 1.6% of GDP, versus a U.S. trade deficit approaching 5% of
    GDP. Excluding China's surplus with the U.S. from its trade balance
    leaves China with a $32 billion trade deficit with the rest of the
    world.
    China's Trade Surplus, 12-Month Moving Sum

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: Bloomberg; Bear, Stearns & Co. Inc.

          The 12-month rolling sum of China's pledged FDI reached a
    new all-time high at $96.6 billion in September, with the single-month
    sum alone at fully $11.7 billion. FDI thus appears set to remain a key
    source of growth and of private employment gains (supporting incomes
    and consumption) in 2004.
    China: Pledged Foreign Direct Investment (12-month Rolling Sum, US$
            billion)

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: Bloomberg; Bear, Stearns & Co. Inc.

        With the US and G-7 placing increasing pressure for a change in the
    exchange rate regime, the markets are weighing the likelihood of a
    Chinese float. This process can be seen in the 12-month non-deliverable
    forward market for China's yuan currency.

          Yuan NDFs are effectively a play on the direction of the
    currency. Upon maturity, the contract is settled in U.S. dollars, not
    yuan. The contract does not cause any actual cross-currency capital
    flows and therefore doesn't have a direct effect on China's economy.
          The 12-month NDF is currently at 7.9092 yuan per U.S.
    dollar, as compared with the 8.28 yuan/$ spot exchange rate. This means
    that the market is effectively pricing a 4.4% appreciation of the
    Chinese currency on a 12-month time frame. This is known as a
    ``premium'' for the yuan.
          While NDF volumes are not large by international currency
    standards, the magnitude of the NDF premium means that sizable
    investments are being made on the possibility that China will be
    pressured into allowing the NDF yuan to strengthen.
          The NDF premium has receded somewhat since mid-October,
    when Treasury Secretary Snow suggested that the Chinese cannot ``go
    there tomorrow'' on a major exchange rate adjustment, and acknowledged
    that intermediate steps ``like reducing capital controls'' would likely
    have to be taken first.
    Chinese Yuan: 12-month Nondeliverable Forward

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: Bloomberg; Bear, Stearns & Co. Inc.
    China's Monetary Policy
        China's monetary policy is its fixed exchange rate rule at 8.27
    yuan per dollar. Rather than setting interest rates or a money supply
    growth rate, it sets the dollar/yuan exchange rate. The tools to
    implement that rule include capital controls and currency intervention.
        China has a balance of payments surplus, thanks not so much to its
    modest trade surplus but to its sizeable capital account surplus. FDI
    flows are one example of that sharp capital inflow, which has fueled a
    rise in international reserves in recent years.
        The balance of payments surplus has increased the monetary base in
    China, which rose by 42% in the twelve months through June 2003. There
    is a difference between a currency board and a fixed exchange rate. In
    a currency board, the monetary base expands and contracts with foreign
    exchange reserves. The central bank usually does not hold many domestic
    assets on its balance sheet. All foreign flows in a currency board are
    unsterilized, meaning increases in international reserves are matched
    by increases in the monetary base.
        The People's Bank of China (PBoC) has been only partially
    sterilizing its capital inflows. That means that, over that time, the
    share of foreign reserves backing the monetary base has risen from
    about 40% to 63%. If China were running a currency board, foreign
    exchange reserves would be roughly equal to the monetary base.

          Over the 12 months ending in June 2003, foreign exchange
    reserves on the PBoC's balance sheet rose by $103 billion, while the
    monetary base has increased by $33 billion. This might be phrased as
    32% unsterilized, 68% sterilized.
    Foreign Exchange Reserves (Percent of Monetary Base)

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: Bloomberg; Bear, Stearns & Co. Inc.

        The combination of strong capital inflows and incomplete
    sterilization has left China's monetary base growing rapidly.

          Broad money, M2, rose 20.7% year-over-year in September,
    having risen 2.9 trillion yuan (US$345 billion) from December. By
    contrast, nominal GDP in the first three quarters was up ``only'' 10.4%
    vs. the same period in 2002.

        The rapid buildup in bank lending continues to raise official
    concerns over financial system asset quality.

          September's 23.5% credit growth was only marginally
    slower than August's 23.9%. This doesn't show much impact thus far from
    the September People's Bank of China's (PBoC) one-percentage-point
    increase (to 7%) in the reserve requirement ratio for commercial banks.
    China: Total Bank Lending

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: CEIC; Bear, Stearns & Co. Inc.

          Chinese banks' credit modeling remains underdeveloped and
    banks still face regulatory and structural constraints on their ability
    to price risk.
          We think policymakers may place additional restraints on
    the expansion or availability of credit in coming months, likely
    through additional hikes in the reserve requirement ratios or through
    ``administrative guidance.''
    China: Banks' Required Reserve Ratio

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: CEIC; Bear, Stearns & Co. Inc.
    Revaluation Would Be Harmful
        Floating the yuan is a monetary policy decision that is fraught
    with risks to the financial sector and economy. China's commerce
    minister, Lu Fuyuan, told a group of European trade ministers in July
    that ``China's major task at present is to maintain stable economic
    growth.'' We don't think this would be possible if the yuan were
    floating and therefore volatile.

          A material revaluation could restart China's deflation,
    undercutting consumption and ironically slowing China's booming import
    growth.
          A revaluation would complicate the task of state-sector
    downsizing and increase the already-high levels of bad debt in the
    state-owned banks.
          By depressing the yuan price of agricultural commodities,
    a stronger currency might slow China's rural economy and accelerate its
    already-rapid urbanization.

        Even if a revaluation were ``successful,'' it could cause China to
    build an investment bubble, just as Japan did in the 1980s under the
    strong-yen policy. Of even more concern, a Chinese revaluation trend
    would increase the pace of investment and job creation into China as it
    did to Japan in the late 1980s and the U.S. in the late 1990s. This
    would draw additional investment and capital away from other countries.
    China would use the faster capital inflow to upgrade the size and
    quality of its export base, again along the lines of Japan's experience
    in the 1980s, further enhancing its productive capacity and efficiency.
    Jobs
        I think China should be viewed as a competitiveness issue in the
    context of the long-term U.S. trend away from manufacturing. The
    theories of relative comparative advantage are some of the strongest in
    economics, arguing that flexible economies which allow resources to
    shift to higher value-added portions of the economy will benefit.

          On a relative basis, the loss of manufacturing jobs has
    been a consistent trend for over 50 years, including job losses to
    Japan, Korea and Taiwan.
          The U.S. nonetheless remained the leader in job growth in
    the developed world in those years.
          Like the U.S., China has also been losing manufacturing
    jobs recently as the world economy evolves.
    Manufacturing Employment as Percentage of Total Employment

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: Haver; Bear, Stearns & Co. Inc.

    From a more near-term perspective, weak U.S. job growth has been
    consistent with other indicators of business caution--inventory
    depletion and relatively cautious business investment.

          Firms have been generally caught off guard by the
    strength of demand. The result was a sharp, we think undesired, decline
    in inventories in the second quarter, down $17.6 billion (in 1996
    dollars). This subtracted 0.7 percentage point from overall Q2 growth.
          The ratio of inventories to sales has remained around its
    all-time low. As demand pressures on businesses grow, we expect that
    inventories will rise.
    Ratio of Inventories to Sales

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: Haver; Bear Stearns & Co., Inc.

          Inventory turnover increases when inventories are low.
    Similarly, productivity increases when job growth is slow. In effect,
    businesses worked their inventory and their employees hard in the
    second quarter because they underestimated their sales.
          This created strong profit growth in the second quarter
    and should lead to substantially faster U.S. production in the second
    half (to stop the inventory drawdown). Robust job growth should start
    in 2004.
    Relationship Between Inventories and Employment

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Source: Haver; Bear Stearns & Co., Inc.

        Mr. PORTMAN. Thank you, Mr. Malpass. Mr. Jarrett.

      STATEMENT OF JAMES W. JARRETT, PAST PRESIDENT, INTEL CHINA
    LTD., BEIJING, CHINA, AND VICE PRESIDENT, WORLDWIDE GOVERNMENT
          AFFAIRS, INTEL CORPORATION, SANTA CLARA, CALIFORNIA

        Mr. JARRETT. Good morning. I am here on behalf of Intel. We
    are the world's largest semiconductor company, based in Santa
    Clara, California. We make chips for computers and cell phones
    and telecommunications equipment. Sales last year were almost
    $27 billion.
        China has become a very important market for the
    semiconductor industry. Chips are our number two export to
    China, and it is their number one import from the United
    States, and it is now the second largest market in the world
    for personal computers. It is the largest market for cell
    phones. When I came to China in 1996, there were about 60,000
    Internet subscribers at that point. Beginning this year, there
    were 60 million, so quite a change going on.
        Our operations in China consist of sales and marketing, of
    course, but then also we are taking chips there. We have an
    assembly and test operation there, where we are taking chips
    that are manufactured in the United States and in Israel and in
    Europe and then we are putting them into packages and testing
    them before shipping them off to our customers. This is a
    function that has been offshore for about 30 years in the chip
    industry.
        We also do software and research and development in China,
    because China has an abundant supply of well-trained electrical
    engineers.
        China's record, in terms of the WTO so far, in our view, we
    would characterize it as a mixed record. They signed the
    information technology agreement, which is a good thing. They
    have eliminated tariffs on their information technology
    products. They signed the Trade-Related Investment Measures
    (TRIMs) accord and have taken away any contingencies on
    investment in China, which is a good thing. They signed the
    TRIMs accord and have changed their laws in very substantial
    ways to protect intellectual property. The enforcement of those
    laws is still kind of a patchy thing, so that is something to
    look at.
        One thing that is a problem for us, there is a
    discriminatory VAT in China on semiconductors. If you bring a
    chip into China, you pay a 17-percent VAT. If you make it and
    design it in China, you pay a 3-percent VAT. In the opinion of
    the Semiconductor Industry Association, that is a violation of
    Article III of the General Agreement on Tariffs and Trade
    (GATT), so that is something we are working on.
        In addition to being a big market, China is also working
    hard to become a competitor in chips. There is a lot of money
    to build chip factories in China right now, and so we need to
    look at how do we compete with China over the long term in this
    market. We think there are five answers to that question.
        Number one, tax policy, and we know you are working very
    hard right now on a couple of things that are very important to
    us. That is the FSC successor, and the taxation on foreign
    income is very critical to us. I would like to see the research
    and development tax credit extended, and we hope you will look
    also at some additional incentives that will be needed over the
    long term to really keep America competitive as a manufacturing
    place in high technology.
        Second, the Federal funding of research and development is
    something that is very important, particularly in the basic
    sciences, the basic research and physical sciences. This is an
    area that the Federal government has always been the lead
    player in, and in recent years the growth has really not been
    what it should have been, so we hope you will take a look at
    making a commitment to keep that commitment to research and
    development moving up.
        Third, K through 12 education system is something that we
    are all going to need to look at in the United States, with
    particular emphasis on math and science. Our students simply
    aren't measuring up in math and science. We need a lot of well-
    trained people in math and science.
        Fourth, we hope you will maintain a posture avoiding any
    protectionism. We really benefit from open markets, and we hope
    that we will continue to have that.
        Finally, we really need to drive productivity. That is the
    real answer for us long term. We cannot compete on the basis of
    wages. We are going to have to compete on the basis of
    productivity. Thank you very much.
        [The prepared statement of Mr. Jarrett follows:]
       Statement of James W. Jarrett, Past President, Intel China Ltd.,
    Beijing, China, and Vice President, Worldwide Government Affairs, Intel
                      Corporation, Santa Clara, California
        My name is James W. Jarrett and I am vice president of worldwide
    government affairs for Intel Corporation, Santa Clara, California.
    Prior to my current position, I was president of Intel China Ltd.,
    based in Beijing.
        Intel is the world's largest manufacturer of semiconductors, with
    sales in 2002 of $26 billion. We employ 79,000 people worldwide. About
    60% of our employees are based in the United States.
        Our products serve as the electronic brains of personal computers,
    servers, mobile phones, network equipment and many other products. Asia
    now accounts for half our sales, with Europe and The Americas
    representing roughly 25% each. The United States is our largest country
    market, followed by China, which recently surpassed Japan to become the
    second largest market for personal computers. China is also the largest
    market for mobile phones.
        Due to the rapid rate of technological progress, Intel must invest
    heavily in new factories, and in research and development. During 2001-
    2002, the steepest downturn in the history of our industry, we invested
    $19.8 billion in these two categories. We continue to invest in the
    United States. Four of the world's newest and most advanced chip
    factories, for example, are Intel plants in the U.S. These factories
    together represent investments of approximately $8 billion.
    Intel In China

        As noted, China is a large and fast-growing market for Intel chips.
    It is both a major consumption market and an export location to other
    countries. In addition to selling to China, we are now performing a
    portion of our assembly and testing in that nation. We opened a chip
    assembly and test operation in Shanghai in 1998, and we recently
    announced plans to locate a second such facility in Chengdu, China.
    These facilities take chips fabricated at Intel factories located in
    the U.S., Ireland and Israel, and put them into packages and test them
    before final shipment to our customers worldwide. This assembly/test
    function has been almost entirely outside the United States for the
    past 30 years.
        In addition, Intel is doing engineering work in China. We have a
    software lab in Shanghai and an R&D center in Beijing. These labs are
    part of a worldwide network of Intel Labs. China is attractive in part
    because it is now graduating substantially more electrical engineers
    than the U.S. Three other notes: 1) the number of electrical engineers
    graduating in the U.S. is declining, 2) about half the Ph.D. candidates
    in the sciences in U.S. universities are foreign born, and 3) once they
    graduate, we are sending more of those newly minted Ph.D.s back to
    their countries because the number of H1B visas available has now
    dropped substantially.
    China's Compliance With WTO Requirements

        China's compliance with WTO requirements has been mixed from the
    standpoint of the semiconductor industry. On the positive side, China
    has signed the Information Technology Agreement and eliminated tariffs
    on imported semiconductor devices. The nation is also a signatory to
    the TRIMS accord and seems to be meeting that treaty's requirements not
    to make approvals of foreign direct investment contingent upon export
    requirements, technology transfers and similar contingencies. In the
    area of intellectual property protection, China has signed on to the
    TRIPS accord and has been revising its laws accordingly. Concerns
    remain about enforcement of such laws, but it is clear China is working
    to improve.
        On the negative side, China has a Value-Added Tax that treats
    imported and domestically made chips differently. An imported chip is
    taxed at 17%; a domestic chip is taxed at 3% after rebates. The
    Semiconductor Industry Association believes this is a violation of
    Article III of GATT, which prohibits discriminatory treatment based on
    a product's country of origin. SIA has raised this matter with the U.S.
    and Chinese governments and we are hopeful the problem can be resolved.
    Competing In a Changed World

        Intel is concerned about keeping America a strong and innovative
    competitor in the high technology markets of the future. We believe
    there are several public policy changes that can help make this happen.
    They are generally not short-term remedies because the problems we
    address are fundamental ones that do not lend themselves to quick
    fixes.
        The first change we recommend is not a policy change itself, but
    rather a recognition by policy makers that America now competes in a
    changed world. Twenty years ago, China, India and Russia, with a total
    population of 2.5 billion people, were not participants in high tech;
    today they are eager and successful players. Thanks to the Internet, it
    is now possible to locate a research lab anywhere and manage it as if
    it were next door. Thanks to global free trade, it is now possible to
    take a microprocessor from the U.S., memory chips from Korea, a disk
    drive from Singapore and a monitor from Taiwan and turn them into a
    personal computer that can be assembled in China, Malaysia, and dozens
    of other countries. It is in short a different world and our policies
    need to reflect that.
        Second, we recommend changes in U.S. tax laws to make the U.S. more
    competitive as a manufacturing location. We specifically recommend:

        1.  Make the R&D tax credit permanent and enhance it. Intel, like
    many high tech companies, spends heavily to develop new products and
    technologies. This year, for example, we will spend about $4 billion to
    keep our technology pipeline full of innovations that will provide the
    basis for the jobs of the future at our company. America's leadership
    in high tech is one of our great strengths, and the R&D tax credit is
    an effective way to help sustain it.
        2.  Make it feasible and cost effective for U.S. multinational
    companies to put to use in the U.S. earnings from offshore operations.
    Due to the structure of U.S. tax laws, there is an unfavorable economic
    penalty to bringing money back from overseas locations. Under current
    rules, even a loan of such funds for use in the U.S. will reduce those
    funds by 35%. We know the Committee is wrestling with this problem in
    the context of legislation to enact a WTO-compliant successor to the
    FSC/ETI provisions. In the short term, as a temporary solution to this
    problem, and as a strong growth catalyst for the U.S. economy, we urge
    passage of the Homeland Investment Act (HR 767 and S. 596) to prompt
    the move of an estimated $300 billion in cash from overseas operations
    into U.S. accounts.
        3.  Consider new tax measures to incentivize investment in new
    factories and equipment, job training and job creation. American
    corporations are visited daily by foreign governments offering rich
    packages of incentives. For example, countries are offering investment
    tax credits for capital investments, an incentive America ended in
    1986.

        Third, we recommend the Federal Government commit to increasing its
    funding of basic research and development in the physical sciences. The
    Government has traditionally been the primary source of funds for basic
    research conducted at the nation's universities, research institutes
    and national laboratories. These investments complement the work of
    corporations, which tend to concentrate on applied research and
    development. This tandem of public and private funding has produced a
    myriad of advances and a strong corps of highly trained people. In
    recent years, Federal funding for the life sciences has grown at a
    faster rate than the physical sciences. We believe it is important not
    to under-fund the physical sciences.
        Fourth, we recommend increased emphasis on fixing our K-12
    education system, with a special focus on improved math and science
    education. Our students simply don't measure up well in math and
    science versus students in other countries. The high tech workforce of
    the 21st century must be able to handle these disciplines well. For
    anyone interested in public policy measures to address math and science
    education problems in the U.S., I would refer you to the
    recommendations of the National Commission on Mathematics and Science
    Teaching for the 21st Century, headed by former Senator John Glenn.
        Fifth, we must not back away from free trade. Past trade
    developments and liberalization in the information and communications
    technology industries have benefited consumers and the U.S. economy:

          Imports and exports currently equal over 50 percent of
    the value-added to ICT products. This figure is far higher than in the
    broader economy and has been rising for decades.
          These trade linkages have fostered the production and use
    of ICT products and strengthened U.S. ICT industries.
          Furthermore, the acceleration since 1995 in quality
    improvements and price declines in many ICT products coincides with
    three major WTO agreements of direct relevance to ICT producers: the
    1995 TRIPS Agreement, the 1997 Information Technology Agreement and the
    1997 Basic Telecommunications Agreement.

        The positive role that trade liberalization has played in the
    development and growth of ICT products should be maintained and
    expanded.
        America's competitive fitness will be tested in coming years as
    China and other emerging nations continue to develop. It is clear we
    can't compete with these nations on wages. Instead, we need to continue
    growing labor productivity. U.S. Government data show a sharp increase
    in U.S. labor productivity in the second half of the 1990's, due
    largely to the nation's heavy investments in ICT. Productivity growth
    can be a powerful tool in keeping the U.S. competitive.
        In summary, we believe America can continue to be a leader in high
    technology if we start with a recognition we're in a more competitive
    world, reject a retreat into protectionist measures, and get on with
    doing the things that will keep us strong.
        Thank you for the opportunity to appear before you today.

        Mr. PORTMAN. Thank you, Mr. Jarrett. Mr. O'Hagan.

     STATEMENT OF MALCOLM O'HAGAN, PRESIDENT, NATIONAL ELECTRICAL
              MANUFACTURERS ASSOCIATION, ROSSLYN, VIRGINIA

        Mr. O'HAGAN. Good morning, Mr. Chairman, distinguished
    Members of the Committee. My name is Malcolm O'Hagan. I am
    President of NEMA.
        We are the largest trade association representing the
    interests of electrical equipment manufacturers in the United
    States. Our sales exceed $120 billion. The 400 member companies
    of NEMA manufacture products used in the generation
    transmission distribution control and use of electricity. These
    products are used in the utility, industrial, commercial,
    institutional and residential markets. The association's
    Medical Products Division represents manufacturers of medical
    diagnostic imaging equipment, including magnetic resonance
    imaging (MRIs), CTs, x-rays, ultrasound, and nuclear products.
        Mr. Chairman, China is the single biggest factor
    influencing our members' business these days. A few years ago,
    I asked members of our board if any of them had recently been
    to China, and I got blank stares. In the spring when I asked
    the question, just about every hand in the room went up.
        Our board has approved a major China initiative for NEMA to
    help China deal with the new opportunities and challenges. As
    part of our China initiative, we will be opening an office in
    Beijing, with support from the Department of Commerce to a
    cooperative agreement in the form of a matching grant of almost
    $400,000. We are very grateful for this support from our
    government, and we look forward to working with U.S. officials,
    both here and in China, in advancing the interests of our
    industry under the very capable men and women who we employ.
        Mr. Chairman, for our industry, China is a two-way street.
    It offers great opportunity, but it also raises substantial
    concerns and challenges.
        Let me touch on the concerns first. We have major concerns
    relating to IPRs and counterfeiting. We have already
    encountered a number of counterfeit products as well as patent
    and trademark violations. We are concerned that Beijing's new
    product certification requirements would raise non-tariff
    barriers by adding costs or delaying market access.
        We have concerns about subsidized products coming into this
    country, putting domestic producers at an unfair competitive
    advantage. With China's accession to the WTO, we are optimistic
    that these concerns will be addressed promptly and that China
    will fully comply with WTO rules, but we intend to closely
    monitor their actions.
        China also represents great opportunities. There is
    enormous demand in China for the products that NEMA
    manufacturers make, from power generating equipment to medical
    technology. As Deputy Trade Representative Shiner noted in her
    remarks to the Committee yesterday, our member sales to China
    have gone up considerably in recent years. China is now our
    industry's number three export market. Moreover, we expect
    exports to continue increasing faster than any other foreign
    market. Fifty-eight percent of the respondents to a survey we
    conducted recently reported that they are selling product in
    China, and many have been doing so for years. Most expect the
    positive sales trend to continue.
        Direct investment in China by NEMA members continues to
    grow, in order to serve the needs of both the domestic market
    in China and the export market.
        In addition, China has become a valuable source of low-cost
    components and commodity products. Two-thirds of the
    respondents to our survey said they are already sourcing from
    China, and half of the rest said they soon planned to be.
        Sourcing low-cost components from China allows our members
    to remain competitive. Having commodity products manufactured
    in China allows our companies to offer these products to
    consumers at attractive prices. According to our survey, the
    mean landed cost of product source from China is 27 percent
    less than what it would cost to manufacture here.
        Finally, China poses a competitive threat to members of
    NEMA. Eighty-five percent of respondents to our survey said
    they are facing direct competition from Chinese manufacturers,
    and about 65 percent expect Chinese competition to increase
    significantly.
        Our industry, like others, welcomes fair competition.
    Chinese companies must play by the rules of the game and comply
    fully with the results of the WTO. We will be competitive in
    certain areas and not in others. It is easy to point the finger
    at the Chinese when we are not competitive, but, in fact, many
    of the problems are of our own making. We can manufacture
    products better than anyone.
        The productivity gains in the United States in recent years
    are phenomenal. Those making products is not the problem. The
    problem is the social costs that have been heaped upon
    manufacturers. The plaintiffs' bar has imposed enormous costs
    on manufacturers. Health insurance costs continue to drain more
    and more resources. Environmental, work safety, and our
    regulations add huge non-productive costs, and our tax code is
    punitive.
        Thankfully, under the current Administration, industry has
    finally won some tax relief, but more is needed. We cannot
    blame the Chinese for what I have just detailed. We have to
    face up to the reality that we will not be competitive, and we
    will continue to lose good manufacturing jobs to countries
    where these costs are not mandated.
        Now, Mr. Chairman, I thank you for conducting this hearing;
    and I thank you and your colleagues for giving NEMA the
    opportunity to offer these comments.
        [The prepared statement of Mr. O'Hagan follows:]
         Statement of Malcolm O'Hagan, President, National Electrical
                  Manufacturers Association, Rosslyn, Virginia
        NEMA, the National Electrical Manufacturers Association, is the
    largest trade association representing the interests of U.S. electrical
    industry manufacturers, whose worldwide annual sales of electrical
    products exceed $120 billion. Its mission is to improve the
    competitiveness of member companies by providing high quality services
    that impact positively on standards, government regulation and market
    economics. Our more than 400 member companies manufacture products used
    in the generation, transmission, distribution, control, and use of
    electricity. These products, by and large unregulated, are used in
    utility, industrial, commercial, institutional and residential
    installations. The Association's Medical Products Division represents
    manufacturers of medical diagnostic imaging equipment including MRI,
    CT, x-ray, ultrasound and nuclear products.
        The Commerce Department has just chosen NEMA as one of the winners
    of its 2003 Market Development Cooperator Program competition, and we
    are honored to be entering into a cooperative agreement with the
    International Trade Administration in support of our China-related
    activities. This follows on the decision by our Board of Governors last
    spring to launch a new electrical industry initiative to assist our
    members with all aspects of their China-related activities--and of
    course our members continue to be very interested in opportunities
    stemming from Beijing's accession to the World Trade Organization
    (WTO).
        To give you some background: Despite the high regard with which
    U.S. electrical products are often held abroad, our members often have
    trouble getting their products accepted into foreign markets on
    technical grounds and therefore feel that they need to play a greater
    role in helping other countries develop their electrical standards.
        This is certainly the case with China. NEMA staff has long worked
    with the Administration and Capitol Hill on China-related trade
    issues--and some NEMA members have excelled there. Yet we are well
    aware that foreign companies have generally had trouble succeeding in
    China, and feel that our role as a trade association is to help U.S.
    electrical manufacturers avoid the pitfalls.
        Nevertheless, U.S. electrical sales there have been growing rapidly
    in recent years to the point where the PRC and Hong Kong, when their
    figures are combined, has become our #3 ``national'' export market
    after Mexico and Canada. Little wonder that it is very much considered
    to be a market of even greater potential by our members--yet our
    exports could have grown much more were it not for a variety of tariff
    and non-tariff barriers.
        To give you some examples:

        Counterfeiting: Like numerous other sectors, the U.S. electrical
    industry continues to have fundamental, ongoing concerns about
    Intellectual Property protections in the People's Republic. Our members
    continue to be victimized by repeated, vast trademark infringement
    abuse. China has to keep on strengthening its anti-counterfeiting
    measures and enforcement.
        Potentially ``Subsidized'' Product Coming Into the U.S.: We have
    received reports from some of our members complaining about unfair
    competition from extremely low-priced Chinese electrical imports. Since
    the goods in question are frequently not labor-intensively produced,
    these member companies are concerned that the Chinese government may be
    subsidizing the purchase of raw materials and/or providing them below
    cost via state-owned enterprises. China has made WTO accession
    commitments regarding state-trading enterprises and subsidies; we trust
    the USG will join us in encouraging China to meet and keep those
    commitments, which include eliminating specific export subsidies and
    providing full information on the pricing mechanisms of its state
    trading enterprises for exported goods.
        The CCC Mark: The new China Compulsory Certification (CCC) mark is
    also of particular concern to our industry. The costs of compliance are
    exorbitant. Moreover, while Beijing committed upon entering the WTO to
    change its conformity assessment procedures so as to afford non-Chinese
    product ``national treatment'', for many electrical products with the
    CCC it has also moved to accept only goods built to either Chinese
    national standards or standards developed and published by the
    International Electrotechnical Commission (IEC) and International
    Standards Organization (ISO). (The latter still frequently does not
    include products built to U.S. requirements.) Since the end to the
    ``grace period'' for implementing the CCC only just ended on August 1,
    it still too early to judge how implementation is proceeding in
    practice--but the non-acknowledgement of North American-based
    international standards still remains.
        The introduction of the CCC was declared on December 7, 2001--just
    prior to China's WTO accession. As a result, WTO member governments did
    not have a chance to comment as per the WTO Treaty on Technical
    Barriers to Trade (TBT). While the streamlining of China's conformity
    assessment is welcome--especially if it really does lead to
    ``national'' treatment for U.S. electrical goods--it is clear that,
    unfortunately, that the Chinese have developed their technical
    requirements with precious little input from U.S. sources.
        As it happens, much still needs to be done on the CCC, since the
    Chinese have left a number of details outstanding or unavailable in
    English with regards to implementation, such as precise classification
    of which products are affected, exclusions, education of customs
    officials, what exactly is needed when applying for the mark, etc.
        Under these circumstances, the U.S. Government and NEMA need to be
    reaching out to Chinese authorities to expand the range of acceptable
    electrical norms, as well as better inform them about their standards
    and conformity assessment options in general. Under the auspices of our
    MDCP with the Commerce Department, we intend to begin working with the
    Chinese in this direction.
        Thank you for your consideration of these remarks.

        Mr. PORTMAN. Thank you, Mr. O'Hagan. I would like to turn
    to my colleague from Missouri, Mr. Hulshof.
        Mr. HULSHOF. Thank you, Mr. Chairman. I am privileged to
    introduce a fellow Missourian today who is presenting testimony
    on behalf of the American Farm Bureau Federation.
        As you know, Mr. Chairman, agriculture is one of the few
    U.S. sectors that enjoys a positive trade balance. I have known
    Charlie Kruse for many years. He has been a long-time family
    friend. He has been President of Missouri's Farm Bureau for 11
    years. He is known as a leader in agriculture not just in our
    home State of Missouri but across the country; and while I
    intended, Mr. Chairman, to ask him his opinion about the energy
    conference and ethanol bio-diesel, it is not the subject of
    today's hearing.
        He is, though, well-versed to speak on the subject matter
    today. Charlie has led several trade trips abroad, including
    China. Not only does he speak with authority, but he is, as I
    am, a family farmer, an active farmer. He is a fourth
    generation farmer, along with his wife Pam. He is not a
    constituent. He is actually Representative Jo Ann Emerson's
    constituent, but he is a friend, and I am privileged to
    introduce you and look forward to your testimony.

    STATEMENT OF CHARLES E. KRUSE, PRESIDENT, MISSOURI FARM BUREAU
      FEDERATION, JEFFERSON CITY, MISSOURI, AND MEMBER, BOARD OF
               DIRECTORS, AMERICAN FARM BUREAU FEDERATION

        Mr. KRUSE. Thank you very much, Congressman Hulshof. I am
    proud to call you my friend, and we have been friends a long
    time. Congressman Hulshof's father, Paul, was a good friend of
    mine. I know you miss him every day, and so do we.
        Mr. Chairman, thank you very much for the opportunity to
    speak to Members of the Committee on Ways and Means this
    morning. I am Charles Kruse. I am President of the Missouri
    Farm Bureau and serve on the Board of Directors of the American
    Farm Bureau. As Congressman Hulshof said, I am a fourth
    generation farmer, and that is where my passion lies. I
    appreciate this opportunity, and I commend this Committee for
    holding this hearing.
        The Farm Bureau has trade and economic concerns with China.
    Nevertheless, over the past couple of years, we found China
    overall to be a positive trading partner. This is very
    important because agriculture in the United States is
    increasingly dependent on foreign trade. We look to developing
    nation markets as the best targets for future trade growth; and
    we look particularly to growing markets in the Asia Pacific
    region, especially to China, as the area where both income and
    population growth will offer the greatest opportunities for
    future trade successes.
        As Congressman Hulshof stated, agriculture is in a unique
    position, enjoying over a billion dollars trade surplus with
    China. Since 1998, we registered strong gains in exports of
    soybeans, hides and skins, consumer-oriented products such as
    red meat, poultry meat, dairy products and fresh and processed
    fruit and vegetables.
        Total exports to China grew by more than 54 percent during
    this period. Conversely, imports of agricultural products from
    China since 1998 have grown but at a slower rate of 34 percent.
        To U.S. agriculture, China is a great opportunity, while,
    as other people testifying this morning have said, at the same
    time it is a substantial threat. In many respects, it is a
    developing country, yet it has become a dominant producer and a
    world-class exporter of many agricultural products.
        Combining the value of U.S. exports directly to China and
    its special administrative region, Hong Kong, with the value of
    U.S. exports already sold to other countries, Japan, Korea,
    Taiwan, and the Association of Southeast Asian Nations, where
    China is pursuing bilateral trade agreements, it is easy to see
    that China has the ability to strongly affect more than $16
    billion annually of U.S. agriculture exports. That is more than
    29 percent of our total exports and roughly equivalent to the
    total exports with our North American Free Trade Agreement
    (NAFTA) trading partners, Canada and Mexico, so I think we can
    see very quickly that China has a lot of issues for all of us.
    Certainly agriculture is no exception.
        With regard to monetary policy, certainly more explicit
    testimony has already been provided to the Committee that I
    will not duplicate. We strongly support efforts that urge China
    to reform its monetary policy in a manner that results in a
    gradual but deliberate adjustment to market-driven principles.
        Although U.S. agricultural exports to China have increased
    since 1998, China still maintains barriers to imports of many
    U.S. agriculture products. The most obvious of these barriers
    is the manner in which China has implemented its system of
    TRQs. It almost seems that China imposes some trade
    restrictions based on their need for certain products. When
    they have a strong need in their country, they do not raise as
    many red flags, so to speak, as perhaps when their domestic
    supplies are available to their people.
        Again, our view is that the United States should not
    hesitate, as a last resort and as a necessary resort, with its
    monetary policy or TRQs or whatever, to impose and use trade
    remedy tools if that becomes necessary.
        Another issue I want to quickly mention is the whole issue
    of SPS violations. This is an issue where countries of the
    European Union become masters of raising SPS concerns, and
    China has done so with soybeans in the terms of genetically
    enhanced crops that we try to sell there, as well as an issue,
    Congressman Hulshof, that we are very familiar with in the area
    of Missouri where we farm, Phytopthera Root Rot, they raised
    that as a concern. We think that is pretty invalid, but
    nevertheless, they did.
        I would just--in summary, Mr. Chairman, Members of the
    Committee, I would applaud you for holding this hearing. I
    think it is vitally important that we continue to keep before
    the American people as well as the Chinese the importance of
    fair and free and open trade with China.
        In 1994, China had roughly 100 million people that were
    considered middle class, that had the wherewithal to make
    purchases that they chose. By 1996, that number had reached 350
    million people; and by the year 2006 it is projected that that
    number will be over half a billion people. I think that right
    there demonstrates the potential we have in trade with China.
        I thank you for this opportunity, and I look forward to
    answering any questions you may have.
        [The prepared statement of Mr. Kruse follows:]
        Statement of Charles E. Kruse, President, Missouri Farm Bureau
     Federation, Jefferson City, Missouri, and Member, Board of Directors,
                        American Farm Bureau Federation
        Thank you Mr. Chairman, members of the Committee, I am Charles E.
    Kruse, President of the Missouri Farm Bureau Federation, a member of
    the Board of Directors of the American Farm Bureau Federation, and a
    corn, wheat, soybean and cotton producer from Dexter, Missouri. It's my
    pleasure to appear before you today to give the views of the AFBF on
    U.S.-China economic issues, which focus mainly on trade in agricultural
    products.
        AFBF has trade and economic concerns with China. Nevertheless, in
    the past couple of years AFBF has found the Chinese overall to be
    constructive trade partners. This is important because, as the charts
    in the appendix to this statement demonstrate, U.S. agriculture:

          is increasingly dependent on foreign trade,
          looks to developing nation markets as the best targets
    for future trade growth,
          and looks particularly to growing markets in the Asia-
    Pacific region, especially to China, as the area where both income and
    population growth will offer the greatest opportunities for future
    trade success.

        The U.S. enjoys an agricultural trade surplus with China of more
    than $1 billion.[1] Since 1998, the U.S. has registered
    strong gains in exports of soybeans, hides & skins, and consumer-
    oriented products such as red meat, poultry meat, dairy products, and
    fresh and processed fruits & vegetables. Total U.S. agricultural
    exports to China grew by more than 54 percent during this period.
    ---------------------------------------------------------------------------
        \[1]\ U.S. Bureau of Census Trade Data/USDA-FAS BICO, CY2002.
    ---------------------------------------------------------------------------
        Conversely, imports of agricultural products from China since 1998
    have grown, but at a slower rate of 34 percent. China made significant
    gains into the U.S. market for intermediate and consumer-oriented
    products such as fresh and processed fruits and vegetables including
    juices, nursery products, and miscellaneous high-value products.
        To U.S. agriculture, China is a great opportunity while at the same
    time it's a substantial threat. In many respects it is a developing
    country, yet, it has become a dominant producer and a world-class
    exporter of many agricultural products, including corn, vegetables,
    fruits & nuts, soybean meal, pork, sugar and confections, food
    ingredients, and rice. Moreover, it has established or is in the
    process of establishing preferential or free trade agreements with
    several current and very important customers of U.S. agricultural
    products in the Asia-Pacific region, including Japan, Korea, Taiwan,
    and the ASEAN countries.
        Combining the value of U.S. exports directly to China and its
    Special Administrative Region, Hong Kong, with the value of U.S.
    agricultural exports already sold to these preferred trade partner
    countries, it's easy to see that China has the ability to strongly
    affect more than $16 billion of annual U.S agricultural
    exports;[2] more than 29 percent of the U.S. total. This is
    an amount roughly equivalent to the total annual value of U.S.
    agricultural exports to our NAFTA partners, Canada and Mexico, and does
    not take into consideration the effect of China's imports on domestic
    U.S. markets and production. Without question, China is a market with
    which the U.S. must be strenuously engaged on economic and trade issues
    for many years to come.
    ---------------------------------------------------------------------------
        \[2]\ Sum of the value of total U.S. agricultural exports to Japan,
    Korea, Taiwan and ASEAN-10 divided by the total value of U.S.
    agricultural exports to all countries in 2002; USDA/FAS BICO.
    ---------------------------------------------------------------------------
    SPECIFIC ISSUES THAT NEED VERY CLOSE ATTENTION

        China has made considerable progress towards trade liberalization,
    which is in stark contrast to that of a similarly large population,
    developing country that has been a member of the WTO for a far longer
    time, India. However China still has a considerable distance to go to
    be in full WTO compliance, which is why these annual reviews are so
    important.
    Monetary Policy

        China's monetary policy has a significant and, at the moment,
    negative impact on U.S. agriculture by increasing the landed price of
    U.S. exports while decreasing landed prices of Chinese imports relative
    to what would be expected from market signals. Much has been made of
    this issue by other business organizations and economists, and more
    explicit testimony has already been provided to the Committee that I
    won't duplicate. AFBF strongly supports efforts that urge China to
    reform its monetary policy in a manner that results in a gradual but
    deliberate adjustment to market-driven principles. AFBF hopes this can
    be accomplished through negotiation however, failing that, AFBF
    supports imposition of import duties on Chinese products if it is
    determined that China's system of monetary management is non-compliant
    with its obligations as a member of the WTO.
    Market Access Barriers

        Although U.S. agricultural exports to China have increased since
    1998, China still maintains significant barriers to further imports of
    many U.S. agricultural products. AFBF has noted the irony with which
    many of China's import barriers are used seemingly for the purpose of
    limiting access to its market at times when domestic supplies are
    plentiful and import adjustments are needed to protect the value of
    domestic production.
        The most obvious of these barriers is the manner in which China has
    implemented its system of tariff rate quotas (TRQs). Implementation of
    the TRQs has been only semi-transparent, has restricted the manner in
    which products imported under quota may be marketed in China, has
    required some in-quota imports to be re-exported to third countries,
    and has made importing U.S. products difficult for Chinese buyers by
    allocating quotas in such small quantities that purchases could not be
    made in commercially viable amounts. The Chinese were also months late
    in announcing the TRQs.
        Notwithstanding the efforts of the President and the Office of the
    U.S. Trade Representative to negotiate reform in TRQ administration,
    progress has been slow. The Chinese have proposed changes that would
    address a few U.S. concerns including a plan to drop allocating quotas
    between ``general traders'' and the ``processing trade''. But many of
    the problems continue to exist. Should reasonable negotiation to bring
    further reform fail, the U.S. has clear grounds upon which to file a
    WTO complaint and prevail in a formal dispute settlement proceeding.
    The U.S. should not hesitate to use this trade remedy tool if necessary
    to preserve or enhance U.S. trading rights.
        Another less transparent but equally effective barrier to further
    market access is the use of sanitary and phytosanitary (SPS)
    ``violations'' to block the unloading of cargoes that are alleged to
    have failed China's SPS import protocols. The most recent example is
    China's sudden imposition of vague rules regarding the import of
    genetically modified soybeans. Citing unknown health and environmental
    hazards, China pronounced with little advance notice that it would not
    accept genetically modified soybeans unless or until each genetically
    modified soybean ``event'' had been approved by the Chinese government,
    and then only after considerable testing and evaluation.
        Through the efforts of the President, the Office of the U.S. Trade
    Representative, the USDA, the Dept. of State, the Congress and the U.S.
    agricultural industry, China agreed to an interim protocol that
    eventually allowed imports of soybeans from the U.S. to continue while
    it completes construction of its permanent approval system in early
    2004.
        SPS was the basis this summer of another claim by the China
    quarantine agency, which made a list containing several U.S. soybean
    exporters who had allegedly violated China's phytosanitary import
    standards. The agency threatened to halt soybean imports from companies
    on the list. Again, the Office of the U.S. Trade Representative, the
    USDA, the Congress and U.S. agriculture commenced bi-lateral
    negotiations with the Chinese to resolve issues and keep trade flowing.
    Efforts continue at a technical level to resolve outstanding issues,
    but the situation illustrates China's inconsistent and arbitrary
    enforcement of its own import regulations. The regulations upon which
    this dispute is based had not previously been enforced and, in fact,
    had been deliberately overlooked by Chinese officials for a
    considerable period of time.
        And finally Mr. Chairman, it's very important that U.S. trade
    remedy tools be more effective in addressing disruption to the U.S.
    market caused by significant increases in imports of lower-priced
    agricultural products from China. AFBF recognizes that trade remedy
    tools such as countervailing duties and antidumping measures are
    intended to allow domestic producers the opportunity to adjust to
    import competition. But their application to China, as a Non Market
    Economy, has failed to bring needed and justified relief to certain
    import sensitive agricultural sectors.
        For example, the U.S. apple industry has been severely affected by
    rapid increases in imports of apple juice concentrate (AJC). From 1995
    to 1998, imports of AJC from China increased an astounding 2000 percent
    as the imported price of AJC from China decreased 53 percent from
    $7.65/gallon to $3.57/gallon. Consequently, China's share of the U.S.
    market increased rapidly from one percent in 1995 to 18 percent in
    1998. While I am not totally familiar with the apple market myself Mr.
    Chairman, I am told that juice apples set the floor for the entire
    apple industry. Thus actions by the Chinese dropped the price of all
    apples in the United States.
        Using U.S. trade laws in response, the U.S. apple industry went to
    the Department of Commerce and the International Trade Commission. Both
    found the apple juice industry had suffered economic damage and levied
    antidumping duties.
        However, the Chinese appealed these duties. On a remand from the
    Court of International Trade, the Department of Commerce changed their
    methodology, ultimately reducing the level of the antidumping duty to
    the point that Chinese apple juice is once more entering the U.S.
    marketplace, building market share and causing economic damage to the
    U.S. apple industry. Understandably, U.S. apple producers have lost
    faith in the process.
        It is absolutely essential, Mr. Chairman, that agencies which
    administer trade remedy and compliance laws in the U.S. must be
    vigorous in their defense of U.S. industries and businesses against
    unfair trading practices. This is especially true when administering
    trade remedy laws in defense of unfair trading practices undertaken by
    Non-Market Economy countries such as China.
        Thank you for the opportunity to present our views on this vitally
    important topic. I look forward to answering any questions that you and
    members of the Committee may have.
                                     ______

                                  APPENDIX I:
    The Importance of Trade With China and Asia to the Economic Vitality of
                                U.S. Agriculture

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Mr. PORTMAN. Thank you, Mr. Kruse. Mr. Papovich.

          STATEMENT OF JOSEPH PAPOVICH, SENIOR VICE PRESIDENT
        INTERNATIONAL, RECORDING INDUSTRY ASSOCIATION OF AMERICA

        Mr. PAPOVICH. Thank you, Mr. Chairman and Members of the
    Committee. On behalf of the Recording Industry Association of
    America, I appreciate the opportunity to testify today, and I
    have submitted my full testimony for the record.
        Foreign sales account for over 50 percent of the revenues
    of the U.S. record industry, so we are very dependent on access
    to other markets and to being able to limit the piracy of our
    products in other countries. We share our problems in China
    with other U.S.-copyright-based industries which, together with
    us, account for over 5 percent of the U.S. GDP. Our industries
    have been involved in IPR negotiations between the United
    States and China since 1992. The special section 301
    negotiations in 1995 and 1996 resulted in agreements obligating
    China to close factories producing and exporting pirate optical
    discs all over the world.
        Today, despite China's various commitments and efforts, we
    face four related problems.
        First, Chinese factories in the past, as I said, produced
    and exported huge quantities of pirated compact discs (CDs).
    This was stopped by the 1996 agreement. It is resuming, and we
    are now finding pirated Chinese CDs entering our major markets
    all over the world.
        Second, the Chinese market remains almost entirely pirate,
    despite thousands of raids and tens of millions of CDs seized
    annually by the Chinese, in part because the penalties that
    they impose are just too small. Pirated music sales continue to
    exceed half a billion dollars a year in China, and the market
    is over 90 percent pirated product.
        Third, Internet and broadcast piracy are rapidly growing in
    China.
        Fourth, market access and investment barriers of the
    Chinese prevent our members from serving China in a timely
    manner, which perversely increases the demand in China for
    pirated product.
        China must but has not taken steps to effectively address
    these problems. We were recommending the following:
        First, a high-visibility nationwide campaign in China
    against piracy, led by a vice premier that Chinese enforcers
    take seriously. A problem has consistently been that the
    enforcers do not take these efforts seriously.
        Second, China's administrative finds upon which they now
    rely are too low to deter anyone. They should be raised
    significantly.
        Third, and more importantly, China must criminally
    prosecute pirate traders, producers, and distributors. Today
    China does not, in part because their criminal law discourages
    prosecutions. For example, their law permits criminal
    investigations only if the pirate that has been caught has
    documented revenues or profits that exceed specified levels.
        Revenue is defined as goods already sold. A warehouse full
    of unsold pirated goods is not counted. Pirates, of course,
    keep no records, so that revenue or profits cannot be
    determined. Their law has to be made more realistic, and we are
    pushing hard for this.
        In addition, Chinese customs, when they do seize pirated
    product, refuses to refer seizures, no matter how large, for
    criminal prosecutions. This relates directly to the surge in
    pirated Chinese exports that we are experiencing. Criminal
    prosecutions have and should occur against large Customs
    seizures.
        The WTO TRIPS agreement requires China to provide deterrent
    penalties against piracy. To date, China has not done so.
        Finally, to combat piracy, China must also liberalize its
    market access and investment barriers. China's regulatory
    procedures make it difficult for our companies to establish and
    operate. My full testimony describes this in detail. I will
    provide two examples.
        First, Chinese government censors are required to approve
    the content of foreign-produced recordings before release but
    not domestically made Chinese recordings. China should
    terminate this discriminatory practice and at least accelerate
    its censorship process. This process is now very time
    consuming, during which time pirates face no censorship, have
    the market to themselves.
        Finally, China requires a complex, non-transparent and
    artificial division of labor separating who can record music,
    publish music, and retail music that slows to a crawl the
    process of getting a new record to the market, further
    benefiting the near monopoly that the pirates enjoy.
        So, as you can see, we believe, much more needs to be done
    for China to meet its obligations in this area; and I must say
    we applaud the fact that Secretary Evans and Ambassador
    Zoellick, who have been in China recently, have been working
    hard on this. There was a nice picture in this week's New York
    Times of Secretary Evans holding a pirated CD that he found in
    China. We are glad that they continue to press these issues for
    us.
        The Chinese government must acknowledge the nexus between
    market access and fighting piracy. The vacuum caused by China's
    market barriers will always be filled by pirates who, by the
    nature of their illegal activities, did not adhere to
    legitimate market rules.
        We urge the United States to increase pressure on China
    bilaterally and as appropriate in the WTO to more effectively
    combat copyright piracy and to open the markets to our
    legitimate products. Thank you very much.
        [The prepared statement of Mr. Papovich follows:]
      Statement of Joseph Papovich, Senior Vice President International,
                   Recording Industry Association of America
        Mr. Chairman and Members of the Sub-Committee, on behalf of the
    Recording Industry Association of America, I appreciate the opportunity
    to testify about U.S.-China economic relations and China's role in the
    global economy. The Recording Industry Association of America (RIAA) is
    the trade group that represents the U.S. recording industry. Its
    mission is to foster a business and legal climate that supports and
    promotes our members' creative and financial vitality. Its members are
    the record companies that comprise the most vibrant national music
    industry in the world. RIAA members create, manufacture and/or
    distribute approximately 90% of all legitimate sound recordings
    produced and sold in the United States. We work closely with other
    copyright-based associations such as the Motion Picture Association and
    the Entertainment Software Association and to a certain extent this
    testimony reflects their concerns as well.
        International markets are vital to our companies and our creative
    talent. Exports and other foreign sales account for over forty fifty
    percent of the revenues of the US record industry. This percentage is
    even higher similar to those in related industries suffering similar
    problems like such as the motion picture industry. This strong export
    base sustains American jobs.
        However, America's creative industries are under attack. The impact
    of piracy has grown in recent years with the advance of digital
    technology. High levels of piracy, in conjunction with market access
    barriers in certain countries--most notably China, plague our
    industries.
    Our Problems in China

        Our organization, along with our sister copyright organizations in
    the International Intellectual Property Alliance (IIPA), has been at
    the forefront of intellectual property negotiations between the United
    States and China since 1992, when a memorandum of understanding was
    signed obligating China to protect copyright in line with international
    standards at the time. We and our IIPA colleagues were again actively
    involved in USTR-led negotiations in 1995 and 1996 undertaken pursuant
    to Section 301 investigations, resulting in exchanges of letters
    obligating China to close factories producing and exporting pirate
    optical media product which were causing catastrophic disruption of our
    global markets. We and our colleagues were then heavily involved in a
    number of sectoral negotiations in connection with China's WTO
    accession, and supported the renewal of normal trade relations
    annually, and eventually permanent normal trade relations (PNTR). Each
    of these milestones has had significant commercial ramifications for
    the U.S. copyright industries.
        Today, despite China's various bilateral and multilateral
    commitments to the United States, U.S. entertainment industries face
    four significant and related problems in China. A more detailed paper,
    submitted to USTR by IIPA as part of this year's Executive Branch
    review of China's implementation of its WTO obligations, is attached.
    The first of our ongoing problems was addressed by the 1995/6 Special
    301 agreement, but is now reappearing. The others remain unaddressed
    major problems.

        1.  Chinese optical media factories in the past produced huge
    quantities of pirate CDs, much of which was exported throughout the
    world. This had been largely controlled subsequent to the 1996 US-Sino
    IPR agreement--but is now resuming. The Motion Picture Industry reports
    that pirated exports from China shot up from less than 0.5 percent of
    total seizures of pirated DVDs in 2002 to 12.1 percent in the first six
    months of 2003, based on data from the UK Customs. This sharp rate of
    increase is cause for alarm.
        2.  The Chinese internal market remains almost entirely pirate (at
    over 90%) despite many raids, seizures and administrative fines that
    are inadequate to deter continued piracy. Pirated music and motion
    pictures are produced in China or are imported from Hong Kong, Taiwan
    and elsewhere. Pirated music sales in China exceeded half a billion
    dollars in 2002.
        3.  Internet and broadcast piracy is growing rapidly in China. Many
    websites offer downloading of illicit music files and streaming of
    illicit movies. China-based ISPs have become online ``warehouses'' for
    international pirate syndicates. In addition, other distribution
    networks, including provincial and local broadcasters and cable
    systems, also routinely include unauthorized broadcasts of U.S.
    programs.
        4.  A Chinese labyrinth of market access and investment barriers
    prevent legitimate entertainment producers from serving the Chinese
    market in a timely manner, which perversely increases consumer demand
    for pirated product. A solution to piracy requires much greater
    progress on this issue.

        China is currently the world's largest consumer of pirated
    products. Unless action is taken promptly, China may once again become
    the world's foremost producer of pirated materials as well.
    The Solutions

        1. Anti-piracy: China MUST criminally prosecute pirate producers,
    importers and distributors, as well as internet pirates and infringing
    ISPs. China remains among the last countries in the world that does not
    prosecute commercial pirates for criminal copyright infringement. As we
    have learned from years of experience in fighting piracy, without use
    of criminal sanctions, there is little likelihood that China can
    significantly reduce piracy rates. To do this, at minimum the following
    must occur:

          A nationwide initiative must be mandated as a Chinese
    national priority; a vice-premier should lead the campaign so that
    enforcers take it seriously.
          Pirates must be criminally prosecuted. Current reliance
    on administrative sanctions has failed as an enforcement tool.
          Criminally prosecuting pirates will require legal and
    administrative changes. For example, contrary to the practice in the
    U.S. and most other countries, China does not permit private
    organizations like ours to conduct investigations in China. Yet China's
    Public Security Bureau--their police--has not been inclined to
    investigate either, leaving anti-piracy enforcement to administrative
    agencies, which have authority only to seize product and impose small,
    ineffective monetary fines. Private investigations to gather evidence
    must be permitted.
          The current law sets thresholds for initiating criminal
    investigations only if the pirate has revenues or profits in excess of
    specified levels as described in our attached documentation.
    ``Revenue'' is defined as the goods already sold, valued at pirate
    prices. Unsold seized pirate inventory is excluded. But revenues or
    profits are rarely possible to determine as pirates avoid record-
    keeping, and we are not permitted to undertake investigations that
    would assist the authorities. These thresholds must be reduced and
    redefined, for example, to permit unsold inventory to be counted and to
    establish whatever threshold is set by reference to the retail, not the
    pirate price.
          Another major problem is that Chinese Customs will not
    consider seized imported or exported pirate product to be ``sold''
    goods, thus refusing to refer large seizures for criminal prosecutions.
    This relates directly to China's inability to address the renewed surge
    in pirated exports from China. Criminal prosecutions must be permitted
    for large Customs seizures.
          China committed in its WTO Protocol of Accession to
    address these problems, in part by reducing significantly the existing
    onerous thresholds for initiating criminal prosecutions. In fact, the
    TRIPS Agreement requires it. Yet China has not done so.
          The Chinese Supreme Court and State Council must issue
    new interpretations, guidelines and instructions to judges, prosecutors
    and the Public Security Bureau to permit private investigations, to
    lower the current onerous thresholds and to direct enforcement
    authorities to actively investigate and criminally prosecute copyright
    piracy, including certain Customs seizures. We understand the Supreme
    Court is considering new guidelines and interpretations along these
    lines. China committed to achieve this as part of the WTO accession.
    The US Government should press to make this happen.

        2. Market Access
    Censorship:
        (1) Chinese government censors are required to review the content
    of only legitimate foreign-produced sound recordings before their
    release. Domestically-produced Chinese sound recordings are NOT
    censored. Of course, pirated product is not censored either. China
    should terminate this discriminatory process between imported and
    domestically-produced product.
        (2) Censorship offices are woefully understaffed, causing long
    delays in approving new recordings. The best result would be for
    censorship to be industry-administered, as in other countries. If this
    is not possible, steps must be taken to expedite the process so that
    legitimate music and motion pictures can be promptly marketed,
    preventing pirates from getting there first. In the near-term, China
    should be pressed for a commitment to (1) end discrimination in
    censorship and (2) complete the approval process within a reasonable
    period (e.g. a few days). In the long-term, censorship should
    abolished.

            Producing and publishing sound recordings in China:

              U.S. record companies are skilled at and desirous of
            developing, creating, producing, distributing and promoting
            sound recordings by Chinese artists, for the Chinese market and
            for export from China. However, onerous Chinese restrictions
            prevent this from occurring. For example, for a sound recording
            to be brought to market, it must be released through an
            approved ``publishing'' company. Currently only state-owned
            firms are approved to publish sound recordings. China should
            end this discrimination and approve foreign-owned production
            companies.
              Further, production companies (even wholly-owned Chinese
            ones) may not engage in replicating, distributing or retailing
            sound recordings. This needlessly cripples the process of
            producing and marketing legitimate product in an integrated
            manner. China should permit the integrated production and
            marketing of sound recordings.
              U.S. record companies may market non-Chinese sound recordings
            only by (1) licensing a Chinese company to produce the
            recordings in China or (2) importing finished sound recording
            carriers (CDs) through the China National Publications Import
            and Export Control (CNPIEC). China should permit U.S. companies
            to produce their own recordings in China and to import directly
            finished products.

            Distributing sound recordings:

              Foreign sound recording companies may own no more than 49% of
            a joint venture with a Chinese company. However, the recently
            concluded ``Closer Economic Partnership Agreement (CEPA)''
            between China and Hong Kong permits Hong Kong companies to own
            up to 70% of joint ventures with Chinese companies engaged in
            distributing audiovisual products. China should grant at least
            MFN status to U.S. record producers per the terms of the CEPA.
    Conclusion

        The piracy situation in China remains dire. Much more needs to be
    done by China in order for it to meet its TRIPS obligations in the area
    of copyright, both with respect to the TRIPS enforcement and
    substantive obligations. It is time for the Chinese government to
    acknowledge the nexus between practicable market access and the ability
    to effectively fight piracy. Piracy cannot be defeated or effectively
    deterred by enforcement alone--it must be accompanied by market-opening
    measures. Some of the necessary steps are reflected in China's WTO
    commitments. Others, such as allowing essential activities related to
    record production by foreign companies, have not occurred, but must
    begin to occur if China is to have any hope of effectively curtailing
    copyright piracy. The continuous vacuum left by China's closed market
    will always be neatly filled by pirates who, by the very nature of
    their illegal activities, do not adhere to legitimate market rules. We
    urge the United States and the rest of the international trading
    community to keep pressure on China through the WTO and other processes
    to provide a vehicle for opening the Chinese market to our products,
    and to more effectively combat copyright piracy.
                                     ______

    Attachment

    September 10, 2003
    BY ELECTRONIC MAIL (FR0083@ustr.gov)

    Ms. Gloria Blue
    Executive Secretary
    Trade Policy Staff Committee (TPSC)
    Office of the United States Trade Representative
    1724 F Street, N.W.
    Washington, D.C. 20508

        Re:  Comments Regarding Intellectual Property Rights (Including
    Intellectual Property Enforcement), and Services/Market Access in
    China, in Response to the ``Request for Comments and Notice of Public
    Hearing Concerning China's Compliance With WTO Commitments,'' 68 Fed.
    Reg. 43247-8 (July 21, 2003)

    Dear Ms. Blue:

        This filing responds to the Request for Comments and Notice of
    Public Hearing Concerning China's Compliance with WTO Commitments,
    appearing in 68 Fed. Reg. 43247-8 (July 21, 2003). The request invites
    comments on China's compliance with the commitments it made in
    connection with its accession to the World Trade Organization (WTO).
    Specifically, the Request for Comments notes,

              In accordance with section 421 of the U.S.-China Relations
            Act of 2000 (Pub. L. 106-286), USTR is required to submit, by
            December 11 of each year, a report to Congress on China's
            compliance with commitments made in connection with its
            accession to the WTO, including both multilateral commitments
            and any bilateral commitments made to the United States.

        The Request for Comments states that ``to assist USTR in preparing
    the report to Congress, USTR is hereby soliciting public comment,''
    including on China's compliance with commitments in the area of
    intellectual property rights and services/market access that were made
    in connection with its accession to the WTO.[1]
    ---------------------------------------------------------------------------
        \[1]\ The terms of China's accession to the WTO are contained in
    the Protocol on the Accession of the People's Republic of China
    (including its annexes) (Protocol) (WT/L/432, Nov. 10, 2001), at http:/
    /www.mac.doc.gov/China/ProtocolandDecision.pdf, the Report of the
    Working Party on the Accession of China (Working Party Report) (WT/
    MIN(01)/3, Nov. 1, 2001), at http://www.mac.doc.gov/China/WPReport11-
    10-01.pdf, and the WTO Agreement. Specific copyright commitments are
    made in Section 5 of the Working Party Report. Specific market access
    commitments are made in Report of the Working Party on the Accession of
    China, Addendum, Schedule CLII--The People's Republic of China, Part
    II--Schedules of Specific Commitments on Services, List of Article II
    MFN Exemptions (WT/MIN(01)/3/Add.2, Nov. 10, 2001), at http://
    www.mac.doc.gov/China/ServicesSchedule.pdf.
    ---------------------------------------------------------------------------
        The International Intellectual Property Alliance (``IIPA'') submits
    comments on key issues with respect to China's compliance with the
    TRIPS Agreement, and with respect to certain of China's other WTO
    commitments, particularly in the areas of services and market access.
    In order to provide a more detailed analysis of China's compliance with
    the substantive and enforcement obligations under the TRIPS Agreement,
    IIPA also takes this opportunity to append to this filing a report on
    China (see Appendix) that was submitted to the United States Trade
    Representative on February 14, 2003, as part of our filing in the
    annual Special 301 process.
    A. IIPA AND THE COPYRIGHT INDUSTRIES' INTEREST IN THIS FILING

        The International Intellectual Property Alliance (IIPA) is a
    private sector coalition formed in 1984 to represent the U.S.
    copyright-based industries in bilateral and multilateral efforts to
    improve international protection of copyrighted materials. IIPA is
    comprised of six trade associations, each representing a significant
    segment of the U.S. copyright community. These member associations
    represent over 1,300 companies [2] producing and
    distributing materials protected by copyright laws throughout the world
    \3/4\ all types of computer software including business applications
    software and entertainment software (such as videogame CDs and
    cartridges, personal computer CD-ROMs and multimedia products);
    theatrical films, television programs, home videos and digital
    representations of audiovisual works; music, records, CDs, and
    audiocassettes; and textbooks, tradebooks, reference and professional
    publications and journals (in both electronic and print media). Since
    1984, this diverse range of industries has worked together,
    individually and under the IIPA umbrella, to strengthen the copyright
    laws and enforcement regimes in over 100 countries around the world.
    IIPA has also represented the copyright-based industries in the
    negotiation of key bilateral and multilateral agreements (including of
    course TRIPS) to raise international minimum standards of copyright
    protection and, of increasing importance, enforcement.
    ---------------------------------------------------------------------------
        \[2]\ This number is updated as of September 10, 2003.
    ---------------------------------------------------------------------------
        In April 2002, the IIPA released an economic report entitled
    Copyright Industries in the U.S. Economy: The 2002 Report, the ninth
    such study written by Stephen Siwek of Economists Inc. This report
    details the economic impact and contributions of U.S. copyright
    industries to U.S. Gross Domestic Product, employment, and trade. The
    latest data shows that in 2001, the U.S. copyright industries accounted
    for 5.24% of U.S. Gross Domestic Product (GDP), or $535.1 billion--an
    increase of over $75 billion from 1999 and exceeding 5% of the economy
    and one-half trillion dollars for the first time. In addition, over the
    last 24 years (1977-2001), the U.S. copyright industries' share of the
    GDP grew more than twice as fast as the remainder of the U.S. economy
    (7% versus 3%). Between 1977 and 2001, employment in the U.S. copyright
    industries more than doubled to 4.7 million workers, which is now 3.5%
    of total U.S. employment; and the U.S. copyright industries' average
    annual employment grew more than three times as fast as the remainder
    of the U.S. economy (5% versus 1.5%). Finally, in 2001, the U.S.
    copyright industries achieved estimated foreign sales and exports of
    $88.97 billion, again leading all major industry sectors, including:
    chemicals and allied products, motor vehicles, equipment and parts,
    aircraft and aircraft parts, and agriculture.
        Specifically with respect to China, IIPA's members were at the
    forefront of discussions in 1992 that led to the signing of a
    Memorandum of Understanding between the United States and China. That
    MOU obliged China to protect copyright in line with international
    standards in place at the time. IIPA's members were again at the
    forefront of USTR-led negotiations in 1995 and 1996, resulting in
    exchanges of letters, by which China undertook to close down factories
    producing and exporting pirate optical media product with impunity
    (causing catastrophic disruption of global markets) and commence a
    nationally-coordinated enforcement regime for copyright protection.
    IIPA and its members were heavily involved in a number of sectoral
    negotiations in connection with China's WTO accession, and supported
    the renewal of normal trade relations annually, and eventually
    permanent normal trade relations (PNTR). Finally, IIPA and its members
    observed developments with great interest that led to China's entry to
    the WTO on December 11, 2001. Each of these milestones has had
    significant commercial ramifications for the U.S. copyright industries.
        It is essential to the continued growth and future competitiveness
    of these industries that China provides free and open markets and high
    levels of copyright protection. China made commitments to open its
    market during the WTO accession negotiations, as well as the commitment
    immediately to comply with TRIPS enforcement and substantive standards,
    the legal foundation for adequate and effective substantive levels of
    copyright protection and copyright enforcement. Meeting these
    commitments is essential to the copyright industries' and individual
    authors/creators' abilities to do business in China.

     B. SUMMARY OF CONCLUSIONS WITH REGARD TO CHINA'S WTO COMMITMENTS, AND
        PARTICULARLY, TRIPS COMPLIANCE
        Our conclusion is that two primary problems have kept China's
    market largely closed and have prevented copyright owners from
    benefiting from China's accession to the WTO. The first is copyright
    piracy, which dominates the local market for copyrighted materials and,
    as in the 1990s, is beginning to become an export problem again. The
    second is market access restrictions which further exacerbate and limit
    the ability of Chinese authorities to tackle the piracy problem. It is
    only through steps designed to deter piracy, including lowering the
    threshold in order to bring criminal actions in China against copyright
    piracy and commencing coordinated efforts to enforce against all forms
    of piracy, combined with steps to open the Chinese market, that China
    can hope to meet its WTO commitments. The Appendix notes other
    continued TRIPS deficiencies, both substantive and enforcement-related,
    that China must address to fully comply with TRIPS.
        One of the goals of the accession process with China was to ensure
    the immediacy of China's obligations to comply with TRIPS substantive
    and enforcement obligations.[3] This was achieved upon
    China's accession to the WTO on December 11, 2001. China also agreed to
    meet various schedules with respect to other commitments, including
    services and market access commitments for U.S. companies/service
    suppliers, that are the subject of comments below.
    ---------------------------------------------------------------------------
        \[3]\ The TRIPS Agreement had already entered into force for the
    U.S. (and for all other WTO members that did not qualify for and take
    advantage of transition periods) on January 1, 1996, and even for WTO
    members that qualified for a transition period, the national treatment
    and MFN provisions of TRIPS applied fully as of January 1, 1996 (TRIPS,
    Article 65.2 provides that ``any developing country member is entitled
    to delay for a further period of four years [following the expiration
    of the one year period after the entry into force of the WTO generally]
    the date of application, as defined in paragraph 1 above, of the
    provisions of the Agreement other than Articles 3 [and] 4 . . . of Part
    I''; Articles 3 and 4 establish the national treatment and MFN
    obligations of the Agreement). On January 1, 2000, all TRIPS copyright
    obligations, including providing adequate enforcement procedures and
    effective remedies to deter piracy, entered into force for all the
    world's developing countries (except those classified by the U.N. as
    the ``least'' developed countries, which have until January 1, 2006 to
    comply).
    ---------------------------------------------------------------------------
        Before 2000, many countries had successfully amended their
    statutory law to bring them into compliance (or close to compliance)
    with their TRIPS obligations. China's outdated 1990 law had been
    supplemented by ``International Treaties Regulations'' in 1992 which
    satisfied some TRIPS requirements, but it was not until October 2001
    that China revised its law with the intent to comply with all
    substantive requirements of TRIPS.[4] Unfortunately, certain
    problems remained even after the amendments, and subsequent regulations
    (computer software regulations and new implementing regulations to the
    copyright law) contained further problems.[5] Even more
    important, however, is compliance with TRIPS enforcement obligations
    (Articles 41-61), and China's record has been disappointing and
    accounts for the steady high levels of piracy and the billions of
    dollars in losses suffered by copyright owners. It is the promise of
    these new enforcement obligations that is essential to returning the
    commercial benefits that were envisioned at the conclusion of the
    Uruguay Round. China must therefore begin to demonstrate that its
    enforcement system is, in practice, effective in deterring piracy.
    ---------------------------------------------------------------------------
        \[4]\ Copyright Law of the People's Republic of China, Adopted at
    the Fifteenth Session of the Standing Committee of the Seventh National
    People's Congress on September 7, 1990, Amended in Accordance with
    ``Decision to Amend Copyright Law of the People's Republic of China,''
    Adopted at the Twenty-fourth Session of the Standing Committee of the
    Ninth National People's Congress on October 27, 2001 (translation on
    file at IIPA).
        \[5]\ We are disappointed that the Implementing Regulations
    (September 15, 2002) did not take steps to come into full TRIPS
    compliance. For example, the regulations significantly weakened the
    fine provisions, by changing the calculus of fines in the vast majority
    of cases (by the use of the term ``three times the revenues,'' which
    could be higher than the previous maximum monetary fine but will be
    very difficult to prove) and by removing certainty as to the maximum
    administrative fine (which under the old Regulations was up to roughly
    US$12,000). The Implementing Regulations also leave in place a
    compulsory license that, with respect to U.S. and other WTO members'
    subject matter, clearly violates TRIPS. It is disappointing that the
    Chinese government did not clarify that those provisions do not apply
    to foreign right holders in order to meet China's TRIPS obligations.
    The implementing regulations further failed, among other things, to
    clarify whether temporary copies are protected. They also fail to
    clarify that the reproduction right in Article 41 for sound recording
    producers extends to indirect reproductions, as required by TRIPS. The
    Computer Software Regulations (effective January 1, 2002) also
    contained many problems and deficiencies discussed in detail in the
    Appendix. For example, the Regulations failed to clarify whether
    temporary copies (of computer software) are protected. The Regulations
    also established a huge, TRIPS-incompatible exception to protection for
    software that goes well beyond what is permitted under the Berne
    Convention and TRIPS, as it may permit reproductions or other exercises
    of exclusive rights without authorization (such as in the context of
    reverse engineering). The Regulations further create a huge loophole
    allowing corporate end-user piracy, providing that the possessor of
    infringing software is relieved of liability if the possessor is
    ignorant, or reasonably ignorant, of the infringing nature of the
    software. This is inconsistent with the copyright law as amended, which
    puts the burden of proof in such cases of infringement on the
    possessor. If this exception is abused, it would so weaken enforcement
    against corporate end-user piracy that it would amount to a violation
    of TRIPS Article 41. The same exception also may extend beyond what is
    allowed by TRIPS by establishing a compulsory license (i.e., the remedy
    may be limited to paying a license fee) that directly conflicts with
    the normal exploitation of the work and the legitimate interests of
    right holders. The normal damages provision of the law should govern in
    these cases. These problems and others are detailed in the Appendix.

    ---------------------------------------------------------------------------
    C. PIRACY AND CHINA'S RESPONSES IN 2003

        The market in China remains dominated by piracy. Piracy levels
    (which reflect the percentage of product sold in a market that is
    illegal) remained at 90% or above in 2002 for all copyright industries;
    the Chinese enforcement system has failed to lower such piracy levels,
    and therefore, it cannot be said to provide adequate procedures and
    effective legal remedies to protect copyright, as is required by the
    TRIPS enforcement provisions . Estimated losses due to piracy of
    copyrighted materials (excluding entertainment software) were over $1.8
    billion dollars in 2002. This combination of debilitating levels of
    piracy and huge economic losses to America's creative industries serves
    as a tremendous de facto barrier to entry into the Chinese market for
    U.S. firms.
        Optical media plants in China continue to produce pirate CDs, VCDs
    and DVDs, and there is increasing evidence that pirate producers in
    China have once again begun exporting product out from
    China.[6] Imports of pirate product from other territories
    in Asia remain a most significant problem.
    ---------------------------------------------------------------------------
        \[6]\ As examples of anecdotal evidence, IIPA knows of one seizure
    by Hong Kong Customs on June 10, 2003 in which over 5,000 pirated DVDs
    were seized in a transshipment originating from Fuzhou, China. In
    another example, on June 6, 2003, Macau Customs intercepted a suspected
    shipment from China, seizing almost 13,000 optical discs including
    3,600 VCDs, 3,200 DVDs and more than 5,000 music CDs.
    ---------------------------------------------------------------------------
        Internet piracy is an ever-growing phenomenon in China today
    (including Internet piracy at Internet cafes).[7] The rise
    of websites like listen4ever.com and chinamp3.com in recent years,
    which were giving away pirate MP3 files of whole songs or even trying
    to sell them, indicate that the convergence of a growing young consumer
    base in China and technologies like those employed in digital networks
    is causing increasing problems for copyright owners in China. While
    China has to date done a commendable job in trying to halt illegal
    activities over digital networks, it is quite disappointing that the
    latest law in conjunction with the new implementing regulations failed
    to solidify the legal framework necessary to protect copyright on the
    Internet.[8] We understand that China is now reviewing the
    2001 Internet regulations, and we look forward to reviewing the draft
    Internet regulations expected to be issued in late 2003. We urge the
    U.S. government to seek an opportunity for transparent review of these
    important Internet regulations prior to their issuance.
    ---------------------------------------------------------------------------
        \[7]\ The Chinese government has recently directed greater
    attention on the activities occurring at Internet cafes. While content
    blocks (i.e., on pornography, news sites, and the like) have been
    commonly required in such premises, less attention has been paid to
    possible infringing uses of copyrighted materials, including illegal
    uses of pirated entertainment software. IIPA hopes the Internet
    regulations will address this legal deficiency and ensure that Internet
    cafes strictly adhere to the copyright law, including ensuring that its
    customers do not engage in the unauthorized use of copyrighted
    materials, including entertainment software products.
        \[8]\ The tools are largely in place for the Chinese government to
    take down illegal websites and prosecute their operators. However, such
    vital protections, for example, protecting temporary copies as
    reproductions, are missing from China's copyright law. Also, while the
    copyright law established some legal tools to go after the manufacture
    of certain devices that circumvent technologies used by copyright
    owners to protect their works in the online environment, those
    provisions did not go far enough. It is disappointing that the latest
    implementing regulations did not cure these deficiencies. We note that
    the Chinese further failed to take this legislative opportunity to
    fully modernize their law. We note with great disappointment that the
    amendments did not take advantage of the opportunity to extend terms of
    protection to life plus 70 years and 95 years from publication. This is
    the modern trend. A full right of importation applicable to both
    piratical and parallel imports should also have been included. Greater
    discussion of these points can be found in the Appendix.
    ---------------------------------------------------------------------------
        For the business software industry, unauthorized copying within
    companies and government entities in China causes the greatest losses
    to that industry. As with all of the other copyright industries, the
    criminal and administrative systems have not been effective in curbing
    this problem, and civil redress has also proved to be ineffective
    against enterprise end user piracy due to the reluctance of courts to
    issue preservation orders. There is no effective administrative
    enforcement system against end user piracy of software (corporate end-
    user piracy) and other copyrighted materials in China. The Chinese
    government has issued Decrees and Orders to the local copyright
    administrations to investigate end-user piracy, but they have failed to
    self-start such efforts without the filing of complaints from copyright
    owners. Simply put, the National Copyright Administration has not
    demonstrated that it has the political mandate, resources and
    experience to address the end-user piracy problem. This failure to
    address end-user piracy implicates China's compliance with its TRIPS
    obligations. Finally, to our knowledge, very few court-ordered
    preservation measures under TRIPS Article 50 have been carried out in
    practice.
        Piracy affects the markets for every copyright sector, including
    movies, recorded music, business software, entertainment software, and
    book publishing. Pirate versions of the newest Harry Potter
    book,[9] and the latest first-run motion pictures, for
    example, Uptown Girls, Freddy vs. Jason, American Wedding 2003 and
    Pirates of the Caribbean, continue to decimate the markets in China for
    those products. Even local Chinese directors such as Zhang Yimou have
    struggled against piracy in China to attempt to secure a decent return
    on their investments.[10]
    ---------------------------------------------------------------------------
        \[9]\ Satoshi Saeki, Harry Potter latest victim of China's
    lucrative piracy mart, Yomiuri Shimbun, August 9, 2003.
        \[10]\ A Shanghai Daily article from January 18, 2003 documented
    the fruitless efforts of famed Chinese director Zhang Yimou and efforts
    to protect his latest film Hero. On January 8, 2003, a cinema in Xi'an
    reported losing a print of the film. The police cooperated and
    interviewed the theater's employees, one of whom killed herself by
    jumping off a building. Then low-quality copies started showing up on
    the street. The legitimate DVD distributor then violated his contract
    with the film's distributor and began selling pirate DVDs before it was
    authorized to begin legitimate distribution on February 20, and in a
    low-quality, cheap format to compete with the pirates. An article
    appeared in the New York Times on November 1, 2002 regarding this
    struggle for Mr. Zhang. In that article, the head of New Pictures (the
    distributor of Hero), Jiang Wei, said, ``[a]fter the release [of a
    film], we often have only three days before the pirate copies hit the
    market . . . The industry can't survive that.'' Another Chinese film,
    The Touch, starring famed Michelle Yeoh, was available on pirate DVDs
    four days after the film's release, ``and ticket sales slid fast.'' See
    http://nytimes.com/2002/11/01/business/01PIRA.html.
    ---------------------------------------------------------------------------
        Book publishers have experienced four major problems in 2003 that
    are worthy of note: (1) continued, unabated piracy of higher education
    textbooks; (2) illegal/unauthorized downloads of online journals and
    other materials; (3) an increase in pirated translations undertaken by
    so-called ``secondary channel distributors''--often small, private
    entrepreneurs who distribute books outside the normal state run
    distribution channels; and (4) counterfeiting of well-known publisher
    trademarks and unauthorized use of well-known authors' names and trade
    dress.
        A crucial TRIPS deficiency in the Chinese legal system remains the
    excessively high thresholds set for bringing criminal actions. The high
    thresholds translate to difficulties convincing Chinese authorities to
    prosecute commercial piracy cases under the copyright provisions of the
    Criminal Law. Article 41 of TRIPS requires countries to provide
    ``effective action'' against infringements that actually creates a
    ``deterrent to further infringements.'' Article 61 of TRIPS requires
    that criminal procedures be available (in practice) against copyright
    piracy ``on a commercial scale.'' While there were several successful
    criminal prosecutions for piracy in 2003, those mainly involved local
    right holders. One very recent conviction in Shanghai involving U.S.
    motion picture product resulted in strict penalties being meted out
    against several defendants. However, that prosecution was brought for
    commission of a crime other than criminal copyright infringement--for
    `illegal business operations'--so while the result was very positive,
    it does not go to satisfy China's TRIPS obligations, since Article 61
    of TRIPS requires China to provide a criminal remedy at least in cases
    of commercial copyright piracy. Simply put, thresholds for bringing
    criminal actions against those committing acts of copyright piracy must
    be lowered. The State Council, in the WTO Working Party document, has
    promised to recommend to the Supreme People's Court that it lower
    thresholds for bringing criminal actions; in addition, administrative
    fines must be raised, to make such actions truly effective and
    sustainable.
        For foreign right holders, enforcement in 2003 continued to involve
    mostly administrative enforcement actions, chiefly aimed at seizing
    infringing materials, but such efforts remain largely ad hoc and lack
    coordination. Administrative enforcement has generally been an
    ineffective basis for enforcement in China, since administrative cases
    result in notoriously low fines, no imprisonment, and thus no real
    deterrence to further piracy. For example, one entertainment software
    company reports that some Chinese factories engaged in the illegal
    manufacture of counterfeit entertainment software products have been
    able to continue their operations even after their premises have been
    raided and infringing goods seized. In addition, shutting down a
    factory often does not deter further piracy, since in many instances,
    the same entity merely shifts operations to another location under a
    different corporate name.[11] The Chinese government must
    carry out criminal investigations, focusing on organized criminal
    operations such as those mentioned, and must initiate prosecutions with
    deterrent penalties against egregious pirates in order for China to
    meet its TRIPS enforcement obligations.
    ---------------------------------------------------------------------------
        \[11]\ For example, in October 2002 and January 2003, Chinese
    administrative agencies raided the ``Electronic Dragon'' production
    facilities at which over 49,000 counterfeit Game Boy Advance cartridges
    and components were confiscated. During post-raid surveillance, the
    company found that the factory had resumed operations in a different
    location under a new company name. A subsequent raid on the new
    location was conducted in July 2003 and more than 78,000 counterfeit
    Game Boy Advance cartridges and semiconductor chips were seized. The
    principals all fled China and authorities have been able to take no
    further action against them. Such actions by the pirates and
    difficulties enforcing against them indicates how well-developed and
    sophisticated these manufacturers and distributors have become. Such
    organized criminal behavior demands a coordinated national response
    from the Chinese government.

     D. MARKET ACCESS: A NECESSARY INGREDIENT TO FIGHT PIRACY IN CHINA
        Providing market access to allow more legitimate product into China
    is an essential element of an effective anti-piracy strategy in the
    country. It is significant that China, through its WTO commitments, has
    agreed to open its market in various ways to different copyright
    industry sectors. For example, it is noteworthy that China has agreed
    to open its market to wholesale and retail distribution by foreign book
    publishers. Other commitments, particularly in the audio and
    audiovisual sectors, are less helpful, but as minimum commitments, it
    is possible for China to effectuate further market opening at any time.
    It is now of paramount importance that the U.S. government work to
    secure the commitments made through any necessary changes to China's
    legal system, and to ensure that the gains that were promised are not
    stymied by continued restrictive commercial practices in China with
    respect to publishing. It is also equally important for the U.S.
    government to continue to press for greater market opening, since it is
    only with market opening that the problems of piracy can be addressed
    in a fundamental way.
        For example, policies such as China's WTO commitment to allow in a
    minimum of 20 films annually under standard commercial terms (revenue
    sharing) essentially provide pirates with a monopoly in the Chinese
    market for the six-month period between theatrical release of a motion
    picture and the release of the product in home video formats. If delays
    are permitted to occur in the censorship process for home video
    entertainment, then pirates have an even longer period in which they
    can operate before legitimate product enters the market. For other
    industries, for example, the book publishing industry, the WTO commits
    China to gradually open retail (beginning in December 2002) and
    wholesale distribution to foreign entities (both without restrictions
    except as to ``chain'' retail stores no later than December 2004).
    Unfortunately, continued severe restrictions on related activities,
    such as importation (which remains ``prohibited'') and printing (which
    is ``restricted'') call into doubt whether China can meet its WTO
    obligations (to allow unfettered distribution) under the current
    system.
        The record industry faces serious market access hurdles (for every
    essential activity to their business in China) that result in limiting
    China's ability to effectively fight piracy.[12] The WTO
    commitments oblige China to open wholesale and retail distribution to
    foreign [record] companies in contractual joint ventures with Chinese
    firms (but not wholly-owned foreign entities).[13] Other
    essential activities such as the signing of recording artists, artist
    management, and producing sound recordings, are not covered in WTO
    commitments. Chinese guidelines make it clear that ``publishing,
    producing, master issuing and importing'' of records in China are
    prohibited foreign investment activities, as is
    broadcasting,[14] while distributing and selling records is
    a ``restricted'' activity. In practice, certain ``cooperative''
    agreements (not joint ventures) may allow foreign entities to publish
    and produce in China, and foreign entities may also apparently sign and
    manage artists as long as they have proper permits (again, the WTO
    commitments do not appear to cover these activities). Nonetheless, the
    overall restrictive nature of the recording business in China makes it
    impossible for China to effectively enter the market, and thus,
    fighting piracy of foreign content is virtually impossible. More
    important to the Chinese people and the Chinese economy, failure to
    open the Chinese market to those with the bulk of the wherewithal and
    know-how to make records makes it impossible for the vast majority of
    record producers worldwide to bring local Chinese content to the
    Chinese people and to make those artists and the music known to the
    world.
    ---------------------------------------------------------------------------
        \[12]\ For a more detailed account of the serious market access
    problems faced by the recording industry, we refer you to the comments
    of the Recording Industry Association of America (RIAA), which were
    filed on September 9, 2003, in response to 68 Fed. Reg. 43247-8 (July
    21, 2003).
        \[13]\ World Trade Organization, Report of the Working Party on the
    Accession of China, Addendum, Schedule CLII--The People's Republic of
    China, Part II--Schedules of Specific Commitments on Services, List of
    Article II MFN Exemptions, WT/MIN(01)/3/Add.2, Nov. 10, 2001.
        \[14]\ The chief piece of legislation governing the record industry
    in China is the Administrative Regulations on Audio-Visual Products,
    State Council Order No. 341, Approved December 12, 2001 at the 50th
    session of the State Council s Standing Committee, signed and
    promulgated December 25, 2001 by Premier Zhu Rongji, and effective from
    February 1, 2002).
    ---------------------------------------------------------------------------
        For publishers, the WTO Working Party Report, while it fails
    directly to address the permissibility of certain core activities
    carried out by foreign publishers, does set forth China's commitments
    with respect to the distribution of books, newspapers and magazines.
    The ``Schedule of Specific Commitments on Services'' attached to the
    Working Party Report defines ``Distribution Services'' to include
    wholesale services, retail services, as well as commission agents'
    services, franchise services and the like. With regard to
    ``Distribution Services,'' [15] China has committed to allow
    ``foreign service suppliers'' to ``engage in the [wholesale]
    distribution of books, newspapers, [and] magazines'' without market
    access restrictions no later than December 11, 2004, which is ``three
    years after China's accession.'' By that time, there must also be no
    restrictions on foreign majority ownership and no geographic or
    quantitative restrictions.[16] With regard to ``Retailing
    Services,'' China committed that ``[f]oreign service suppliers will be
    permitted to engage in the retailing of . . . books, newspapers and
    magazines within one year after accession,'' or December 11, 2002.
    There are various geographic and equity ownership limitations in place
    until December 11, 2004, at which time all restrictions on commercial
    presence are lifted except as to ``chain stores.'' [17] In
    addition to the specific commitments on wholesale and retail
    distribution, immediately upon accession (December 11, 2001),
    ``[f]oreign-invested enterprises'' are permitted to distribute (both
    wholesale and retail) their products (including those listed in the
    commitments, which include books, newspapers and magazines) as long as
    they are ``manufactured in China.'' Both wholesalers and retailers may
    also, as of the date of China's accession, December 11, 2001, ``provide
    the full range of related subordinate services . . . for the products
    they distribute.'' [18]
    ---------------------------------------------------------------------------
        \[15]\ ``Distribution Services'' are defined in Annex 2 of the
    Working Party Report, which is adopted from Annex I of the Agreement on
    Market Access Between the People's Republic of China and the United
    States of America, Nov. 15, 1999 (``China-US Market Access
    Agreement'').
        \[16]\ Restrictions on foreign majority ownership and geographic
    and quantitative restrictions will be lifted on December 11, 2003.
    Therefore, foreign service suppliers of books, newspapers and magazines
    will have unfettered access to the wholesale distribution market by
    December 11, 2004, when China is committed to lift market access
    limitations to such foreign service suppliers. In the China-US Market
    Access Agreement, China also agreed that ``[s]tarting no later than
    January 1, 2003 there will be no restrictions on equity/form of
    establishment'' with respect to commission agents' and wholesale trade
    services. That commitment does not appear expressed in the Working
    Party Report, and we are interested to know whether this omission has a
    material impact on publishers (we suspect that the lifting of
    limitations on restrictions on foreign majority ownership may obviate
    the need for a separate provision regarding ``equity'' restrictions).
        \[17]\ The term ``chain stores'' is defined as stores ``which sell
    products of different types and brands from multiple suppliers with
    more than 30 outlets.'' For those stores, foreign majority ownership
    will not be permitted if they sell, among other products, books,
    newspapers, and magazines.
        \[18]\ The ``subordinated services'' are defined in Annex 2 of the
    Working Party Report Addendum as including ``inventory management;
    assembly, sorting and grading of bulk lots; breaking bulk lots and
    redistributing into smaller lots; delivery services; . . . storage,
    warehousing and garage services; sales promotion, marketing and
    advertising . . . and after sales services including . . . training
    services.''
    ---------------------------------------------------------------------------
        These market opening commitments for the distribution of published
    materials are extremely important, but they do not address core
    activities carried out by publishers, except in an ancillary
    way.[19] One crucial question left unclear in the WTO
    commitments is whether the commitments allow foreign entities to
    ``import'' published materials into China for distribution. Such
    activities are apparently not permitted at all according to China's
    current legal framework. While the word ``importation'' is absent in
    describing the activities to be permitted under the WTO commitments,
    the additional commitment allowing an FIE to immediately (upon
    accession) distribute books ``manufactured in China'' seems to imply
    that the phase-in commitments refer to other books, namely, books that
    are not manufactured in China--imported books. We urge the U.S.
    government to continue its vigilance in seeking greater market opening
    for U.S. publishers to engage in publishing activities (including
    printing, reproduction, binding and other manufacturing activities) in
    China, as well as the importation into China of published
    materials.[20]
    ---------------------------------------------------------------------------
        \[19]\ For example, the commitments indicate that ``foreign-
    invested enterprises'' (FIEs) may distribute books ``manufactured in
    China'' upon the date of China's accession. This clearly means a
    foreign distributor can sell Chinese books, but a respectable argument
    might also be that a foreign distributor might be able to engage a
    Chinese printing house to run a printing of copies of books in China in
    order to distribute them in China.
        \[20]\ In particular, we note that current Chinese law is ambiguous
    as to what foreign entities may and may not do. Recent Administrative
    Regulations on Publishing appear to permit foreign entities to apply to
    engage in certain activities related to publishing and the U.S.
    government should confirm what activities are permitted and what
    activities remain restricted or prohibited and how those restrictions
    or prohibitions operate. It may be that the Regulations must allow
    foreign entities to engage in certain publication activities in China
    in order for China to meet its WTO services commitments. The U.S.
    government should further seek to lift ownership/equity restrictions
    for ``publication importing entities'' since the inability to import
    could directly or indirectly impair a foreign entities' ability to
    distribute wholesale and/or retail in China.
    ---------------------------------------------------------------------------
    E. SOME PROGRESS NOTED IN 2003 IN CHINA

        Despite the many problems and deficiencies in the enforcement
    system, the Chinese government remains serious about reducing piracy
    and government ministers appear to be sincerely concerned about the
    problem. Indeed, Chinese government officials have admitted in recent
    years that piracy is serious, and both the problem and the government's
    awareness of it have been reported in the Chinese press.[21]
    Periodic crackdowns during 2002 and 2003 have resulted in seizures of
    tens of millions of pirated products. In addition, between January 1,
    2002 and July 31, 2003, 18 VCD/DVD factories (2 of which were
    registered) were raided, yielding seizures of 45 VCD/DVD production
    lines. Regarding retail raids, the Ministry of Culture has stated that
    more than 5,000 retail shops were raided nationwide from January 1,
    2002 to July 31, 2003. The seizure numbers indicate both the resolve of
    Chinese authorities to continue trying to rid the markets of some
    product, but also the sheer magnitude of the problem and how it will be
    impossible for the Chinese government to rid the market of piracy based
    on periodic anti-piracy campaigns and without a more coordinated,
    sustained effort.
    ---------------------------------------------------------------------------
        \[21]\ See, e.g., Weifeng Liu, 42 Million Discs Smashed in
    Nationwide Crackdown, Guangdong Key Target in Drive Against Audiovisual
    Smugglers, China Daily, August 13, 2003 (in which Gui Xiaofeng, Deputy
    Director of the Press & Publications Administration and Deputy
    Commissioner of the National Anti Piracy & Pornography Working
    Committee said that pirated products have become a big problem for
    China, adding that the smugglers were not only breaching China's
    copyright laws but are also tax evaders); see also Copyright Law Solid
    But Needs Fortifying, China Daily, Sept. 14, 2000, at http://
    search.chinadaily.com.cn/isearch/i_textinfo.exe?
    dbname=cndy_printedition&listid=15654&selectword=COPYRIGHT%20PIRACY
    (quoting then National Copyright Administration Commissioner Yu Youxian
    as saying that the Copyright Law in China needed amending because
    ``[a]nti-piracy regulations are not strong enough, since piracy was not
    serious when the law first took effect,'' and that ``more provisions
    must be added because piracy has become rampant [in China] today'').
    ---------------------------------------------------------------------------
        We also acknowledge some progress in the area of publishing.
    Through immediate implementation of a State Council Decree issued in
    late 2001, the pirating of academic journals has been largely
    diminished. As a result, foreign publishers have been able to negotiate
    arrangements with customers to legitimately purchase or license use of
    academic journals. This positive development is an excellent example of
    how the Chinese government can open a market that was previously closed
    due to piracy, through central government will to address the problem--
    in this case, academic journals piracy.
        China should further be acknowledged for the continued development
    of the specialized IPR courts. These courts handling IP cases in China
    continue to mature in their expertise of copyright issues and appear to
    be working well in deciding copyright cases.[22] In the most
    recent cases, relatively large civil damages were awarded to foreign
    plaintiffs for infringement of plaintiff's copyrighted materials, in
    addition to the court enjoining further infringement and requiring the
    defendants to issue public apologies and be subject to severe sanctions
    if they repeated the infringement. We are also pleased to be able to
    report that foreign copyright owners are receiving good cooperation
    from government and judicial authorities in bringing civil cases. They
    are also receiving positive press regarding their actions against
    alleged infringers. These developments are noted by those on the ground
    in China as fundamental changes in the legal landscape in China since
    it joined the WTO.
    ---------------------------------------------------------------------------
        \[22]\ For example, on March 24, 2003, the Shanghai No 2
    Intermediate People's Court ordered three copyright violators to pay a
    combined 500,000 Yuan (US$60,241) in compensation to the Shanghai
    Lexicographical Publishing House for pirating ``Cihai,'' the most
    popular encyclopedia in the Chinese language. Some recent cases
    involved uses of copyrighted works in the digital environment, and were
    decided in accordance with the laws and with reasoned decisions in
    writing. See, e.g., Guangdong Taixin Co Ltd. v. EMI (HK) Group Ltd.,
    Guangdong Province People's High Court Civil Judgment (2001, Guangdong
    Province People's High Court IP Case No. 153).
    ---------------------------------------------------------------------------
    F. CONCLUSION

        Despite enormous seizures of pirate product, periodic ``campaigns''
    by local governments against piracy, and progress noted against
    journals piracy and in the courts as noted, the piracy situation in
    China remains largely unchanged in 2003; in other words, it remains
    dire. We conclude that much more needs to be done by China in order for
    it to meet its TRIPS obligations in the area of copyright, both with
    respect to the TRIPS enforcement and substantive obligations. With the
    timetable for China's other WTO commitments (as distinguished from its
    TRIPS commitment which was immediate upon accession to the WTO) drawing
    close, the time is now for the Chinese government to acknowledge the
    nexus between practicable market access and the ability to effectively
    fight piracy. Piracy cannot be defeated or effectively deterred by
    enforcement alone--it must be accompanied by market-opening measures.
    Some of the necessary steps are reflected in China's WTO commitments.
    Others, such as allowing greater distribution of motion pictures in
    China by foreign companies, or allowing essential activities related to
    record production or book publishing by foreign companies, have not
    occurred, but must begin to occur if China is to have any hope of
    effectively curtailing copyright piracy. The continuous vacuum left by
    China's closed market will always be neatly filled by pirates who, by
    the very nature of their illegal activities, do not adhere to
    legitimate market rules. We urge the United States and the rest of the
    international trading community to keep pressure on China through the
    WTO and other processes to provide a vehicle for opening the Chinese
    market to copyright, as a necessary step in also achieving improvements
    in the enforcement environment.
        IIPA appreciates the opportunity to provide its views on China's
    compliance with its obligations under the WTO and the TRIPS Agreement
    in the area of copyright. We look forward to our continued work with
    USTR and other U.S. agencies to bring about major improvements in
    copyright protection and enforcement worldwide.
                Respectfully submitted,
                                                          Eric H. Smith
                President, International Intellectual Property Alliance

        Mr. PORTMAN. Thank you, Mr. Papovich. I want to thank all
    the witnesses for their valuable input this morning. I would
    like to ask Mr. Crane, who is Chairman of the Subcommittee on
    Trade, to begin the questioning, and then to our Ranking Member
    this morning, Ms. Tubbs Jones. Mr. Crane.
        Mr. CRANE. Thank you, Mr. Chairman. Mr. Malpass, you state
    that you expect robust job growth in 2004. What factors are
    contributing most to that positive forecast, and how many jobs
    do you expect to be created in the next 12 months? Could you
    also comment on yesterday's GDP release?
        Mr. MALPASS. Yes, sir, Mr. Crane. In the third quarter, the
    GDP grew 7.2 percent. The nominal GDP, which is the basis for
    profits within the economy, grew even faster, at 8.9 percent.
    This is a breakout for the economy.
        It showed up in small business profits, which grew in the
    same quarter at over 12 percent, which is the highest rate of
    growth since 1997. Small businesses within the economy are
    doing much better than they were in the recession. That then
    leads or points toward job growth going forward.
        In my view, the reason that we didn't have job growth in
    the last 2 years was twofold: one, we had a huge amount of
    employment in the late 1990s. To an extent, it was a boom of
    employment that went along with the dot com boom. The
    unemployment rate went to 3.8 percent, which was unsustainable.
    So, part of the reason there hasn't been job growth so far, or
    not much yet in the recovery, is because it was such a low
    unemployment rate going in; and the second reason is because
    inventories have continued to be drawn down. Big businesses are
    simply not participating yet in the expansion. So, my optimism
    for the next year--I think we will see 4-percent growth or more
    in 2004--is that small businesses--are the engine of the U.S.
    economy and will be able to drive it forward.
        You asked how many jobs. Job growth, I think, can move to
    the 200,000 per month level. So, if we multiply that by 12
    months, maybe we will see 2 million jobs created. People are
    making a big deal of this number of job losses since the peak,
    but remember where we still are. We are at 130 million people
    employed in the U.S. economy, which is very high by historical
    standards; and I think we will go higher than that in 2004.
        Mr. CRANE. This is a question for anyone who wishes to
    respond. I had the privilege of visiting Korea earlier this
    year and touring our Hyundai facilities over there, watching
    the construction of those automobiles, and they have totally
    robotized their construction. The only human beings I saw were
    people waiting for cars coming off the production line at the
    end to take them out and park them.
        That is a thing that is happening, and that does have a
    profound impact on employment in the manufacturing industry. Is
    this something that you folks anticipate could escalate? They
    said the reason for robotization was better quality control
    than when you had humans assembling the cars.
        Mr. JARRETT. You have much the same impression if you went
    into a very advanced wafer fab facility making chips. Our new
    factories here in the United States, the number of people
    walking around, is much smaller than it was in the past. The
    chips move in self-contained things that are just moving around
    by robots throughout the factories, so it never was labor
    intensive. It is less labor intensive now, so again it is a
    matter of quality.
        Mr. CRANE. One final question, and that is a recent
    national association's study indicated that several domestic
    economic factors, including health care costs, taxes, and
    energy costs, have had a major impact on the competitiveness of
    manufacturers in the United States is that something you share
    the view of?
        Mr. DEVOS. I would speak for ourselves and say other things
    out there would be the abuse of the legal system. That happens
    to continue to add cost to and impact our competitiveness.
        Mr. O'HAGAN. Mr. Crane, that is absolutely true, also, in
    the electrical industry. All of these factors I mentioned in my
    statement are contributing to the non-productive costs, which
    really put us at a disadvantage.
        Mr. CRANE. Thank you all very much.
        Mr. PORTMAN. Gentlelady from Ohio, Ms. Tubbs Jones.
        Ms. TUBBS JONES. Thank you, Mr. Chairman. Mr. Jarrett, one
    of the statements you made was that one of the most important
    things that we can do is an emphasis on fixing our K through 12
    system, with a special focus on improved math and science. I
    would ask you: would you be willing to forgo some of the tax
    benefits that you are receiving in order to fund No Child Left
    Behind (P.L. 107-110) so that some of the children across this
    country could in fact receive some of the educational benefits
    that you have spoken about?
        Mr. JARRETT. Well, I think that is a convenient kind of
    choice to make, but the fact is we think the education is
    important. It needs to be funded. Most of that funding--as you
    know, only 7 percent of the funding for K through 12 education
    is at the Federal level.
        Ms. TUBBS JONES. I do not need you to educate me on how
    education is funded by the Federal government. My question is
    simply: would you be willing to forgo some of the tax benefits
    that you were proposing in order to fund children's education
    in the United States? Yes or no?
        Mr. JARRETT. Let me respond and say we do not think that is
    a choice that necessarily has to be made.
        Ms. TUBBS JONES. In fact, it may well be because of the
    deficit that we are facing in this country, and it is a choice
    of either giving tax benefits or funding education, basically.
    Since you do not want to answer my question directly, I just
    want to put it on the table with you so we could deal with it.
        Let me raise another question with you, Mr. O'Hagan. Let me
    for the record say I am a trial lawyer by background, and I
    believe in and oppose tort reform. I believe that many other
    benefits that workers have received in this country have come
    by way of litigation, so I must say that the social costs--I do
    not know what your fathers did in terms of work, but my dad
    worked for United Airlines and carried bags for 30 years; and
    it was only because of the hard work and the benefits he
    received in his job that he was able to educate his three
    daughters and send them to college.
        Now the reality is that we operate in a country wherein the
    labor benefits have been better and actually have raised the
    bar for developing countries across the world. My question to
    you is: shouldn't it be that we would want to raise the bar in
    other countries, rather than lower the bar in support for
    workers in this country, in order to improve the economics and
    the industry across the country?
        Mr. O'HAGAN. I would agree absolutely. The point I was
    making is that these social costs are costs that we have to
    bear that others do not. We are not saying they are bad and it
    is the right thing to raise our standard of living, to improve
    our environment, but in the process of incurring those costs,
    we are at a disadvantage. In time, the other countries will
    start to incur those costs, as they should, for the benefit of
    their citizens.
        Ms. TUBBS JONES. Thank you. Mr. Kruse, you stated that the
    middle class in China, in 1994, there were 100 million. What is
    middle class, in terms of income for China?
        Mr. KRUSE. Well, I cannot give you a specific number, but
    what we are talking about by middle class is people in China
    who have disposable--who have reached the level of income that
    they had.
        Ms. TUBBS JONES. Well, what is it? How can you use the term
    middle class and say to me there are 100 million and half a
    billion Chinese who are middle class and you cannot tell me
    what that income is?
        Mr. KRUSE. Well, I think the important thing is, by
    definition, it is people in China in this case that have the
    ability to purchase goods that they choose. There is an
    interesting----
        Ms. TUBBS JONES. Well, let's contemplate this: how many
    people are there in China, sir?
        Mr. KRUSE. A whole lot, several billion.
        Ms. TUBBS JONES. So, in terms of relativity, as compared to
    the people in the United States, in light of the fact that you
    cannot give me a number for what that income is, it may be--
    middle income in China could be $6,000 income, because people
    in China work for 60 cents an hour.
        Mr. KRUSE. And----
        Ms. TUBBS JONES. I do not mean any offense, sir, but I am
    trying to put a perspective on what you are telling me, where
    half a billion people in China are going to be middle income by
    2012.
        Mr. KRUSE. Sure, and I think the important point again is
    people's ability in the country in which they live. In this
    case, the Chinese, have the ability--Congressman Crane is
    talking about automobiles. The automobile, the sale of
    automobiles in China, has exploded over the last couple of
    years. It is the ability of people to make choices and be able
    to purchase what they choose, and I think it is very important
    to all of us testifying this morning, it is all important to
    all of us that the middle-class people in China, the people who
    have the ability to choose and make purchases, is growing at an
    astronomical rate.
        Ms. TUBBS JONES. Let me just end with this question: I
    would appreciate a follow-up response from you, Mr. Kruse, as
    to what you mean by middle class. What were the dollars? It is
    important for people who are listening across the country to
    understand what you mean by middle class as compared to middle
    class in the United States. I would appreciate a written
    response from you on that issue. Mr. Chairman, I know my time
    is up, and I thank you for the opportunity.
        [The information follows:]

        In answer to your question at the Committee's hearing on U.S.-China
    Economic Relations on Friday, October 31, 2003, I am pleased to provide
    the following information in response to your inquiry. Your question
    was, ``what is the definition of ``middle class?'' You amplified your
    question by requesting information about the definition and a
    comparison of ``middle class'' in China relative to ``middle class'' in
    the U.S. The questions followed my parenthetical remark that China's
    middle class is forecast to grow to several million people in the next
    few years.
        In China, there is great debate about the term ``middle class''
    because it carries with it connotations of a social class that fosters
    democracy and of a political structure that is very similar to Western
    democracies. The preferred term in China is ``middle income earners''
    because it succinctly describes an income level. This controversy
    points out one significant difference between these demographic groups
    in each country. China hasn't truly determined how to deal politically
    with this growing affluence yet while in the U.S., the middle class is
    the economic and political foundation upon which the U.S. is crucially
    dependent. Other terms for middle class in China include ``white
    collar'' or ``middle part of society.''
        While no official definition exists in China of middle income
    earners, unofficially the Chinese Academy of Social Sciences defines
    them as those who earn between U.S. $2,500 and U.S. $10,000 per year.
    Unofficially, they indicate that about 15 percent of the Chinese
    population, or between 65 million and 100 million people reach this
    level. An official from the State Information Center forecasts that
    China will have 200 million middle income earners by the end of 2005
    and China's chief WTO negotiator forecasts 400 million to 500 million
    middle income earners within 10 years. The State Information Center
    further defines middle income earners as those who can afford to buy
    cars and housing, and spend money on leisure travel.
        Again, I hope this responds to your inquiry. Should you have
    additional questions or comments, please feel free to contact me.

        Mr. PORTMAN. Thank you, Ms. Tubbs Jones. The gentleman from
    New York, Mr. Houghton.
        Mr. HOUGHTON. Thank you, gentlemen. Thank you very much for
    being here. When we talk about China, we are talking, really,
    about the United States. We are talking about the changing job
    patterns here, and we have got to understand this because it is
    not just China. It is Malaysia, it is the service industry in
    Bangalore, in India, and you have got to help us understand
    what this means, because we must then represent this to our
    constituents back in our home States. So, the question is, what
    is happening, and is it a serious issue? Is it something which
    is out of control, or is it something which is inevitable and
    will right itself? Also, another question is, what can we do
    together?
        I have always felt that you are the engine of our job
    creation, but, at the same time, we must work very closely
    together. We have talked about research and development tax
    credits and investment tax credits and productivity and
    education and things like that. What are really the serious
    things that are necessary in order to make us aware of what
    this changing job picture is? Very, very important for us, so
    maybe if any of you would like to take that question.
        Mr. MALPASS. Mr. Houghton, I will take a crack and then
    defer to my colleagues here. I think it is clearly a serious
    issue, especially as you think about individuals within the
    country. In some cases, they are being overwhelmed by the pace
    of change going on. That goes to people who have lost their
    jobs from manufacturing or from other parts of the economy. So,
    clearly, it is serious and it is affecting a lot of people in
    the country.
        From the standpoint of the good of the country as a whole,
    I think we are moving forward at a faster rate now in 2003 and
    into 2004, and so that is good news.
        We do have engines of change going on in the economy, so
    the way I think for you to think about it is to put it into the
    context of the rapid change going on within both the U.S.
    economy and the world. The way people are producing goods and
    services is changing almost daily, and that sometimes is a
    staggering challenge. My own view is that the United States is
    in a good position to deal with change. We are an economy based
    on small businesses, on freedom of the marketplace, and that is
    going to be the best engines for us.
        Mr. HOUGHTON. Could I just interrupt a minute? So, what you
    are saying is, generally, we are in pretty good control. We are
    in the midst of a changing sea, everybody is. We are--and being
    the largest economy in the world, we are pretty well-situated
    and things like that; is that right?
        Mr. MALPASS. Yes, sir.
        Mr. PORTMAN. Anybody else have any comments?
        Mr. O'HAGAN. I would also like to ask the question, would
    you rather be in China or the United States, and where do you
    feel you have the advantage?
        I think we have the advantages. There is a natural
    migration of jobs for types of products, commodities products,
    that has been going on for many years, but we are moving up the
    ladder, as it were, to the higher products and services which
    substitute or take over the lost jobs in the lower end of the
    ladder, so I think, on balance, we are in very good shape. We
    have a trade surplus with Korea now. The factory you mentioned
    has industrial automation.
        Mr. HOUGHTON. Would you mind if I just interrupt a minute?
        Mr. O'HAGAN. Yes.
        Mr. HOUGHTON. I guess we are going to run out of time. I
    know what you are saying, and I think I feel it, but it is an
    intellectual response, and that is all you have to give, all we
    have to give now. It doesn't help the person who runs a small
    business and is absolutely, totally out-priced by not only
    China, but also people who have the lower labor rates or
    whatever have you. It is very disturbing to us, because we have
    gotten at this through section 203 or section 301 or dumping,
    but it is beyond that now. There is an entirely different
    economic picture out there.
        The question I have is, are we really as well situated as
    we ought to be? What are our strong points to be able so that,
    together, we can build them and combat something which looks on
    paper something which is runaway?
        Mr. JARRETT. Let me mention something. One of the things
    that has always been strong about the United States has been
    the, in my area, the high-tech startups that have continually
    produced great ideas in high technology that America has
    benefited from. One of the things about a startup is it is not
    really in a position to offer big salaries, so what they do
    offer is a piece of the action.
        Mr. JARRETT. They offer stock options to their people, and
    that has been a very important thing in promoting a sense of
    ownership among these small companies, and now we are seeing
    the Financial Accounting Standards Board moving in the
    direction of expensing stock options. All the surveys indicate
    that the number of stock options being granted by companies
    will go down as a result of that. We think this is the wrong
    direction to go in. The stock options should not be--become
    something that small companies really can't offer or really
    large companies for that matter.
        So, the interesting thing is just as we are moving away
    from stock options, China is moving toward them. It is in the
    10th 5-year plan of China to encourage the use of stock
    options. So, it is a very unusual situation we are looking at.
        Mr. O'HAGAN. I would just offer you one quick example from
    our industry, and that is medical technology. We are leaders in
    medical technology. Our exports in medical technology are
    growing very rapidly, and it is interesting that Phillips
    Electronics, a Dutch company, has its worldwide medical
    technology facilities here in the United States.
        Mr. HOUGHTON. Well, my time has run out. Thank you, Mr.
    Chairman. Thank you very much.
        Mr. PORTMAN. Thank you, Mr. Houghton. The gentleman from
    Georgia, Mr. Collins.
        Mr. COLLINS. Thank you, Mr. Chairman. Sometimes the reason
    we move away from policy, it is different opinions from people
    out in the real world, is it affects our Treasury. We don't
    have as much money to spend. It is not that we tax too little.
    We just spend too much in this town.
        It has been mentioned that we have to have trade. Trade is
    important. I don't know of a constituent in the 8th district of
    Georgia who has any objections to producing a product or a
    service and selling it where it may be in the world. It is
    their job that they are interested in, whether it be domestic
    or it be trade, just so as that product or service is
    delivered.
        We have talked a lot about the operation of business and we
    have no way of setting the standards of operation in any other
    nation but this one, but we do have--and we go in--enter into
    agreements with WTO or whether it be bilateral agreements or
    free trade agreements, and if we enter into one and we sign and
    we accept, then we accept the consequences of the same. When
    there are violations by our trading partners, that is when we
    have to step up to the plate. There are accusations that China
    is manipulating its currency, dumping whatever it may be, but
    there is one area that the USTR maybe brought up yesterday that
    I wonder if you all have had any experience in, and that is
    China imposing or reducing--giving credit for a VAT for
    production with the country, which means it costs us more to go
    in because they could then subsidize through that reduction.
    Have you all experienced that? I know you mentioned it some in
    the area of agriculture.
        Mr. JARRETT. Yes. In has been a problem in the chip
    business and semiconductors. As I mentioned, if you design and
    manufacture a chip in China, you can get 14 percent rebate on
    that 17-percent VAT, which gives you a huge cost advantage over
    someone importing chips in and paying a 17-percent VAT. So,
    this is something that we are concerned about and we are
    working with the USTR around trying to work with the Chinese
    government as well to see if it--we can make some changes
    there.
        Mr. COLLINS. Well, in your opinion, is that a violation of
    trade?
        Mr. JARRETT. It certainly--yes. We think that is a
    violation of Article III of GATT.
        Mr. COLLINS. Okay. It was mentioned that we impose--there
    is a lot of nonproductive costs in production here of
    manufacturing. What are some of those nonproductive costs?
    Anyone?
        Mr. O'HAGAN. The ones I mentioned in my statement, the
    legal costs that we have to incur, the health care costs, the
    regulatory costs, whether it is relating to workplace safety or
    the environment. Many of these are necessary and they are good,
    but they add costs to production in this country, and it is
    part of what puts us at a competitive disadvantage.
        Mr. COLLINS. How do those costs or nonproductive costs
    compare 20 years ago toward percentage of production? Do you
    have any idea?
        Mr. O'HAGAN. I don't have a number, but I would suspect
    that they are higher.
        Mr. COLLINS. As a ratio they would be higher in your
    estimate I would say so too. We appreciate the fact that you
    would take time to come here and address the Committee with
    your concerns. We are all concerned because of our workforce.
    We are concerned about not being competitive with other nations
    and their workforce. There are a number of us who believe that
    there are things that we can do as a Congress that would help
    our workforce, and we are working through those. Some of it
    deals with tort reform, medical malpractice, the class action.
    Some of it deals with the cost of taxation, because we have no
    border correction provision for you.
        Some of it deals with regulatory costs. Very little we are
    doing deals with regulatory costs. Normally we add two
    regulatory costs, as we did with the passage of this Sarbanes-
    Oxley Act of 2002 (P.L. 107-204). Thank you again for being
    here. Thank you, Mr. Chairman.
        Mr. PORTMAN. Thank you, Mr. Collins. The gentleman from
    Missouri, Mr. Hulshof.
        Mr. HULSHOF. Thank you, Mr. Chairman. I must respond to my
    good friend from Ohio with her--I am sorry? Each of you are
    friends, Mr. Chairman, but the outspoken, aggressive tone that
    Ms. Tubbs Jones took this morning. I, too, am an attorney who
    actually favors litigation reform. An example would be with
    asbestos litigation which is a hot topic here on Capitol Hill.
    There is no question that there are legitimate cases. There is
    also no question that there have been historically illegitimate
    cases filed in court with regard to as litigation, and there
    are cases that have no merit and then there is no penalty for
    filing a frivolous lawsuit.
        I agree with Ms. Tubbs Jones that workers--there are
    additional protections that have occurred, workplace rules. We
    have eliminated sweat shops in this country at the same time.
    As some of you have alluded to, Mr. O'Hagan, in this question
    of Mr. Collins, China has no Environmental Protection Agency
    (EPA). China has no Occupational Safety and Health
    Administration (OSHA). China doesn't have to worry about
    Internal Revenue Service compliance or health care costs, and
    each of these things, as we have decided as a society, is a
    cost of doing business in our country.
        I would say as a final comment on this issue, one of those
    areas is the way that we tax our U.S.-based companies that do
    business elsewhere. We as a Committee earlier this week had the
    opportunity to level the playing field, and I wish the bill
    that the full House would consider--I wish it had received more
    bipartisan support instead of coming out of this Committee on a
    party line vote.
        That having been said, I do--and I think, Mr. Kruse, your
    point, regardless of where the level of middle income--or
    middle class in China, I think the point that you were trying
    to impress upon us was that the middle class in China is
    growing, is it not?
        Mr. KRUSE. It is growing at a very rapid rate, and I don't
    think you can relate the definition of middle class in one
    country to another. It is, again, the ability of people in a
    certain country to have the ability to purchase goods and
    services that they choose. It is--China is just an unbelievably
    growth country in terms of people that have already and will
    achieve middle class.
        Mr. HULSHOF. I appreciate--I know it was a parenthetical, a
    side during your testimony when you were talking about SPS
    guidelines, but I appreciate whoever happens to tune into this,
    that you mentioned the European Union as far as trying to keep
    out our agricultural products as China seems to do as well.
        I do want to ask some maybe tougher questions, however. Mr.
    DeVos and Mr. Malpass, maybe both to you, because moving down
    the line, Mr. Jarrett talked about the fact that chips are
    subjected to--chips from the United States going into China are
    subbed to VAT that domestically produced, Chinese-produced
    chips are not.
        Electrical products, as Mr. O'Hagan has said, also subject
    to disparate treatment. We have talked about the agricultural
    products, and the same thing with piracy. Each of you in your
    testimony or written statements, though, are cautioning us
    against--as one of you pointed out--ill-conceived tariffs.
    Where is the line, Mr. DeVos, as far as trying to--or Mr.
    Malpass either--as far as making sure that we are given back
    the Holy Grail, that level playing field that everybody wants
    but has different definitions for as far as using
    countervailing duties or whatever we can do when our products
    have been wronged. As Mr. Jarrett has suggested, for instance,
    even a violation of GATT, how would you propose that we deal
    with those types of situations?
        Mr. DEVOS. Well, it is certainly a difficult question, and
    the issue is you have some forums and some provisions to for
    up. Even if there are GATT violations, there are remedy
    provisions that are there. In WTO, there are ways to bring
    people into compliance with areas when they are out of
    compliance. When there are laws or when there are rules in a
    rules-based trading system that are in place, the key is to
    make sure we are--and we have talked earlier a little bit about
    the Department of Commerce and the Department of State and the
    USTR, that we are bringing everyone to the table to go through
    those rules and make sure that they are implemented fairly and
    properly. I think those become the forums, and once we get out
    and we start to pick a specific topic or an issue to put on a
    tariff or to put something, it will have unintended
    consequences on other areas when things start to get
    retaliatory. That is what I was trying to articulate.
        Mr. HULSHOF. Mr. Malpass, let me ask just a quick question,
    because my time--and part of this discussion everyone has
    talked about, and the panel also coming up is also going to
    talk about currency. You mentioned in your written testimony
    that as part of a healthy growth policy--on the bottom of page
    1--is that we should encourage currency stability, but go on to
    talk about not trying to pick currency or push the Chinese
    regarding currency.
        So, do I hear you to say that we should maintain a rigid
    strong dollar policy in this country and yet allow China to
    continue to undervalue their currency?
        Mr. MALPASS. I think the best for both countries is to have
    their currencies be relatively stable over long periods of
    time. That then allows investment, and it allows the economy to
    concentrate on what it can do best. One of the problems that we
    have had in recent years is the volatility of currencies. We
    saw the negative effect of that in the late 1990s when the
    dollar appreciated substantially and disrupted the economy. We
    have also seen the effects on the other side when countries let
    their currencies go weak. Mexico, for example, has continued to
    see its living standards stagnant because of the periodic
    weakness of their currency.
        So, my opinion--and it is different from some other
    economists--is that countries grow fastest when they have
    stability within their exchange rates. That is what allows
    businesses to do their jobs and workers to do their jobs rather
    than worrying about where the currency is going to be.
        Mr. HULSHOF. Thank you. Thank you, Mr. Chairman.
        Mr. PORTMAN. Thank you, Mr. Hulshof. The gentleman from
    Wisconsin, Mr. Ryan.
        Mr. RYAN. Thank you, Mr. Chairman. I am very glad we are
    doing this hearing over the 2 days. This is an issue that
    really affects many of us. I come from Wisconsin which has more
    jobs per capita tied to manufacturing than any other State in
    the country, so this is an issue that we really want to focus
    on.
        I wanted to talk to you for a second, Mr. Malpass, and ask
    you on the VAT shifting issue, where we see that our tax code
    is out of sync with our competitors, particularly China, where
    they are taking their VAT and shifting it on to ours
    essentially by lifting it on their exports and putting it on
    their imports. We seem to have a tax system that is directly
    out of sync with that, where we tax our exports, don't tax our
    imports and we overtax our manufacturers.
        What do you think we can do to change our tax code to make
    it more in sync with our trading competitors so that we are on
    a more level playing field and that they don't have this
    incredible advantage that they are taking over us?
        Also I would like to point out, Mr. Jarrett, that the
    concept and the idea that it is GATT illegal is one that is in
    great dispute. Many countries believe that because the VAT is
    an indirect tax, that that is GATT illegal. If they are picking
    and choosing certain sectors to adjust that, that is illegal;
    but the general concept of having a VAT that is border-
    adjusted, which is an indirect tax, is considered to be GATT
    legal.
        The way we did it with a direct tax and an export subsidy
    with our FSC benefits was determined illegal. We can debate
    that, but the point is the WTO has ruled four times on that
    point. So, what I would like to ask the two of you, do you
    think we should do to make our tax code more helpful with
    respect to putting our exporters on an equal playing field and
    taking some pressure off of our manufacturers who are clearly
    being overtaxed?
        We will start with Mr. Malpass, and then how about Mr.
    Jarrett, and if anybody else has any opinions.
        Mr. MALPASS. Mr. Ryan, thank you for the question, but it
    is a very hard question. This Committee has really studied that
    issue of how to deal with a border-adjusted VAT when we don't
    have that system.
        One of the things I would observe is that a VAT has many
    negatives. It is for one not progressive--in other words,
    people are paying tax on what they consume, and so it hits the
    poor more than the higher up.
        I am simply not in favor of a VAT. You have to look at
    other ways that the United States, as a free country, can have
    an effective and efficient tax system. My small answer to your
    question is simply to have a tax reform that lowers the rates
    and is not quite so complicated as our current system.
        The goal is to allow U.S. businesses to be competitive
    internationally. The best way to do that is just to have a
    better tax code than the one that we have now, and that means a
    lot of work by your Committee. I think that the bill that you
    are putting forward to replace FSC looks to me like a movement
    in the right direction.
        It won't solve this constant complaint that countries with
    VATs get to rebate them when the exports go out, but I think
    you should also recognize the huge negatives that a VAT causes
    those countries.
        Mr. RYAN. Can you not border-adjust a tax system that is
    not necessarily a VAT putting the WTO rules aside?
        Mr. MALPASS. That is a question that I can't answer.
        Mr. RYAN. Mr. Jarrett.
        Mr. JARRETT. I think I would echo Mr. Malpass' comments. I
    think you are already looking at two key things from our
    standpoint. One is to come up with a successor to FSC that gets
    us back to some of--some level of the benefits that we have
    under that now illegal mechanism; and second, to look at a
    better way to tax the foreign income of companies like Intel so
    that there isn't the burden that we have now.
        I guess the third thing I would add, which would be a
    temporary stimulus and was really suggested first when it--as a
    stimulus measure when we were trying to come out of the
    recession, would be the Homeland Investment Act (H.R. 767) to
    bring back an estimated $300 billion that is now outside the
    United States.
        Mr. RYAN. One more--if I may, if the Chair will indulge me,
    for Mr. O'Hagan. I was interested in your testimony where you
    said that some of your members face competition from Chinese
    goods that appear to be subsidized based upon the very low
    seller price that you observed.
        How difficult is it to identify the subsidies in China, and
    how can you or the Federal Government investigate these alleged
    subsidies? How easy or difficult is it to peel away the layers
    of the onion to identify those government subsidies, that
    industrial planning that they are engaging in?
        Mr. O'HAGAN. It is very difficult with our financial system
    in the state it is in, and I don't have a good answer. We know
    that it is there, and these things are always hard to
    investigate, whether it is in China or any other country that
    has subsidies.
        In fact, the foreigners will also contend that we have
    subsidies here in different forms. So, these are always very
    difficult and contentious and hard to get to the core of.
        One other general comment is we are in the era of
    globalization. It is a transition area. We represent one of the
    great companies, we represent Rockwell from your State. They
    are a world leader in industrial automation and doing extremely
    well and have positioned themselves very well locally to tap
    into what is happening on a global scale, not just here in the
    United States.
        Mr. RYAN. Thank you. Mr. DeVos, did you have a comment you
    wanted to add?
        Mr. DEVOS. No.
        Mr. RYAN. Thank you, Mr. Chairman.
        Mr. PORTMAN. Thank you, Mr. Ryan. The gentleman from
    Illinois, Mr. Weller.
        Mr. WELLER. Well, thank you, Mr. Chairman, and, again, I
    want to thank Chairman Thomas for the leadership in conducting
    this hearing and thank our panelists for being here today and
    participating in today's hearing. There is a couple of
    directions I would like to take in my questioning, and the
    first obviously is--builds on what my friend Chairman Crane
    made reference to with the economic news that we heard
    yesterday of the 7.2 percent economic growth, and Mr. Malpass,
    I am sure the economists on the panel. There has always been
    debate when we put together the jobs and economic growth
    package that the President signed into law in May.
        There were arguments in the House over whether it is a good
    idea to lower taxes, particularly for business and small
    business and individuals who happen to be investors. In talking
    with various sectors of the economy over the last month and
    determining what is the impact of the jobs and economic growth
    package that is signed into law in May, the electronic sector
    has indicated they have seen about a 38-percent increase in
    demand for their products. The aviation manufacturers have
    indicated about a 44-percent increase in demand for their
    products. They credit the bonus depreciation component of the
    jobs and economic growth package.
        At the same time, we are seeing what appears to be clear
    evidence that the jobs and economic growth package is working.
    There are some here in the Congress and others outside the
    Congress who advocate a repeal of the jobs and economic growth
    package, and as an economist, Mr. Malpass, what would be the
    economic impact of repealing the tax cuts that the President
    signed into law as part of the jobs and economic growth
    package?
        Mr. MALPASS. Yes, Mr. Weller. I think that that should be
    analyzed as a tax increase, and we know from experience that
    when taxes go up, the activity that is being taxed goes down.
    In this case what the jobs and growth package did was to lower
    the tax rate on labor through the withholding tables, and also
    on capital. We got more of that. We saw that in the third
    quarter GDP number, more economic activity.
        One of the things that I think the tax cut hasn't been
    given enough credit for is simply the stock market gains, which
    affect a lot of Americans nowadays. The market capitalization
    rose in just the second quarter by $1.7 trillion. I think that
    was a partial result of the tax cut, in that it was cutting the
    cost of capital and raising the value of equity.
        So, I would expect several effects if that tax cut were
    repealed. You would see less labor because labor was advantaged
    by the tax cut. You would see less capital, and you would see a
    lower stock market, simply the reverse of what happened in the
    second and third quarter as a result of the tax cut.
        Mr. WELLER. Well, one thing that these industries have
    shared with me is they always point out that when someone has
    an incentive to buy a bulldozer or a company car or a machine
    tool or replace their telecommunications equipment, there is a
    worker somewhere in America who has been working to produce
    that product. So, it creates jobs. We are starting to see those
    positive job numbers as well with that for the first time in a
    long time, new jobs being created as a result of the jobs and
    economic growth package.
        Mr. MALPASS. I do think that we will see more of that going
    forward. One of the good pieces of news in yesterday's GDP
    report was the big rise in business equipment spending. We are
    right now still in this anomaly of having businesses drawdown
    their inventories. What I think is going to happen in the
    fourth quarter is businesses are going to look at the growth
    and say we need more inventory, and that is going to put a lot
    of people back to work.
        Mr. WELLER. Well, we certainly hope that is the case. The
    evidence indicates that is what is happening.
        Shifting to the issue of IPRs, and Mr. Papovich, Mr.
    O'Hagan, you focused on the issue of IPRs. As one who is a free
    trader and who believes that one of the most important
    understandings we need to have with our trading partners is the
    protection of property rights, particularly from those who
    create, that they should be rewarded for their creativity and
    their IPRs should be protected.
        There are many concerns that have been raised regarding the
    Chinese and whether or not they are honoring their commitment
    as part of the WTO regarding IPRs. Mr. Papovich, Mr. O'Hagan,
    you both focused on that in your testimony. It is in the--and I
    would like to hear a little more greater detail from you on
    what your perspective is; but China's criminal law established
    thresholds for initiating criminal prosecutions for copyright
    and intellectual piracy, and many as Mr. Papovich and others
    have noted, suggest and believe that those thresholds are
    impossible to meet, which means that there has been very few
    prosecutions of those who are involved in their own industry of
    piracy.
        I was just wondering, have you seen any evidence that the
    Chinese Government is working to honor that commitment, any
    evidence that they are taking steps to address what is clearly
    a serious problem that affects our relationship with their
    country? Mr. Papovich.
        Mr. PAPOVICH. First, certain levels of the Chinese have
    been very aggressive. As I said--last year, in 2002, they
    conducted 20,000 raids of people selling in the marketplace--
    market operations, retail level raids, and seized 75 million
    CDs. So, at that level we have progress. We have action at
    least.
        We had an unfortunate interpretation by the Chinese supreme
    court a year or so ago that created this problem with getting
    criminal prosecutions, where they ruled that evidence seized
    didn't count, there had to be records of actual sales of
    pirated products. That needs to be changed.
        We are working--and I must say the U.S. executive branch is
    working very hard with us--to get a new interpretation issued.
    It is extremely important.
        Now, it could come to the point where we conclude that the
    Chinese just aren't going to change this interpretation. It is
    possible. If that were to happen, then we would need to
    consider a WTO action, and we think we would have a good case.
    That, in and of itself, would take a while to play itself
    through, and even then if the Chinese didn't change, sanctions
    wouldn't affect us, maybe somebody else's exports in some other
    industry in the United States wouldn't receive imports because
    the United States would impose sanctions.
        So, that is not the optimum solution. The optimum solution
    is getting this interpretation changed. At the moment, as I
    have said, and you have just repeated, we are not able to get
    criminal prosecutions, and for the pirates in China, the
    sanctions that are currently imposed--the fines are seen as
    just a cost of doing business.
        Mr. WELLER. Mr. O'Hagan.
        Mr. O'HAGAN. We have seen a serious counterfeiting problem
    with dry cell batteries that are hurting companies like
    Energizer and Duracell and Rayovac. We have seen it with the
    wiring devices. All I would say is whatever the Chinese are
    doing to address the problem is obviously not adequate at this
    point.
        One thing in time that will happen is that the legitimate
    Chinese manufacturers themselves will start to share our
    concern, because their business is going to be undermined by
    the pirates. So, hopefully they will put additional pressure on
    the Chinese Government to take the proper action to close down
    these pirate operations.
        Mr. WELLER. Mr. O'Hagan, let me ask you----
        Mr. PORTMAN. Mr. Weller, can we make it short? We are over
    time and Mr. English is waiting to question.
        Mr. WELLER. May I just have a quick follow-up? Mr.
    Papovich, I know you indicated the executive branch, the
    Administration has been engaged on this issue. Mr. Papovich and
    Mr. O'Hagan, do you feel you are getting the support you need
    from the Administration from the Department of Commerce, from
    the special trade representative to pursue real enforcement of
    this commitment on IPR? Mr. O'Hagan.
        Mr. O'HAGAN. Yes, I think. So, we are bringing it to their
    attention. We are trying to quantify the nature of the problem
    to help them, but they are certainly receptive and understand
    what the problem is and are trying to address it in the best
    way as they can.
        Mr. WELLER. Mr. Papovich.
        Mr. PAPOVICH. Yes. We do feel that we are getting good help
    at this time.
        Mr. WELLER. Thank you. Thank you, Mr. Chairman.
        Mr. PORTMAN. Thank you. The gentleman from Pennsylvania,
    Mr. English.
        Mr. ENGLISH. I wanted to thank the gentleman, and as I have
    listened to the panel, it has provided certainly a range of
    very interesting insights. I think for the most part,
    supporting positions that each of us have already come into
    this hearing with, but also some additional new insights.
        Mr. Jarrett, I want to congratulate you on making the link
    between trade policy and tax policy and suggesting some new
    incentives for capital investment that I think are necessary to
    allow American manufacturers to continue to thrive in the
    context of an increasingly difficult international marketplace
    and do it on the basis of comparative advantage.
        Mr. Kruse, I want to thank you for bringing up one of the
    forgotten sectors of this debate on China, and that is Chinese
    consumers who I think are being beggared by China's currency
    regime and put at a large advantage in their buying power
    significantly reduced.
        Mr. DeVos, you have offered some very interesting testimony
    to the effect that we need to adhere strictly to our WTO
    obligations, even though that statement seems like a moving
    goal post; and yet, the Chinese should not have to adhere to
    their WTO obligations.
        I have to say that I think the Chinese need to have a
    currency regime that reflects the real value of their currency.
    I believe in response to Mr. Hulshof's question, you said that
    we should use WTO mechanisms in order to enforce China
    following its WTO obligations. In your testimony, you
    acknowledge there is no WTO mechanism for enforcing the WTO
    standard on currency, which I believe China has clearly
    violated.
        That is why I have introduced the China bill, which does
    provide in lieu of any other opportunities to pressure China.
    The option of tariffs in proportion to the distortion involved.
    Those are contingent tariffs. I know most advocates of free and
    open rules-based trade are reluctant to see tariff proposals
    floated out there, but as a practical matter, at the end of the
    day, if the Administration's negotiations with the Chinese are
    unsuccessful, I see very little alternative and very little
    recourse, and I hope we can all agree around here to
    distinguish between using tariffs as a sanction of last resort
    as opposed to tariffs as a standard policy. That brings us to
    your testimony, Mr. Malpass, which I thought again was
    interesting.
        You have spoken out against the idea of China floating its
    currency, suggesting that that was unnecessary, although most
    of the evidence suggests that there is a serious distortion
    here even if it is a long standing policy of distortion. You
    also make the point that there will be no net increase in jobs
    in your view if the Chinese change their currency policy, which
    to me is a chimera, because the real issue here is whether we
    are losing jobs because of Chinese currency policy and other
    factors, that we would not otherwise be losing based on
    comparative advantage.
        So, Mr. Malpass, could you explain in greater detail why
    you believe the weaker dollar relative to its strength in the
    late 1990s would not make some marginal improvements at least
    in stemming the outflow of manufacturing jobs and manufacturing
    capacity that we would not otherwise lose, and would not
    exports increase and exporting firms' employment grow minus
    adjustments for increases in productivity?
        Mr. MALPASS. Mr. English, I think economics is of several
    views on the issue of the connection between a change in the
    exchange rate and the effect on employment and jobs.
        Mr. ENGLISH. My time is short, so I need a one-handed
    economist.
        Mr. MALPASS. I think history shows us that when a country
    has a weak currency, it doesn't see its exports go up. What it
    sees sometimes is itself fall into a recession and its imports
    go down because its living standard has fallen. I don't think
    that is really what we want for the United States.
        If we move into a weak dollar policy, what I think we would
    see is capital exit the United States, our economy would
    weaken, and it really wouldn't be good for our consumers or
    people in any way.
        Mr. ENGLISH. I thank you and I am out of time, but, Mr.
    Chairman, I certainly hope, based on this testimony, that none
    of us embrace the notion that the solution to Chinese state-
    sponsored mercantilism is to adopt in the economics sphere the
    prescriptions of the nuclear freeze movement. I yield back the
    balance of my time.
        Mr. PORTMAN. I thank the gentleman from Pennsylvania and I
    think he has raised some interesting points. I am going to take
    my time now for questions, and then Ms. Tubbs Jones has some
    follow-up questions.
        First following on, Mr. Malpass, to keep you on the spot
    here with regard to Mr. English's question. In response to
    concerns raised about currency manipulation, you made the
    statement earlier that actually the Chinese practice encourages
    investment and its stability in currency is good for
    investment.
        On the second panel, we will have more opportunity I think
    to get into the currency issue of some U.S. manufacturers who
    have been directly acted. Is that fair investment? In other
    words if the Chinese currency is not allowed to flow and if, in
    effect, the U.S. investor therefore can invest with 75 cents or
    even 65 cents on the dollar in China and make investments there
    in terms of jobs, plant and new equipment, rather than here, is
    that investment we want to encourage?
        Mr. MALPASS. China has kept its currency relatively stable
    against the dollar since the middle 1993. In 1997 when there
    was the Asia crisis, it was characterized by devaluations by
    other countries in Asia but not by China. Those devaluations,
    for example, in Indonesia, Korea, Taiwan, hurt the U.S.
    economy. In fact, on a National Income and Products Accounts
    basis, U.S. corporate profits peaked in 1997 and then fell
    thereafter for many years as we fell into the deflation cycle.
    China has stuck with its current policy for 10 years now.
        How does that encourage investment in China? When a
    business looks at a foreign country, one of the risks that it
    doesn't want to take is that the exchange rate is going to
    move. One of the big problems Mexico has had is that their
    currencies are volatile. When the investor thinks about
    building something in that country, the currency risk becomes
    insurmountable. Look for example, at Malaysia which has kept
    its currency pegged against the dollar. It is very attractive
    spot for electronics investments, because they don't have to
    worry about the currency moving.
        In my view, it is fair and proper for a foreign country and
    for the United States to want to keep its currency relatively
    stable as a platform for investment.
        I think one thing that we could look at is for other
    countries, say Mexico, Dominican Republic, countries in South
    America and in Africa, to keep their currencies more stable. I
    think that would help their growth rate.
        Rather than trying to push China to be like a poor, moving-
    backward developing country, it might be useful to see other
    countries try to keep their currencies more stable and move
    forward faster.
        Mr. PORTMAN. I appreciate that, and yet I do think it would
    be helpful if you could more precisely address the issue of
    when our currency is relatively low, as it is now as compared
    to the late 1990s, is it fair for a country like China or Japan
    for that matter not to allow the currency to fluctuate so that
    at a time when U.S. manufacturers are under stress and when we
    are competing legitimately on wages, there is an additional
    advantage to U.S. dollars going to those countries,
    particularly China, to establish what will be longer term
    manufacturing jobs because of that manipulation? I guess your
    answer would be in part, well they did it both ways. They
    allowed it to peg when it was high and now when it is low, and
    so it is fair. I just wonder if that is a legitimate answer to
    a pressing concern we have here in this country, given the
    state of manufacturing and the fact that these are not just
    short-term decisions when you make those investment decisions.
        Mr. MALPASS. One other point that I will make then, and it
    was in my statement, is that if we went into a period where
    China's currency were viewed to appreciate, that becomes very
    attractive for new investment. Japan saw that in the 1980s. So,
    as the yen appreciated, the pace of new investment----
        Mr. PORTMAN. I noted that in your testimony and that was
    interesting, because it would seem counter to sort of a natural
    inclination to be able to find the place where your dollar can
    get the most bang for the buck, but you attribute that to the
    fact that showed a strengthening economy and more stability and
    a better business climate perhaps.
        Mr. MALPASS. Yes. I think a lot of the economic theories in
    this area were developed in the 1950s and 1960s when we were on
    the gold standard and haven't really been updated for the
    floating exchange rate world that we are in. The reality is
    that capital flows are outweighing the trade flows. The
    economic theories were based on the opposite view and haven't
    really been updated. So, what we have seen in practice is that
    Japan in the 1980s, as it appreciated its currency, attracted
    investment. The same happened to the United States in the
    1990s. As the dollar appreciated, it attracted investment to
    the United States. It is the reverse of many of the economic
    theories.
        I think we should be cautious in encouraging China in that
    direction, because I think in their case also they would see
    even more investment--we would see more job losses. They would
    see more investment in China from an appreciating currency.
        Mr. PORTMAN. Well, thank you. We will get into this more in
    the next panel. Are we talking about investing in currency in
    the dollar, or in plant equipment again and things that can
    hurt our U.S. workers.
        If I could just briefly ask all the panelists to very
    briefly respond to a question. I thought Mr. Kruse's comment
    earlier perhaps was the best summary of where we are. China
    presents, you said, an opportunity and a threat, and I think
    you mean to U.S. workers. I think you are right.
        In terms of addressing that threat and addressing the
    challenge, we have gone through a number of issues as I have
    taken notes. One is the currency manipulation issue. Another is
    piracy and intellectual property violations, how the VAT is
    imposed. In China, a 17-percent VAT is imposed, and those are
    taxes imposed on our exports and not on their imports to the
    United States.
        I am told that as of January 1, they are going to change
    that policy somewhat, but that is obviously a distortion of the
    trade adjustment. We have talked about other WTO obligations
    including government subsidies. Mr. O'Hagan talked about that,
    and then finally U.S. policies that affect jobs here.
        If you could just give me one thing that addresses this
    threat or challenge from China that we should be doing
    differently as a country, either in terms of our U.S. policy or
    in terms of our international policy in particular with the
    USTR, the Department of Commerce and the Department of the
    Treasury, what would it be? Mr. DeVos.
        Mr. DEVOS. Well, the first thing I would say is to not just
    get distracted on very specific or smaller parts of the whole
    relationship. This is a long-term relationship. We need to
    develop global trading partners. We need to develop them in a
    way that is consistent, that is defined, that can be monitored
    and developed over time; and, therefore, sometimes we have
    other trends that come in that can get us distracted. So, I
    think our key issue is to not be distracted.
        Now, I say that in an understanding that those distractions
    impact people's lives, and we care about that. We understand
    that. So, therefore, we have to view our long-term policy very
    sensitively in that respect.
        Mr. PORTMAN. Long term. Mr. Malpass.
        Mr. MALPASS. I would sing that old song--accentuate the
    positive and eliminate the negative. The United States has a
    lot of strengths. Build on those strengths. That means
    strengths of small businesses. Lower the tax rates more, and
    educate more. Then eliminate the negative. Try not to have
    harmful regulatory policies, litigation policies and so on down
    the line.
        Mr. PORTMAN. Mr. Jarrett.
        Mr. JARRETT. I think recognize that the world has changed.
    This isn't just a China issue. If you look at China, India,
    Russia, Malaysia, Vietnam, many countries are now participants
    in the world economy, and they weren't 20 years ago. The world
    has become a much more competitive place. We need to make sure
    that America's policies promote our own competitiveness against
    this more--in this more competitive world.
        Mr. PORTMAN. Thank you. Mr. O'Hagan.
        Mr. O'HAGAN. Curtail regulatory costs, more favorable tax
    on manufacturers and absolute enforcement of the rules of the
    game through the WTO.
        Mr. PORTMAN. Thank you. Mr. Kruse.
        Mr. KRUSE. I think on the one hand, we have to continue to
    be firm and to make China understand that we expect them to
    play by the rules. At the same time, as has been mentioned by
    others, we have to have the discipline to have the patience to
    understand that any time you are dealing with a country that is
    a non-market economy that is trying to evolve to where we have
    already come, it does create some problems, and finally very
    quickly, Mr. Chairman, I would say we knew--we all knew there
    were going to be problems when China came into the WTO, and
    certainly there are. We are far better off to have them as a
    part of the WTO and have certain rules they have to play by
    than to not have them.
        Mr. PORTMAN. Thank you. Mr. Papovich.
        Mr. PAPOVICH. Consistent with what several people have
    said, I would say that with the Chinese we have to be precise
    as to what we want, and we have to keep pressing. I think some
    in China count on the fact that we will get distracted and go
    off with some other issue, and so we have to keep--we don't
    become distracted, keep pressing and be precise.
        Mr. PORTMAN. Good point. Ms. Tubbs Jones now has some
    follow-up questions.
        Ms. TUBBS JONES. Thank you, Mr. Chairman. Gentlemen, I
    accept my colleagues' characterization of my questions as
    aggressive as a compliment. The people of the 11th
    Congressional District expect me to be aggressive, and I know
    you don't expect any less from your Congressional
    Representative. Lest you think that I am not supportive of
    exports for companies and I am not pro business, I want you to
    know that I did support the Democratic substitute that offered
    some tax savings for businesses, and that was paid for.
        I also want you to know that on November 10, I am a speaker
    at a luncheon, because I put together a program in my
    Congressional District for businesses to get engaged in exports
    through the Department of Commerce. I am so pleased to let you
    know that Bechtel Steel in my Congressional District is
    receiving an award for its aggressive activity in trying to do
    export business.
        Finally, I would ask you, Mr. O'Hagan, to talk to Rockwell
    Automotive. I have been to visit with them. I have been to
    visit with one of their subsidiaries. I am one of the people
    they do business with. Central Brass is catching hell because
    it is one of those little small businesses that has a niche
    that China is competing with. I have been to Goodyear Tire, and
    Goodyear is the last remaining American tire maker in the
    country, and they are screaming at me, help me, help me, help
    me. I have also visited Olympic Steel.
        My last question to each of you is--and any of you can
    choose to respond to it--in the statements yesterday, there was
    a real discussion about China taking over some of the business
    that Japan had done, and Japan folks are moving into China to
    do business and other countries. What is the risk of us having
    so great a dependency on China that other countries are moving
    in to China and then China says to hell with you all, we are
    going to do what we want to do and we don't--the use of the
    WTO, to my opinion so far, has not really put them in check for
    the violations that they are involved in? What is the risk
    there? How do we address that risk with a heavy reliance on
    China in operating and in our investment and so forth?
        If the question isn't clear, Mr. Jarrett or--I can see a
    question on your face. Whoever. I would appreciate a short
    response, and I thank the Chairman for giving me the
    opportunity.
        Mr. O'HAGAN. One very quick response is that if the Koreans
    and Japanese and others are going into China, we would better
    be there, and that is imperative that we are ahead of the curve
    so we can compete with them, and we are the ones getting the
    advantage. I don't see that there is a great threat or concern.
        Mr. DEVOS. I would just answer as well, it is always hard
    to assess risk, but I think the comment made that having them
    part of WTO, as imperfect as it may be, or however many
    challenges we may have at this time, having them part in the
    whole idea of global trade--we have mentioned many other
    countries here in even this hearing that reliance on one
    country, I think, that risk decreases every day as more and
    more economies begin to engage in trade and as we begin to have
    an organization that tries to develop trade.
        Ms. TUBBS JONES. Thank you very much. I appreciate your
    responses, and thank you for appearing.
        Mr. PORTMAN. Thank you, Ms. Tubbs Jones. Are there
    additional follow-up questions for members of the panel? Mr.
    English.
        Mr. ENGLISH. Yes. Briefly. Mr. O'Hagan, you cite technical
    grounds for some of the trouble your members have getting their
    products into China. Is this, in large part, due to the fact
    that your members must meet the quality standards of the United
    States and then once again--and then once they decide to export
    to China, have to go through an entirely different and
    sometimes altogether nontransparent standards process for the
    Chinese? To what degree do you think these dual standards
    processes place American products at a competitive disadvantage
    in China?
        Mr. O'HAGAN. Mr. English, the nature of the products we
    make requires that they be tested and certified for safety, and
    the most common mark in this country is the UL mark, in Canada,
    the CSA mark. In Canada there is a China Compulsory
    Certification (CCC) mark, and if a company gets its products
    certified here, when it goes to China, it has to go through an
    additional cost of getting the CCC mark, which we really think
    is unnecessary. The mark that is issued in this country is
    absolutely legitimate and should meet their needs.
        So, the requirement for the CCC mark not only does it add
    cost, but more importantly it delays the acceptance of their
    product in the marketplace.
        One of the reasons we are opening an office in China is to
    help to address that issue with the officials in China.
        Mr. ENGLISH. You also mentioned that your members are faced
    with the difficulty of competing against, as you put it,
    ``potentially subsidized products coming into the United
    States.'' I am curious if you put subsidized in quotations in
    your testimony, because under current U.S. trade law, there is
    no way for your members to bring a countervailing duty case
    against Chinese electrical product producers because of a court
    decision a number of years ago that held that we can't apply
    countervailing duties against a non-market economy. Your
    comment.
        Mr. O'HAGAN. Well, that's obviously a limitation. In my
    comments, I didn't intend to imply that that is our most
    serious problem. In fact, I think a more immediate and serious
    problem we face is the counterfeiting issue that I addressed.
        [Additional information follows:]

        We would also like to take this opportunity to follow on the
    question posed by Representative English regarding our description of
    some Chinese products coming into this country as ``subsidized''. With
    some NEMA members reporting imports into this country being priced
    lower than the costs of inputs, we certainly sense that something
    illegal is being done (be it, for example, subsidies from various
    levels of government, or overly generous loans courtesy of China's
    shaky financial system), but at this time it is hard to know exactly
    what or how it should be formally defined.

        Mr. ENGLISH. Thank you. Thank you, Mr. Chairman.
        Mr. PORTMAN. I thank you, Mr. English. I want to thank the
    panel again for giving us some very helpful input as we
    struggle with these issues with the opportunities and
    challenges we face with China, and we look forward to
    continuing to work with you and look forward to having you
    submit any additional comments you may have for the record.
    Thank you all.
        We would now like to call the final panel for this 2-day
    hearing on the U.S. trade relationship and economic
    relationship with China. We are pleased to have with us Larry
    Galbraith, who is President and CEO of Denim North America in
    Columbus, Georgia. Jeb Head, who is President of the Atkins &
    Pearce, Incorporated, of Covington, Kentucky. Jeffrey T.
    Somple, who is President of Mack Molding Co., Northern
    Division, Arlington, Vermont and Westford, Massachusetts.
    Finally, Richard Trumka, who is Secretary Treasurer of the
    American Federation of Labor and Congress of Industrial
    Organizations (AFL-CIO).
        Gentlemen, welcome. We look forward to your testimony. As
    you saw in the previous panel, we will endeavor to keep the
    testimony of each of you to 5 minutes. We have an opportunity
    for exchange with members of the panel. As you know, your full
    testimony will be made part of the record, and you certainly
    have the opportunity to submit additional comments for the
    record if you feel in the dialogue that there is a need for
    more information to be provided to this panel.
        As you saw yesterday, we had interesting testimony from the
    government side. We had the Department of the Treasury here,
    the USTR, the Council of Economic Advisers, CBO, GAO, and also
    the USITC. Then earlier today we have heard from the private
    sector both through trade associations and through individual
    companies.
        Today we have the opportunity to continue that private
    sector analysis of our situation with China. I would like to
    ask my colleague, Mr. Collins, from Georgia, if he would like
    to introduce our first witness.
        Mr. COLLINS. Thank you, Mr. Chairman, and I appreciate the
    opportunity to do this. I appreciate the Committee in working
    with me and inviting Mr. Larry Galbraith from Columbus, Georgia
    as he is President and CEO of Denim North America, which is
    based in Columbus. He has some 30 years experience in the
    textile industry. Having that experience and actually had left
    textiles for a while and went to construction, but back into
    textiles in 2001 when the Japanese company by the name of
    Marubeni in Columbus decided that they would sell out, he was
    part of a team that went in and purchased to keep those jobs
    going. We appreciate that very much.
        He is going to bring to us some first-hand knowledge of
    what is happening in the marketplace with textiles. He told me
    he just returned from a 4-week--prior to coming to Washington
    last night, he had been in Central America, I believe, on some
    trade business. He has a lot of knowledge and a lot of
    information, I think, that would be helpful to us in the area
    of textiles. He also recognizes something else, Mr. Chairman,
    because when you read the bulletin that he puts out to his
    employees on a monthly basis, he talks about the other
    industries in this country that are also suffering from trade--
    lack of trade or lack of exports from here but the
    overabundance of imports company. So, he is not just narrowly
    focused on the textile industry.
        Also, Mr. Chairman, I want to have permission to enter into
    the record a letter from also another manufacturer of textile
    products from Forsyth, Georgia, a letter that he wrote to the
    President outlining some of his concerns about the textile and
    imports. Thank you, and welcome, Mr. Galbraith.
        [The information follows:]

                                                 Trio Manufacturing Co.
                                                 Forsyth, Georgia 31029
                                                           June 6, 2003
    President George W. Bush
    The White House
    1600 Pennsylvania Avenue, NW
    Washington, DC 20500

        Dear Mr. President,

        I am writing you today about a matter that is heavy on my heart. I
    am president of a small textile manufacturing company that was started
    in 1899 by my great grandfather and two other men. We are in the sales
    yarn business which means we purchase raw cotton in bales then spin
    this fiber into yarn that we sell on a cone to the home furnishing,
    apparel and specialty trade. We presently employ 65 people. Most of our
    sales are domestic, however, we do have some export sales, and we are
    attempting to expand this segment of our business.
        In 1999 our revenues were $7 million, in 2000 they were $6.3
    million, in 2001, $4.6 million, in 2002, $4.7 million, and for this
    year revenues are trending below $4 million. For the last 2\1/2\ to 3
    years we have operated at a slight loss or a very small profit. We have
    accomplished this by being as frugal and cost efficient as possible.
    There is no fat in our company.
        Since 1994 we have modernized our plant and equipment and have
    reinvested over $3 million. Improved productivity and quality have
    allowed us to continue to exist. We have just committed to invest
    another $1.4 million in additional equipment in our plant that will be
    installed in November and December of this year. We are financing this
    with a $1.1 million loan from a regional bank.
        We are aware that the new tax bill that was just signed will give
    us a 50% bonus depreciation on this equipment. This will help us in the
    future, but it does not help us if we can not make a profit. Our
    associates earn approximately $10.00 to $15.00 per hour so we are not a
    minimum wage payer. In addition to our wages we pay all but $8.00 per
    week for the health care coverage for each of these individuals who
    work for us. Without these jobs these individuals will not have health
    insurance and if they have a medical need the county taxpayers would
    assume the cost of any medical attention they receive at our local
    hospital's emergency room. We have not had a wage increase in our
    company for anyone, including myself, since September 1999.
        In 1990 there were over 2,000 textile jobs in our county with a
    population of around 20,000 citizens. Today there are less than 200
    textile jobs in Monroe County, Georgia. Last year in this country there
    were 116 textile mills closed that eliminated 67,000 jobs. The U.S.
    textile industry in April of this year experienced an additional 6,000
    jobs that were eliminated.
        We are frustrated, mad and scared. In order to compete
    internationally we must have an extremely modern and efficient plant
    which produces a quality product, and this costs money. We must make a
    profit and keep a positive cash flow, provide benefits to our
    associates and finance the needed equipment to stay modern.
        I commend you and your leadership in Washington for the recent
    legislation that granted the American public tax relief. I have heard
    you repeatedly say we need to create jobs in America, and this
    legislation will help. Mr. President, why not put emphasis on keeping
    the jobs already established in this country? To me this should be our
    first priority.
        I was present at the American Textile Manufacturers Institute
    (ATMI) annual meeting in Washington in March, 2002, and I heard our
    Secretary of Commerce, Donald Evans, say ``know that you have a friend
    in us--know that you can trust us.'' He also stated, ``that our
    President understands the plight of the textile industry.'' Mr.
    President, do you really know our plight? We are hurting. We were told
    we should measure your administration by what you do and not by what
    you say. Well, the loss of 67,000 jobs in our industry in 2002
    certainly is alarming to me and particularly to those individuals and
    the communities directly impacted.
        The entire textile industry is being systematically dismantled.
    Since I started my career in 1971, I can well recall the powerhouses of
    our industry. They were Burlington Industries, West Point Stevens and
    Fieldcrest Cannon just to name a few. I have known the management of
    most of these companies in my career, and it is simply beyond my
    comprehension to even think that any of these three companies would
    ever declare bankruptcy, but that is exactly what has occurred. In
    fact, West Point has just declared bankruptcy for the second time.
    Bankruptcy is a black mark on a person's name and reputation. This is
    the very last thing I would ever consider for our company. If things do
    not improve I would take the road of paying off all debt and simply
    closing the doors of our small company. Please help us so this will not
    happen.
        Manufacturing is vitally important to the economy of any country,
    and manufacturing in this country is on a slippery slope at present.
    Foreign competition is everywhere and many times it is heavily
    subsidized by that country's government. Added to this are illegal
    shipments that circumvent the custom laws of this country. The
    manipulation of foreign currencies (particularly China) continues to
    harm U.S manufacturers.
        I heavily endorse your stance on terrorism and your decision to
    free the Iraqi people from the rule of Saddam Hussein--a truly horrible
    dictator. America is free and strong because of our military
    superiority, and we can preserve peace only by military strength. In a
    similar vein, we can preserve our freedom and strength in the world
    economies by maintaining and supporting a strong and diversified
    manufacturing base in this country. If we continue to lose this vital
    economic ingredient we will eventually become a weakened nation,
    subject to the control of some future super power. Stop building the
    world! We need to be concerned about America first!
        I could list dozens of specific instances where your administration
    has failed to support the U.S. textile industry, but the one that galls
    me and other leaders of our industry the most is the recent bilateral
    trade agreement that was signed with Vietnam--a communist country. Our
    industry was misled again. When is this going to stop?
        You were granted Trade Promotion Authority in December, 2001, much
    to the dismay of many textile state congress men and women. It appears
    these representatives were correct if the trade agreements we get now
    and in the future are similar to Vietnam. Upon approval of TPA you made
    this statement reference textile workers, ``they have a right to expect
    a trade policy that guarantees that competition for markets will be
    free, open and fair.'' You also stated, ``I intend to ensure that the
    interest of our textile industry and workers are at the heart of our
    trade negotiations.'' What we need, Mr. President, is ``fair trade''
    and we are not getting it. You have failed us and lied to us.
        Take care of America first. I am deeply concerned about the 65
    people who work for our company. We are risking the financial security
    of our company's shareholders and associates by making this capital
    investment. But if we do not invest in our plant and equipment, we have
    no hope. So the real question is why should you and your administration
    be concerned about these 65 people and little Trio Manufacturing Co.
    and their future? I feel the answer is that companies like ours are
    being negatively impacted all over America. Important jobs are being
    eliminated, Mr. President.
        Stand up for U.S. manufacturing. Support us and help us. Will you
    heed this call for help or simply turn a deaf ear to our company and
    our industry's plea? Time will tell. The future of America's strength
    and its future generations is now and it is at risk. I am very afraid I
    see a significantly weakened America in ten, twenty or thirty years.
    Please, please help Trio, its associates, our industry and all of
    America.
        I am praying for you and our country just as I am praying for our
    company, our associates and our industry.
                Sincerely,
                                                       Howell W. Newton
                                                              President

    STATEMENT OF LARRY L. GALBRAITH, PRESIDENT AND CHIEF EXECUTIVE
            OFFICER, DENIM NORTH AMERICA, COLUMBUS, GEORGIA

        Mr. GALBRAITH. Thank you very much, Congressman. I want to
    commend this Committee for taking time. I think it is important
    that the discussions that are taking place in this hearing
    where we look at both sides of what is going on, what is good
    for China, what is good for the United States. I think what is
    important and what I am concerned about is the job losses that
    we are incurring in this country.
        When I look at the numbers and I see that we have lost over
    2 million manufacturing jobs in this country, it gives me great
    concern. I am concerned because of those 2 million jobs that
    were lost. Many of them also lost their health care, and what I
    want to talk a little bit about this morning is the textile
    industry and the effect of job loss in this textile industry.
        As Congressman Collins said, a group of us bought a denim
    facility in Columbus, Georgia to preserve at that time 300
    jobs. Today we have 240 jobs, because we have been impacted by
    imports from China.
        In Georgia, there are close to 90,000 people employed in
    the textile and apparel industry. In this country we have
    630,000 employees in this industry; yet, each day we pick up
    the newspaper or we go on the Internet and we see where we have
    had another plant close.
        Today you have many of the major textile industry producers
    that are in bankruptcy. You have Westpoint Stevens in
    bankruptcy, Cone in bankruptcy, Burlington in bankruptcy, and
    Galey & Lord in bankruptcy. This year already other denim
    producers, Avondale Mills has closed three of their facilities.
    Cone has closed two of their facilities. Swift has cut their
    workforce virtually in half, and you have taken about 100
    million yards of denim production out of North America.
        Let's think back about when we talked about the WTO, the
    GATT Agreements, the NAFTA Agreements, and if you remember at
    that time, this industry was told to formalize this with your
    partners and countries in Mexico, Honduras, Guatemala, and I
    can tell you we have done that.
        As Congressman Collins says, I have just returned from a
    trip through Mexico, on through Guatemala, into Honduras, and I
    can tell you as the decline of textile and apparel production
    in this country happens, the same thing is happening in Mexico.
        I was at one of the large cutters that cut and sew jeans.
    They virtually have the capacity to cut about 600,000 dozen
    pairs of jeans a week. This past week they cut their workforce
    in half. That is astonishing. Here you have cheap wages that
    are not cheap enough. So, not only are we going to be affected
    by these job losses in this country, our neighbors in this
    hemisphere are going to be affected by the same thing.
        I can tell you that the textile industry has invested
    heavily to become very competitive to remove high cost. At
    Denim North America we have one of the reasons that I elected
    to go back into this business; this is a new state of the art
    facility. It has cutting technology that will compete with
    anyone in the world. We have--and everyone talks about labor
    cost. I can tell you in a state of the art manufacturing
    facility such as Denim North America, labor is less than 12
    percent of your cost. So, moving those jobs to cheaper labor is
    not the answer.
        What I am concerned about, as you have watched what has
    happened in the last year, in 2002, China's export of apparel
    into this country has increased by 117 percent. Through May
    2003, it has increased another 120 percent. What is happening
    in this country is that even though we have alliances with our
    friends in the Caribbean and in Mexico, where we have access to
    duty free garments, we are still unable to compete. Something
    is wrong with this picture. When you take your costs down, when
    you are able to buy assets for virtually pennies on the dollar
    and you still cannot compete, something is wrong, and I submit
    that is the currency manipulation.
        Now if you think who are the largest consumers of apparel
    products, which country consumes most products? This Nation
    consumes more textile-apparel products than any other nation in
    the world. I want this Committee to know that I understand that
    if we had this field level where we competed in fair trade and
    if what we are doing today is competing under the disguise of
    free trade, would apparel products be more expensive?
    Absolutely. They would be more expensive. The retailer would
    pay more. I am the first to admit that.
        We are big in the jeans business. If you think denim
    production and denim sales in this country last year grew, yet
    denim production sold out of U.S. textile companies declined
    dramatically. There is not a company in North America today
    that is operating anywhere close to their full capacity and
    when you operate at reduced schedules it increases your cost,
    and if something is not done soon to deal with this currency
    differential because they buy U.S. cotton--remember under the
    NAFTA Agreement we must buy U.S. cotton, and I fully support
    that because we support our farmers in this country. We must
    buy U.S. cotton. We must certify that all the yarns and cotton
    that go into fabrics are NAFTA or Caribbean Basin Initiative
    friendly, and yet we are still not able to compete.
        Something is wrong and if you look at the cotton exports
    this year, over two-thirds of the cotton produced in this
    country will be exported to the Asian countries. China has
    surpassed Mexico, our trading partner for apparel, as the
    largest exporter of textiles and apparel into this country.
        I am concerned about the future of this industry. There are
    630,000 people employed in this industry and unless something
    is done I am afraid that if this continues at this rate, by the
    year 2006 most of these jobs will go away.
        I again commend this Committee for taking time to listen to
    this. Give us the opportunity to talk about it. We support free
    trade. We support more fair trade and we ask that you look and
    that the--remember when we agreed to join the WTO we were told
    at that time as an industry don't be concerned because if your
    industry is disrupted there are safeguards that will be
    implemented to protect that industry to keep from disrupting
    your industry. I submit that these safeguards need to be
    enacted and that we need to deal with the China import issue in
    the textile-apparel industry as soon as possible. Thank you.
        [The prepared statement of Mr. Galbraith follows:]
    Statement of Larry L. Galbraith, President and Chief Executive Officer,
                     Denim North America, Columbus, Georgia
        First I would like to thank Chairman Thomas and Ranking Members for
    holding this hearing and affording the opportunity to testify.
        Denim North America produces denim fabric for most major denim
    brands sold in the U.S.A. Our company employs 240 at it's manufacturing
    plant in Columbus, Georgia.
        Georgia's textile industry today employees 89,000 which is 25,000
    fewer than just five years ago. These 25,000 jobs have vanished to
    China, India, Pakistan and Viet Nam, just to name a few countries.
    These Georgians were not put out of work because our industry continues
    to invest heavily in world-class manufacturing technology. Certainly,
    our industry's productivity has increased as we've invested to protect
    jobs and better serve our customers. And this investment should have
    enabled the industry to increase its share of the U.S. market and
    export its products throughout the world, especially to Mexico and the
    CBI countries. The evidence that the rising productivity of the U.S.
    industry is not to blame for the job losses is clear in the dramatic
    increases in textile and apparel imports from China-which more than
    doubled in 2002, growing by an astounding 117 percent. China's exports
    have continued to skyrocket in 2003, up an additional 117 percent
    through May. China's U.S. market share in apparel categories that have
    been removed from quota jumped from 9 percent in 2001 to 53 percent in
    2003. The fact, not the rising productivity of the U.S. textile
    industry, accounts for the massive job losses.
        Denim North America's facility has the latest cutting-edge
    technology equipment in this hemisphere if not in the world.
        Fabric produced in Columbus Georgia is shipped to Mexico,
    Guatemala, etc. to be cut, sewn and shipped back to the U.S.A.
    retailers. All yarn and cotton used must be certified to be N.A.F.T.A.
    or C.B.I. friendly, meaning only U.S. cotton and yarn must be used.
        Each Quarter in 2003 Denim North America has lost sales. China
    furnishes finished garments to retailers at two to four dollars below
    the prices for identical garments produced in C.B.I. or N.A.F.T.A.
    countries.
        China has surpassed Mexico as the largest exporter of textile and
    apparel to the U.S. market.
        In 2002 Denim North America primarily produced denim fabric for
    women and kids jeans. Today, the kids and women's stretch jeans are
    imported in garment form from China (again, two to four dollars below
    N.A.F.T.A. and C.B.I.).
        Denim North America has taken a very aggressive approach to try to
    be competitive with Asia's full package garments. To retain some
    women's and kids fabric, Denim North America, in conjunction with cut-
    and-sew producers in Mexico and Guatemala, sold garments at no profit
    to maintain a small market share. For example, stretch denim that sold
    in 2002 for $4.35 a linear yard, is now being sold at $3.15 a linear
    yard. Yet, for the most part we retain only a very small share of these
    two markets.
        Other denim producers in the U.S.A. have closed operations or have
    filed bankruptcy. Swift (Galey and Lord), Cone and Burlington are all
    in bankruptcy. Avondale has closed three plants this year. Cone has
    closed two plants and Swift has terminated about half of its workforce,
    resulting in over 100 million yards of denim production going away in
    2003.
        Remember U.S. denim producers must use all U.S. cotton yarn, which
    I support because it helps the farmers in this country. Cotton yarn is
    the largest cost U.S. fabric producers have. About 50% of fabric cost
    is U.S. Cotton yarn.
        Denim North America has a very low cost base with cutting edge
    technology and yet we continue to lose market share.
        Many think lower wages are the reason for the price difference; I
    submit this is not the case. In a world class manufacturing operation
    like Denim North America, wages are only 12% of total cost.
        China's rapid surge into our market is aided by pegging of the yuan
    to the U.S. dollar. Currency manipulation has allowed China to gain an
    unfair price advantage in our market. Despite the presence of relative
    high duties and the ability of product produced in Mexico, Central
    America and the Caribbean to get duty-free advantage, China has rolled
    into the U.S. Market at an unstoppable speed and increased volume each
    quarter of 2003. How else can this happen other than currency
    manipulation and state subsidy programs?
        Denim North America has experienced appx $12,000,000 loss of sales
    for the first nine months of 2003 resulting from unfair competition.
    Our employees are experiencing time off and lost wages as a result.
        I urge you to ask President Bush to inact the Safeguard Provisions
    agreed to by China to get the U.S. to okay their joining the W.T.O.
    However, it will ultimately be necessary to restore a fair competitive
    market place after safeguards.
        China's current monetary manipulation will displace thousands of
    U.S. workers as well as thousands of jobs in important North American
    countries such as Canada, Mexico, Guatemala, Honduras and the Dominican
    Republic.
        The U.S. market is the market place China wants to dominate. The
    United States is far and above the world's largest textile and apparel
    consuming Nation.
        Thank you for your sense of urgency, as each month passes more and
    more manufacturing jobs are lost in this country.
        While we support Free Trade, Fair Trade is what is important!
        We must always ask ourselves ``Are the decisions we make today good
    for our grandchildren tomorrow''?
        Thank you for your time and I welcome any questions that the
    Committee has regarding the affect of China's trade practices on the
    textile industry.

        Mr. PORTMAN. Thank you, Mr. Galbraith. I would like to take
    a moment if I could do introduce a constituent of mine, Mr. Jeb
    Head. Jeb is here with his wife, Nervoni. He is an entrepreneur
    in the Cincinnati area. He is President of Atkins & Pearce,
    which is a small manufacturing company of industrial textiles
    that faces competition from China on a daily basis. This
    business was begun in 1817. He is the seventh generation to
    operate the business. It provides employment and opportunities
    to over 230 greater Cincinnati workers and their families. He
    is on the frontlines of this economic battle, and he has
    impressed me with his writing and his speaking out on the
    currency issue in particular. He has addressed it in a very
    thoughtful manner and we are delighted that a small
    manufacturer will be here on that issue today. I am pleased to
    have your testimony, Jeb.

       STATEMENT OF JEB HEAD, PRESIDENT, ATKINS & PEARCE, INC.,
                          COVINGTON, KENTUCKY

        Mr. HEAD. Thank you, Mr. Chairman, and thank you,
    distinguished Members, for giving us the opportunity to speak
    here today. I want to start by saying that as Americans we all
    support and respect the aspirations of the Chinese, but at
    least so far in this hearing, I don't feel like we have heard
    the kind of imbalances that really exist in the U.S.-China
    trade relationship.
        As my associate here mentioned, in manufacturing the labor
    costs are between 12 and 25 percent. If it was only cheap labor
    we would be able to compete. The Chinese have to bring their
    product halfway around the world and between shipping costs and
    other logistics costs that would be a level playing field. We
    could compete on quality. We could compete on deliveries and we
    could compete on services.
        The fact is though that there are massive subsidies that
    are on Chinese products from the Chinese Government. We have
    heard about currency manipulations that are in the 20 to 30
    percent range. We have heard about VAT rebates that are in the
    12 to 18 percent range. Altogether this represents 40 percent
    in terms of subsidies to Chinese products.
        Now in industrial markets you don't have 30 or 40 percent
    margins. That is devastating to industrial markets. The playing
    field is like this and jobs that would otherwise stay in
    America, manufacturing infrastructure that would otherwise stay
    in America, and technology that would otherwise stay in America
    is draining into China as a result of these subsidies.
        Now, with all due respect, I will say that these subsidies
    help a lot of people in the United States. It subsidizes many
    corporations' profits. China sends over $140 billion worth of
    material here, and if you accept that 40 percent subsidy number
    that means there is nearly $60 billion of subsidies applied to
    those products. Frankly, that buys a lot of friends and it will
    get a lot of people to say it is a good deal, but it is not a
    good deal.
        I would say in closing that U.S. manufacturers are facing
    tremendous challenges. We are losing a vital part of our
    heritage. I was talking to a business editor at a major
    metropolitan newspaper and she told me she didn't think this
    would be an election issue. She said it was too complicated for
    people to understand, and I want you to know that people
    understand this issue more and more and more. We are suffering
    in manufacturing. It is not right. I think history will look
    back at this period and say this is one of the biggest policy
    mistakes that we have ever had. The time for baby steps is
    over. We need real action, real action not on the little issues
    but on the big ones. The currency, the VAT, we need action.
    Thank you very much.
        [The prepared statement of Mr. Head follows:]
      Statement of Jeb Head, President, Atkins & Pearce, Inc., Covington,
                                    Kentucky
        Atkins & Pearce is a manufacturing company, which produces cordage
    and sleeving for a wide range of industrial uses. We employ 235 people,
    and have been a family owned and operated company since 1817. We have a
    great heritage. We have survived a Civil War, two World Wars, the
    depression, recessions, stagflation. . . . Now, we face a threat that
    may exceed all that we have seen. Our business and the business of my
    customers and suppliers have been dramatically affected by the
    predatory trade policies of China.
    China's Century
        We are witnessing the unfolding of the ``China Century'', just as
    we will come to terms with the twilight of the ``American Century''.
    Within twenty years, China will be the largest economic power on earth.
    Additionally, as evidenced by the recent manned space flight, China
    will also likely gain parity if not military superiority.
        Commentators covering the recent APEC summit observe that China has
    already largely displaced the US in terms of regional influence in
    Asia. To be sure, China is a vast country with a palpable yearning for
    advancement, status, and dignity. Unfortunately, these ambitions have
    degenerated into a trade policy regimen that is astonishing in its
    imbalance, and dangerous in the inevitability of disaster.
        As Americans, we must respect and support the aspirations of the
    Chinese people, even as we embrace the realities of the world in which
    our children and grandchildren will live.
        A part of embracing future realities is a frank assessment of the
    current dynamics of China's relationship to the US, and the rest of the
    world. The pressure on the Chinese leadership to create jobs is
    intense. However, taking US industry, jobs and technology through the
    adoption of predatory trade practices, is a solution we should not
    accept. We should compete on a level playing field.
    Predatory Trade Policies are Unmistakable
        While there are those who seek to defend the trade policies of
    China, nobody should be fooled by what is a comprehensive scheme of
    predatory trade practices. These practices amount to a Chinese
    Government buy-out of US manufacturing jobs.
        The largest component of the China/US unfair trade practice is the
    subsidized Chinese currency. The Chinese buy $600 million dollars a day
    to keep their currency deflated by 40%. This is a fact. This deflated
    Chinese currency has given Chinese goods an overwhelming price
    advantage against American goods, which has led to a huge trade deficit
    of $120 billion, which is growing at 30% per year, as well as a
    staggering loss of US manufacturing jobs.
        There is also a Value Added Tax rebate to Chinese companies from
    the Chinese Government that amounts to a generalized export subsidy,
    making Chinese products more expensive in the Chinese market than they
    are for export to the US. This VAT program is funded by $30 billion
    annually, and amounts to an additional 18% price subsidy across the
    board. These manipulations give Chinese producers an astounding pricing
    power advantage that far exceeds the advantage that comes from cheap
    labor.
        US Manufacturers typically have labor costs of between 15% and 30%
    of sale price. Cheap labor certainly is an advantage, but shipping
    costs, and duties largely offset the labor advantage. If the labor
    differential were the only factor, a vast proportion of manufacturers
    could easily compete by improving efficiency, providing higher quality
    product lines, and importantly, by providing shorter lead times and
    better service.
        However, the currency manipulation, VAT subsidies, and other direct
    unfair practices currently supported by the Chinese Government make it
    impossible for companies producing in the United States to compete.
    These subsidies add an additional 30% to 40% advantage to Chinese
    goods, on top of the cheap labor advantage. US Industrial products do
    not have 30 or 40% margins, and therefore cannot absorb these pricing
    disadvantages.

           ``. . . There is one, and only one, explanation of what's going
    on when a country amasses more than $300 billion in foreign-exchange
    reserves: This is currency intervention on a massive scale to depress
    the value of the currency--to favor exports and restrict imports. These
    effects are identical to a tariff on imports and a subsidy to exports.
    I yield enthusiasm for free trade to no one, but this is not free
    trade. It is explicit government intervention in trade by the back
    door.''
           Lawrence G. Franko, Professor of International Financial
    Management, University of Massachusetts

        The China Economic and Security Review Commission, which has been
    charged by Congress ``to help better understand the almost tectonic
    economic forces now shaping the U.S.-China economic relationship'',
    offers the following:

           China continues to follow a policy of one-way market
    interventions by the government to maintain its currency at a level
    that economists estimate is between 15-40 percent undervalued.--China,
    in violation of both its IMF and WTO obligations, is in fact
    manipulating its currency for trade advantage.
           Manufacturers in China are supported through a wide range of
    national industrial policies, which include: tariffs; limitations on
    foreign firms' access to domestic marketing channels; requirements for
    technology transfer by foreign investors; government selection of
    partners for major international joint ventures; preferential loans
    from state banks; privileged access to listings on national and
    international stock markets; tax relief; privileged access to land; and
    direct support for R&D from the government budget.
           China's undervalued currency and government investment
    strategies are having a deleterious effect on the competitiveness of
    U.S. manufactured goods and contributing to a migration of world
    manufacturing capacity to China, with a concurrent erosion of the U.S.
    manufacturing base.

        It is not disputed that some portion of US industry will
    continually shift to low wage areas when barriers are lifted. Nor is it
    disputed that free trade raises incomes, and benefits society in
    general. But anyone who doubts the degree and intensity of the
    imbalance and deliberate unfairness in China's trade policies at best
    has their eyes closed, and at worst is benefiting from the imbalance,
    and purposefully denying the facts to create confusion.
    Long Term Losses of Industry, Technology, Prosperity
        The artificial and unsustainable pricing power that China achieves
    through this comprehensive regimen of unfair predatory trade practices
    has, and will continue to ``steal'' a larger share of the US industrial
    base than ``free trade'' economics would justify at equilibrium.
        The incremental industrial share that goes beyond what ``natural''
    economics would shift to China is a huge and long-term loss to the US.
    Critical mass is a critical concept.
        New York is the home of global finance, Detroit has historically
    been an automotive center, Pittsburgh retained a global advantage in
    steel for over a half a century, and the Carolinas have, until
    recently, led the world in textile production. These activity centers
    have been based on an initial lead that developed into a cumulative
    build-up of technology, infrastructure, supply chain, and skill base.
    This kind of industrial critical mass feeds upon itself, and nourishes
    a long-term sustainable industrial base.
        When you artificially decimate an industry, or the entire
    industrial base, you lose that critical mass. It doesn't come back. If
    the decimation is based on artificial pricing power, it does not return
    once the artificial advantage is lifted. By tilting the playing field,
    the Chinese are gaining critical mass in terms of infrastructure and
    technological know-how that they would not have gotten on a level
    playing field. But once expropriated, the industrial infrastructure and
    technology will not return.
        The reverse effect occurs in America. As industries are gutted,
    skill and expertise is lost, workers with experience are dissipated,
    economies of scale evaporate, research and development becomes
    unsustainable.
        The electrical circuit board industry is a good example, among
    many. Over the space of just a few years, vast chunks of this industry
    moved to Taiwan and China. The move was utterly fueled by massive
    government subsidies. Now that it is gone there is no chance that it
    will return--even if the playing field was leveled. The skill base,
    network of suppliers, R&D centers, equipment businesses that supported
    this industry have simply died on the vine.
        When our manufacturing base is growing, we benefit from a
    ``multiplier effect''. That is, every $1 of final demand for
    manufactured goods generates an additional $0.67 in other manufactured
    products, and $0.76 in products and services from non-manufacturing
    sectors. Therefore, each $1 of manufactured goods equates to $2.43 of
    total economic activity. This multiplier is the highest of any economic
    sector. Nearly triple that of the Financial Services sector. (NAM
    Report: ``The Case for a Strong Manufacturing Base'', by Joel Popkin,
    6/03)
        Of course, the opposite is also true. When you destroy vast chunks
    of your manufacturing base, you suffocate allied producers and service
    providers; thus, for every $1 of manufactured product lost, the economy
    actually loses a total of $2.43 of economic activity. Lost jobs, lost
    skills, lost economies of scale--a downward spiral.
    This Process Will Not Stop, or Slow Down. It Will Accelerate.
        As stated above, manufacturers do not have 30% or 40% margins. If
    the labor differential out of China was the only factor, a vast
    proportion of manufacturers could easily compete. But given the scale
    of the imbalance there is little that can stop a continued and
    accelerating loss of manufacturing base to China.
        An entire industry has grown up around that process of transferring
    infrastructure and technology to China. Today there is a growing legion
    of consultants that can assist and support the process of either moving
    your operation to China, or sourcing your supply base out of China.
    There are now dozens of ``Private Equity'' firms that can even buy the
    stock in your company. They then do all the dirty work of shutting down
    the US operation, and moving it to China.
        When an incentive this huge is offered, the market reacts. The
    infrastructure that has developed to accelerate this process has only
    recently achieved critical mass. Two years ago, you had to be a real
    pioneer to access China. Today, bailing out of the US is just a phone
    call away.
        Many manufacturers don't like it. Particularly, small and medium
    sized firms have a loyalty to their people, and their nation. But they
    have a gun to their head. It's a game of chicken. If one of your
    competitors bails out first, you will be left unable to compete against
    the Chinese product that is so extensively supported by the Chinese
    Government. I have heard a number of times, from manufacturing
    associates, ``I don't like it, but if I don't, somebody else will.''
        So it will accelerate--until the playing field is leveled. On a
    monthly basis, Chinese imports are at roughly $12 billion and growing
    at 30% year on year. US exports to China are about $1.8 billion per
    month, and growing at 15%.

           ``In one industry after another--clothing, furniture, light
    electronics--domestic manufacturers unable to match Chinese prices have
    gone out of business or shifted production abroad. A recent study done
    for a congressional panel found that at least 760,000 U.S.
    manufacturing jobs have migrated to China since 1992.'' (Los Angeles
    Times October 20, 2002)

        Reliable estimates suggest as many as 7,500 to 10,000 jobs are lost
    with each $1 billion increase in our trade deficit with China. The
    deficit with China is growing by $2 billion per month.
    Wait! Don't Worry. We Can Spend Our Way to Prosperity.
        In the midst of the manufacturing blood bath, we have begun to
    celebrate the return of economic vitality. GDP growth is strong, and
    strengthening. So everything is OK, right? This is a terrible
    misreading. We are becoming a nation of highly indebted consumers.
    Isn't it great for our country to have access to such fabulous prices!
        The current economic regimen is exclusively focused on consumers
    and consumption. There are three legs to the stool that is propping up
    consumers. First, there is the Federal deficit, which pumps dollars
    into the system through tax cuts and increased spending; secondly,
    there is an extremely stimulative monetary policy, which provides low
    interest rates that increase borrowing; and finally, there is massive
    subsidies on consumer products from China and other Asian nations.
        As housing prices, which are fuelled by low interest rates,
    continue to soar, consumers can borrow more and more under their home
    equity lines. This allows them to buy more stuff. The savings rate in
    the US is at historic lows, and among the lowest in the world.
        While we are tempted to think all is well when reports of increased
    economic activity are broadcast, all is not well. The vision of a
    highly indebted, consumer society, where there is no manufacturing, no
    real value produced, where we all ``service'' each others' needs, in an
    all-service economy, is as hollow as any vision could be.
    Willing Accomplices
        There are many who argue that the outcry from American
    manufacturers is misplaced. That it is merely protectionism. Clearly,
    there are two camps in this debate. Large multi-nationals and
    investment banks, as well as the Chinese themselves, have thrown out
    theory after theory, rationale after rationale, to confuse the issue,
    and perpetuate the status quo.
        We shouldn't be surprised. These companies are already heavily
    invested in China, and enjoy the benefits of China's subsidized
    currencies in pricing their products. Consider Walmart. Walmart buys
    roughly $12 billion from China. The currency manipulation factor alone,
    which depresses the value of the Yuan by 20% to 40%, yields Walmart a
    savings of between $2 and $4 billion dollars annually. This makes
    Walmart the price competitive place to shop, displacing American
    manufacturers of their goods, and this savings increases Walmart
    profits and executive bonuses as well.
    Selling Out?
        When one considers the role Walmart has had in transferring
    American jobs to China, it is staggering. It is particularly ironic
    that Sam Walton's biography is titled ``Made in America.'' In it he
    explains his policy of buying from local producers. He reasoned that if
    Walmart bought from local producers, the people surrounding the stores
    would have money to buy things at Walmart. At one time, Walmart did buy
    mostly American products. However, that has changed.
        Consider a Harvard Business School case study on Walmart circa 1995
    (shortly after Sam's death). The study covers Walmart's 1994 entry into
    China. At that time Walmart's plan appeared to have been to set-up
    retail in China. The case quotes, ``Walmart carried more than 1000
    different branded products, most items are directly imported from
    America representing the best sellers in many categories . . .'' (HBS
    case 9-795-118)
        Today, while Walmart's retail operations in the Far East are
    modest, Walmart imports an estimated $12 billion in goods from China.
    So instead of selling in China, they are buying in China. A WSJ article
    suggests that Walmart buys 70% of its goods from China--all subsidized
    by the Chinese Government. (Low Value of Yuan Helps Companies Dependent
    on Cheap Manufacturing, WSJ 9/4/03)
        So what happened to the 1000 American brands that they were going
    to take to China? Do we imagine that when they got there, Chinese
    producers just happened to have exact duplicates of their American
    supplier's best products?
        It would appear that Walmart shifted focus from selling to buying,
    recognizing that the currency subsidy gave them a massive potential
    competitive advantage. It seems only too likely that, product-by-
    product, Walmart took some 1000 leading indigenous American products to
    China, and arranged to have them copied in China. Perhaps they gave
    them the specifications, assisted in setting up production, and
    arranged the delivery under guaranteed orders. Now the American
    companies are out, and Chinese firms have set-up to capture the
    business.
        There is certainly nothing illegal about this activity. But the
    selling out of the domestic supply base seems at odds with Sam Walton's
    original vision. Walmart accepts vast subsidies from the Chinese
    Government on Chinese products. Profits are boosted, and Walmart gains
    large chunks of market share with low pricing made possible by the
    subsidies. China benefits by getting the business, and can proceed to
    build industrial capacity to displace the US capacity, assisted by a
    clear view of the products to be duplicated. And finally America loses
    as domestic companies are driven out of business, and manufacturing
    employees lose their job. Walmart is the rogue-purchasing agent of
    America, Inc., who benefits individually while damaging the broader
    enterprise, and China is the vendor buying the business by subsidizing
    Walmart's profits.
        The Walmart effect may be larger than it first appears. Europe's
    trade deficit with China is much smaller than ours (less than $20
    billion). While this has a lot to do ``strong dollar policy'' in the US
    over the past ten years, it is clear that Walmart provides an amazing
    portal into the US market. And what Walmart does, other retailers are
    forced to do as well.
    The China ``Bubble''
        There can be little question that the trading regimen that the
    Chinese have developed is very deliberate. It is costly, but the
    acquisition of global manufacturing infrastructure is the goal. The
    means to this end are utterly predatory trade policies.
        However, there is a huge risk in pursuing this course for China and
    the world. Many of the apologists for China want us to believe that it
    is the US that risks destabilization by calling for an end to the
    currency peg. However, it is clearly China that is driving an
    unprecedented and wild ride toward a global supply bubble.
        There is no better source for illuminating the 'irrational
    exuberance' that is fanning throughout China than this excellent
    article, which is excerpted here:

      Surge in Lending In China Stokes Economic Worries

      Spending, Investment Sprees Point To Overheating; Bad Debts Rise

       By KATHY CHEN and KARBY LEGGETT Staff Reporters of THE WALL STREET
    JOURNAL 10-3-2003

           Liu Yijun is 27 years old and works as a real-estate agent. He
    and his wife, a supermarket purchasing agent, together make about
    $8,000 a year. On that modest income, this year they've bought a new
    Mazda for more than $19,000 and a new apartment priced at almost
    $91,000. How did they do it? ``Bank loans changed our life,'' Mr. Liu
    says.
           China is awash in easy credit these days, spurring a national
    spending and investment spree . . . Pessimists point to overproduction
    in steel and a possible asset bubble developing in property. They worry
    that economic growth can't be sustained at its current pace. What's
    more, economists estimate that of China's nearly $2 trillion in
    outstanding loans, between $500 billion and $750 billion aren't
    expected to be repaid. Those amounts are in line with Japan's bad-loan
    problem . . .
           . . . The lending boom has roots in an economic-stimulus program
    that Beijing began in the late 1990s after the Asian financial crisis.
    It promotes government spending and easy credit to stimulate growth and
    generate jobs. The program has called for issuing large amounts of
    government debt, seriously widening the country's budget deficit--
    $37.39 billion last year, compared with $2.5 billion in 1993.
           The country's tightly controlled foreign-exchange regime also
    plays a big role in the flow of credit. But maintaining this fixed
    exchange rate often puts China's central bank in a difficult position:
    For every dollar from exports and foreign investment that enters
    China--a total of $378 billion last year--the bank must supply an
    equivalent amount of yuan. Since there is more money entering China
    than leaving it, the supply of yuan keeps rising. China's money supply
    surged 21.6% as of the end of August over the same time last year.
           The government has resisted revaluing the yuan or ending its
    policy of pegging it to the dollar, even after warnings earlier this
    year from Federal Reserve Chairman Alan Greenspan that the yuan's fixed
    exchange rate could make China's economy overheat . . .
           . . . As the cash piles up, Beijing is pressuring bankers to put
    the money to use. . . . [making] new loans totaling $60.4 billion for
    the first eight months of this year and accounting for 23.1% of total
    new lending. Banks have become so eager to lend that they often conduct
    only minimal credit checks and impose minimal penalties for
    delinquencies . . .

    The Peg Drives the China Bubble
        For anyone who has been in China, the pace of growth is truly
    ``crazy''. The currency is undervalued, and driving a near hysteria of
    investment in production infrastructure, as well as real estate.
        The currency peg results in two avenues for irrational exuberance.
    On the one hand, it creates uncontrolled growth in the supply of money,
    which leads to out-of-control and poor quality loan growth. On the
    other hand, it causes Chinese entrepreneurs to think they are
    unbeatable. The artificially perceived pricing power that derives from
    the pegged currency drives unchecked speculative production capacity
    growth for export. The fallout from these distortions will be great.
        Millions of job seeking Chinese stream toward the eastern
    manufacturing zones, where entrepreneurs, who did not exist before
    1992, take out ever larger loans, to fund hyper growth of manufacturing
    infrastructure, while exports grow at 30%, driving 70% of all economic
    growth in China.
        Meanwhile, China amasses a $120 billion trade surplus with the US,
    which is growing at a rate of 28% per year. There is massive daily
    intervention in the currency markets to defend their undervalued
    currency, driving their total foreign dollar reserves to $360 billion
    (one third of their total annual GDP). This strain comes upon a banking
    system that has 40 to 50% non-performing loans, and where loan growth
    is 30% per year, many of which will become non-performing.
        This is not a complicated economic principle. Chinese hyper-
    competitiveness is artificial. And the fundamentals amount to insanity.
    The Chinese are grabbing global market share in manufactured goods with
    heavy subsidies and non-market advantages in the form of the currency
    peg, and export subsidies that total over 40%. The artificial pricing
    power is stimulating unprecedented growth in global manufacturing
    capacity. False market signals lead to oversupply, which leads to long-
    term deflation. When this bubble breaks, everyone will say we should
    have seen it coming.
        It is useful to reflect on the Internet Bubble in this context.
    Many feel rather foolish for believing the hype. Some have gotten in
    trouble for supporting it. But most certainly would agree that we all
    suffered from a collective delusion.
        But think. In the US we have an utterly free press, well
    functioning capital markets, an SEC that regulates securities markets.
    We have a heritage of corporate transparency. There are very venerable
    and trustworthy accounting firms, that certify accounts based on well-
    established accounting principles. There are analysts that analyze, and
    a broad swath of experienced investors, making decisions that are very
    purely driven toward making the right call.
        While the Internet fiasco has caused us to call into question many
    aspects of the integrity of our system, there is no comparison to the
    Chinese system. Yet we fell prey to the Internet Bubble.
        In China, there is little transparency. No free press. There is
    significant corruption through the ranks of government. The banks are
    in terrible shape. Lending is out of control . . . To pursue the rapid
    overheating strategy that the currency peg drives is bound to lead to a
    Bubble that will make the Internet bubble look small, and this will end
    up serving nobody.
        But many cry out that China cannot abandon the peg because that
    would cause havoc on China's delicate economic balance. The truth is
    that the peg is inflicting the damage. Alan Greenspan, when he
    testified at the July senate banking committee, called the manipulation
    ``unsustainable'', and said that the peg would deteriorate the China's
    monetary system. [FT July 17, '03 ``. . . Mr Greenspan suggested that
    the renminbi would have to be allowed to float, saying the current
    campaign of intervention to support it was unsustainable. ``It has
    required them to be very heavy purchasers of US dollar-denominated
    assets,'' Mr Greenspan said. ``At some point they will no longer be
    able to do that, because it will create an inability of their monetary
    system to function well. . . . And I think the Chinese are sufficiently
    sophisticated to understand that.''
        Yes. It is true that when the Yuan appreciates, there will be tough
    economic consequences. But that is the only path to a healthy global
    economy. (It is also inevitable). Those who argue against such a
    course, like the late stage internet analysts, are just trying to get
    everyone to keep their money in, so they can get their money out.
    But What if They Stop Buying Our Bonds
        There is a buzz that there is danger that the Chinese would stop
    buying US bonds in the event of a currency appreciation. This
    apparently will ruin everything.
        Here again we see a Wall Street that is only interested in Wall
    Street. It has to be put in sequence. The Chinese buy a disproportional
    amount of US debt, because they have a disproportionally large amount
    of dollars. They have the dollars because of an artificially large
    surplus, and they have the surplus because of an undervalued yuan. They
    will always have dollars in proportion to the trade surplus. If the
    Yuan appreciated they would have less dollars to buy bonds, but there
    would be a lower trade deficit for the US to finance. This is in the
    right direction.
        The idea that the Chinese might get mad, and do something else with
    their dollars does not hold water either. They could sell the dollars
    for euros and yen and invest in euro bonds and yen bonds. Of course
    that would cause the dollar to further weaken, and would strengthen the
    Euro and Yen (essentially transferring the yuan's strength to the euro
    (yen)). This would simply aggravate China's problem.
        Also, buying the bonds (particularly on the long maturities),
    extends the stimulative US monetary policy out to the home equity
    lines, and as a result, the stimulative regime of the Fed is angled
    more toward consumer spending (as it puts money in consumer pockets).
    This is to say that there is a relatively unmediated connection between
    China bond buying and US importing of Chinese goods. They have little
    incentive to stop financing the purchase of their goods.
    The Voters Will Understand This Issue
        As we look at this debate, we see the two sides. On the one hand,
    the very few--the corporate executives and agents that profit by
    exploiting the lucrative subsidies offered by China. All they have to
    do is sell out their workers, and give up America's technology, and
    America's future. They are well positioned to dominate the debate. They
    have access. They have big profits to protect. On the other hand, the
    very many--those who work in manufacturing companies, and those who are
    supported by their jobs. They are good at what they do. By combining
    brain-power, and the art of their hands, they reach their highest
    potential. But they have little access, and little expertise in the
    affairs of international finance.
        There are some who bet that the many will never understand this
    issue. But already, the truth is coming clearer and clearer. In January
    of this year there was virually no news on this subject. Today, each
    week, across this country, dozen of articles are written--and being
    read.

    MEMBER EXCHANGE: Manufacturing an endangered species in NJ
    phillyBurbs.com

    Alamance County textile leaders brace for a potential flood of Chinese
    goods
    Jan. 1, 2003 Times-News

    US Trade Chief to Push Fair China Trade
    Reuters

    Mexico treasury secretary: Global economy too dependent on U.S. growth
    San Francisco Chronicle

    Who wins when jobs move offshore?
    CNET

    Job Losses, Bush's Risks Rise
    Los Angeles Times

    A.T. Cross: Jobs to be transferred to China
    Pawtucket Times

    Their unemployment assistance exhausted, Wichita's laid-off workers
    struggle daily to make ends meet
    Wichita Eagle

    Fortune 500 taking U.S. jobs overseas
    Sun-Sentinel.com

    Letters: America's trade policies are not working
    Rocky Mountain News

        This is a small sample of how this story is fanning out across
    America--from Pawtucket to Los Angeles, Miami to Chicago, Roanoke to
    Oshkosh. We will not be confused. We will not be called protectionist.
    America will fight to save its future. Anyone running for President
    would be wise to put aside the empty arguments of those who seek to
    keep the status quo. We need to do the right thing.

           There is a growing recognition that executive pay is so high,
    and so linked to profits, that many are willing to defend the corrupt
    system at any cost.
           ``Thanks to the overpaid CEOs, I am going to have to try to
    explain to my children why Daddy doesn't have a job. I'm going to have
    to explain that the company I worked for would rather pay the CEO
    millions of dollars, plus stock options, than keep American workers
    employed. What I am going to teach them is that Americans must buy
    American-made products, or we are not going to have any jobs left in
    this country. I am going to teach them that greed is one of the
    greatest evils there is. That we must fight for and protect what is
    ours. Go ahead, Raytheon, send my job to a Third World country and
    exploit their people. Because one day, you will wake up and find that
    there is no one left in America who can afford to buy your product--and
    then you will be the outsourcing victim!

    DON TERNES
    Wichita Eagle, Posted on Tue, Sep. 16, 2003

    Section 2: Responding to those who cry ``protectionism!''

        There are a number of vocal defenders of the Chinese currency
    regime, which again, is not all that surprising. If we consider that
    the Chinese currency is undervalued by let us say 30%, then the
    currency effect of the $140 billion in goods that are imported amounts
    to $42 billion. That is, the companies that are importing the goods are
    benefiting from $42 billion in subsidies that result from China's
    massive daily currency manipulations. The record $52 billion in foreign
    direct investment flowing into China is also benefited.
        This kind of largess helps China make good friends, and those who
    defend the current highly imbalanced trading regime have come up with a
    full range of theories and rationales to defend the status quo. Let's
    look at a few. The first thing one notices is a strong ``offense
    through arrogance''. This is to say that we are repeated buffeted by
    the claim that exchange rate economics are far too complicated for
    almost anyone to understand--so most of us should just butt out.
    Consider Robert Bartley's ``Exchange Rate Primer'' from the WSJ (9/29/
    03):

           ``The American political elite knows almost nothing about
    exchange rates. Worse, much of what it does know is wrong. This
    wouldn't be so bad if presidents, congressfolk and Treasury secretaries
    were content to leave the issue alone, but recently they've been
    listening to the whining of a curious coalition of protectionists,
    anti-China zealots and beleaguered manufacturers. So herewith a primer,
    aimed at dispelling myths that befog the issue . . .''

        Bartley moves to explain that the Chinese apparently are not as
    confused as to the proper economics behind exchange rates . . .

           ``. . . floating represents the absence of a policy. A fixed
    rate is a policy. The central bank of, say, China uses the exchange
    rate as a policy target; if the yuan starts to rise against the dollar,
    it creates more of them; if it falls it creates fewer.

        So we are supposed at this point to understand that really only the
    Chinese and Wall Street understand the proper disposition of exchange
    rates. Bartley then claims that the law of one price means that
    currency manipulations simply have no effect . . .

           ``. . . Say $1 is worth 8 yuan and each will buy a bottle of
    wine. Then say the exchange rate changes to $1 for 6 yuan. Suddenly the
    wine will sell for $1 and 6 yuan. This arbitrage happens instantly with
    widely traded goods such as gold, and only over time with untraded
    goods such as haircuts. But it will defeat attempts to sell more abroad
    by devaluing your currency . . .''

        So Bartley instructs us that commodity prices react so
    ``suddenly'', or instantly, that exchange rates make no difference.
    However, the fact that over the past year both the Euro and the Yen
    have changed value against the dollar, while the Yuan has remained at
    exactly the same valuation means that by reference something has not
    adjusted.
        The undermining of Bartley's claim is more precisely achieved in
    ``Currency Devaluation: Sometimes It Works'' by John V. Deaver, Former
    Chief Economist at Ford Motor Co., Dearborn, Mich. (WSJ 10/17/03).

           Excerpt: ``. . . Robert Bartley's ``Exchange Rates: a Primer''
    (Thinking Things Over, Sept. 28) is generally sound, but makes an error
    that is common even among non-specialist economists: ignoring the
    importance of capital movements and the bookkeeping equality between
    the current account and the capital account in the balance of payments.
    Thus his ``law of one price'' argument suggests that no country can
    long benefit from a predatory exchange rate policy. . . . Whether the
    balance is ``good for the country'' is hard to measure; whether it is
    ``fair'' depends on whose ox is gored; what to do about it is
    debatable, but whether it happens is not.'' Updated October 17, 2003

        Bartley finishes up his piece with the reaffirmation of his basic
    premise. That Wall Street and China are the only folks qualified to
    understand exchange rates, and that utter catastrophe awaits the entire
    globe if someone like a Congress folk or Treasury Secretary does
    anything but ignore the issue totally.

           ``. . . All of which is to say that when Treasury Secretary John
    Snow makes himself point man for the devaluationists he is an innocent
    playing with matches. . . . Clearly the Administration's confused
    stance toward the dollar is a political calculation, intended as a
    display of doing something about the ``jobless recovery.''
    With Friends Like These . . .
        Stephen Roach, Chief Economist for Morgan Stanley, has also weighed
    into the debate. It is important to fully understand Mr. Roach's
    arguments, because he has been outspoken, has claimed the intellectual
    high-ground, and his ideas have resurfaced time and again throughout
    the debate. In ``The Scapegoating of China'' (US Investment
    Perspectives (USIP), 7/16/03), Roach explains that ``. . . I urged the
    Chinese to stay the course--to leave their RMB policy unchanged. I
    offered three reasons in support of this conclusion . . .'' These
    arguments were written in a Financial Times Op Ed piece, and have been
    echoed in The Economist, and Business Week. His first argument as
    recounted by the Economist goes as follows:

           ``. . . American manufacturers accuse Chinese firms of stealing
    global market share. Yet Stephen Roach, chief economist at Morgan
    Stanley, points out that two-thirds of China's export growth since 1994
    has come from the subsidiaries or joint ventures of foreign
    multinationals. China's export boom is partly due to efforts by rich-
    world firms to remain competitive. Had these firms not invested in
    China, they would have been less profitable and might have hired fewer
    workers at home. A large revaluation of the yuan could hurt them.''
    (Tilting at dragons, Economist, Oct 23rd 2003)
           Roach proclaims, ``China's increasingly powerful export machine
    has America, Europe and Japan stamped all over it. This is hardly and
    example of China grabbing market share from the rest of the world.
    Instead, it is more a by-product of the struggle for competitive
    survival by high-cost producers in the industrial world . . . A high
    cost industrial world has made a conscious decision that it needs a
    Chinese-based outsourcing platform. Dismantling the RMB peg would
    destabilize the very supply chain that has become so integral to new
    globalized production models . . . By putting pressure on China to
    change its currency regime, the industrial world runs the risk of
    squandering the fruits of its own efforts . . .'' (USIP)

        Now of course the obvious critique of this argument is that just
    because the decision makers of major US, European and Japanese firms
    are complicit with the Chinese in exploiting the vast, and unfair
    subsidies offered by the Chinese doesn't make it right, or good.
        In fact, it makes it worse. Looking back at the Walmart example,
    it's bad enough that they took the best American made products to the
    Chinese to have them copied. Copied under a subsidized regime that made
    it impossible for the American firms to defend their position. Do we
    now also find that Walmart actually provided the front money to set up
    the operations? Are we supposed to feel good about that?
        Doesn't this actually dramatically accelerate the loss of
    technology that is perhaps the most damaging consequence of the
    predatory system? When Motorola shuts down a US facility, and ships the
    tooling to China, don't they also ship over the procedural manuals?

         China wins, U.S. loses
           For every 10 percent increase in U.S. FDI in China, there was a
    6.3 percent increase in the level of imports from China to the U.S.,
    with no statistically significant effect on the level of exports from
    the U.S. to China.'' Manufacturing News February 3, 2003

        As we saw, Roach concludes his first point with, ``. . . By putting
    pressure on China to change its currency regime, the industrial world
    runs the risk of squandering the fruits of its own efforts . . .'' Of
    course the ``squandering of the fruits'' would result because changing
    the currency regime would raise the cost of buying from China. It would
    be a reduction of the subsidy.
        For the second point, having argued that dismantling the RMB peg
    would destabilize the very supply chain that multi-nationals have built
    (i.e. that it would matter), Mr. Roach throws out the Bartleyesque
    argument that the exchange rate actually has virtually nothing to do
    with the trading system (i.e. that it doesn't matter).

           ``. . . A second argument in support of China's currency peg is
    the nature of the nation's competitive prowess. Contrary to widespread
    perception, China does not compete on the basis of an undervalued
    currency. It competes mainly in terms of labor costs, technology,
    quality control, infrastructure, and an unwavering commitment to reform
    . . .'' (Pause so I can wipe away the tears. (jh)) `` . . . I have a
    hunch that if China were to revalue the RMB upward by 10%--a change I
    do not expect or advise--its exports would suffer little loss of market
    share.'' (USIP)

        This argument seems to surpass the first in terms of both
    absurdity, and irrelevance. Roach glibly dismisses the full magnitude
    of the currency manipulation, which is generally thought to be more in
    the range of a 30% advantage. Further, the broader abuses committed by
    China include a 18% VAT rebate, tariffs; limitations on foreign firms'
    access to domestic marketing channels; requirements for technology
    transfer by foreign investors; etc., etc.
        To suggest that a 10% change in the currency, which would raise the
    cost of Chinese goods by 10%, would not have an effect is dead wrong.
    Industrial markets are extremely competitive. Roach knows that. 10%
    exceeds the full pretax profit of most manufacturing firms. Certainly,
    a 30% to 50% advantage is overwhelming to industrial businesses.
        Moving to the third reason Mr. Roach advised the Chinese to
    maintain their peg . . .

           ``. . . Third, it's important to stress that there is little
    doubt over the endgame. China has consistently reiterated its long-term
    commitment to opening its capital account and making its currency fully
    convertible. At the same time, China knows full well that a good deal
    of heavy lifting on the reform front has to occur before these
    objectives can be accomplished. That's true of both capital market
    reforms and the need to clean up its banking problems. China is taking
    great strides on these fronts, but a lot more needs to be done. Until
    there is more progress on financial reforms, it would be premature and
    risky for China to float its currency, in my view . . .'' (USIP)

        Mr. Roach is indeed a good friend to the Chinese. Standing in full
    view of a clearly predatory trading behavior, which is causing the loss
    of literally millions of US jobs, and the bankrupting of hundreds of
    firms, he feels that we should continually support the predatory system
    because they need more time to reform their capital markets. Clearly,
    we should support China's efforts to reform its financial system. But
    there is no reason that US employees should lose their jobs permanently
    in support of such reform. Needless to say, from the vantage point of a
    US manufacturer, Mr. Roach's arguments are shockingly empty. But these
    very arguments have been picked up, over and over again.

        Mr. PORTMAN. Thank you, Mr. Head. Mr. Somple.

    STATEMENT OF JEFF SOMPLE, PRESIDENT, MACK NORTHERN OPERATIONS,
                MACK MOLDING COMPANY, ARLINGTON, VERMONT

        Mr. SOMPLE. Mr. Chairman and Members of the Committee, I
    also would like to thank you for taking the time to listen to
    what I have to say today. After listening to what has just been
    said by my two colleagues, I know I am on the right panel.
        Mack Molding is a company that was founded in 1920. It is
    also a family business, third generation, and basically what we
    do is provide plastic-sheet metal contract manufacturing and
    print circuit board services and parts, by far the largest
    which has been historically the computer and business equipment
    marketplace.
        I will be relatively brief because I really only have one
    point to make and I think it has just been made relatively
    well.
        I think we recognize that China has several advantages over
    U.S. manufacturing. They have low labor, the lack of
    regulations, for instance, no EPA, no OSHA. Things of that
    nature have been brought up, and I guess our point on that is
    fine. That is okay. That is the advantages they have. We have
    some of our own.
        I think in terms of product activity, in terms of
    engineering, in terms of what we can bring to producing
    products, we have a lot of advantages as well, and I think all
    we are asking for is that the rules are the same for everyone
    playing the game.
        A little historical section on what has happened to at
    least our company, and I think we are relatively representative
    of small to midsize manufacturers. I joined Mack in 1988. At
    that time we were a $35 million company. We employed about 300
    people. From 1988 to the year 2000, a lot of challenges were
    thrown at us by the new global economy. One of the first ones,
    if you remember back in the 1980s and early 1990s, was you
    can't possibly compete on a quality basis with Japan. American
    manufacturing took that as a challenge and devised new systems,
    new training, new equipment, et cetera, and we met that
    challenge, and we were producing great quality.
        There have been a lot of other buzzwords over the last
    several years, all representing challenges to U.S.
    manufacturers. One-stop shopping. Our customers wanted to have
    us vertically integrated so they could reduce their supply
    chain. We went out and made the appropriate investments to be
    able to provide that. Time to market, we have got to get our
    products from the drawing board into the showroom or into the
    marketplace quicker. We need you to help. So, we made
    investments again in a design company, in a prototype company.
    Just-in-time delivery, no matter where you produce Mack, if you
    want to produce it in the United States but when I snap my
    fingers, I want your product in my factory multiple times in
    the same day. Another challenge, another challenge met. We
    established logistic centers, distribution centers throughout
    Europe and the United States.
        I guess the point I am trying to make is that we can
    compete, we can be creative, we can work hard. We can reinvest
    substantially all of our profits back into facing these
    challenges, back into facing these challenges the global
    economy has put on us, and the low cost has always been there.
    You guys have seen that. It has never been not present, and we
    have addressed that in a lot of ways. We have automated. Labor
    is a significantly low percentage of what we do.
        We have deliberately focused on that, and by the year 2000
    we were manufacturing products like mass storage devices,
    servers, deliberately concentrating on products that were
    large, bulky, difficult to ship, and had a relatively low
    percentage of labor cost. That was a strategy that was working,
    and by 2000 we employed over 2,100 people. Our revenues had
    grown to over $400 million when things were looking relatively
    good.
        Coincidentally, with the weakening of the dollar right
    around the year 2000, a couple of our largest customers, three
    in fact, our three largest customers all announced they were
    going to set up manufacturing in China, and we were welcome to
    go join them if we wanted to, but they would no longer need to
    buy products from us. This was devastating. A lot of other
    customers followed, and it made no sense to us. We thought
    again we have done everything right. We have played by the
    rules, the challenges have come up. We have met those
    challenges, and yet for some reason we are losing the game and
    we don't understand why.
        I certainly do not pretend to be an economist like the
    distinguished first panel had a few on. I am definitely not a
    currency expert by any means, but the net effect has been we
    have lost a thousand jobs, and those jobs are good jobs. They
    are factory jobs, they are well paying. They have full
    benefits. They have retirement plans. A lot of the people that
    I used to be able to wave to on the way to work now either
    don't have a job and they are looking for one or they have
    taken a job in the service sector or in some other type of work
    which may not even provide any health benefits or any
    retirement plans.
        This is painful on a personal basis as well as a
    professional basis. When you work in small towns in America,
    you really become a part of the community, and it is very, very
    painful when you know that you are feeling as if you are
    letting down the people that count on you. If there is a
    currency problem of 15 to 40 percent, to echo what Jeb said, we
    don't have 15 percent to fool around with in our margins.
    Fifteen percent is huge. If there is a competitive disadvantage
    of 15 to 40 percent, we cannot compete with that.
        I think we faced all the challenges that people have thrown
    at us by ourselves with ingenuity and with hard work. At this
    point we need some help, and I think what we are asking, and I
    really liked what I heard earlier from Congressman English, a
    China bill or something which could in some way make China get
    their currency in line with where it should be would go a long
    way to doing that.
        I am originally from New York City so this is a little
    painful for me to say, but last week the Yankees lost the World
    Series. They lost the World Series to the Florida Marlins
    despite a three to one disadvantage in their payroll. I think
    the way they did that was it was nine players to a side and
    three outs to an inning, and that is all we are asking for from
    you. If you can help us, I think we would all appreciate it.
    Thank you very much for your time and consideration this
    morning.
        [The prepared statement of Mr. Somple follows:]
      Statement of Jeff Somple, President, Mack Northern Operations, Mack
                      Molding Company, Arlington, Vermont
        Mack Molding Company was founded in Wayne, NJ in 1920, and moved to
    Vermont in 1939. One of the pioneers in the plastics industry, Mack
    produces injection molded parts and assemblies for a variety of
    markets. Mack consists of three main operating divisions--Mack Northern
    Operations (headquartered in Arlington, VT), Mack Southern Operations
    (headquartered in Inman, SC) and Mack Technologies (headquartered in
    Westford, MA). I am the President of Mack Northern Operations and
    joined the company in 1988.
        Over the last fifteen years we have faced, along with most of
    American manufacturing, numerous challenges. In the 80s and early 90s
    we were told that we could not compete with the quality of Japanese
    imports. We invested heavily in people, systems and equipment and were
    one of the first U.S. companies to achieve ISO registration of our
    quality system in 1992. We have won numerous awards for our quality
    performance and were part of the ``Quality Revolution'' that
    transformed U.S. manufacturing and allowed us to not only compete but
    thrive in the new global economy.
        Then came the advent of ``One Stop Shopping''. Our customers wanted
    to simplify their supply chain and looked for companies that were
    vertically integrated and had multiple capabilities. Mack added sheet-
    metal fabrication and contract manufacturing services that included
    printed circuit board (PCB) assembly and test. We acquired existing
    companies and continued to add jobs and grow. As the marketplace
    demanded up-front services to improve ``Time to Market'' we responded
    by adding design and prototyping services, creating Mack Design and
    Mack Prototype.
        When our customers demanded ``Just in Time Delivery'' we developed
    a network of warehouse and distribution centers throughout the U.S. and
    Europe, which enabled us to provide multiple daily deliveries while
    continuing to manufacture in the Eastern United States. The game was
    constantly changing and we adapted to these changes. We re-invested
    substantially all of our profits into new facilities, equipment and
    employee training and development. We were creative, energetic and
    hardworking--words that also apply to the American workforce and
    American manufacturers.
        Throughout these last fifteen years there has always been the
    pressure to be globally competitive and to be constantly lowering our
    cost structure. We have done this as well. We have automated, we have
    invested in the newest technologies and equipment and we have
    concentrated on products and markets that have relatively low labor
    content. Despite competition from countries that have labor rates of
    $.20/hour Mack continued to be successful. In 2000 we had over 2100
    employees and sales in excess of $400 million. Our primary market was
    Computer & Business Equipment. We provided parts, assemblies and
    complete products for Fortune 500 manufacturers. These products
    included high-end servers, storage systems, printers and copiers.
        Small electronic devices such as cell-phones, personal CD players
    and laptop computers had long since left the U.S. and were being
    manufactured in low-cost countries such as Korea, Mexico and China.
    This made sense--as a proportion of total cost labor makes up a
    significant percentage. A $30 electronic toy might have $5 worth of
    labor. In China, this might be $.50. This difference of $4.50 would
    represent a 15% savings in the overall cost. Small parts are also easy
    and inexpensive to ship, so freight was not a major deterrent to this
    type of work moving offshore. So we concentrated on large, complicated
    products that had relatively low labor content and required a high
    level of engineering support. A $10,000 server might have $200 worth of
    U.S. labor content. In China, this would be $20. This $180 savings
    sounds significant, but represents only 1.8% of the total cost.
    Shipping large parts is expensive, and it is also slow and creates a
    large inventory ``bubble'' that customers like to avoid. We can compete
    with these types of products, and over the years were very successful
    based on a strategy of supporting the high-end of the high technology
    market.
        In 2000 several events conspired to wreak havoc on the computer
    industry. Y2K created a build-up of infrastructure that was
    unsustainable and resulted in an industry-wide glut of inventory and
    capacity. The Internet Bubble burst, compounding the problem. And our
    three largest customers essentially abandoned their U.S. factories and
    set up shop in China. We were stunned and confused. Our carefully
    developed strategy of avoiding the types of products that were likely
    to move out of the U.S. wasn't working anymore. What happened? Large,
    bulky, high tech products with low labor content were supposed to be
    invulnerable to the threat of low cost Chinese manufacturing. In theory
    they still are.
        I do not pretend to be an economist, and I certainly can offer no
    credentials as a global currency expert. But if what I read is true--
    that the Chinese yuan is undervalued by 15-40%, then this offers an
    explanation for the incredible migration of products we are seeing
    moving to China. Even at the low end of that estimate (15%), that
    $10,000 server is now $8500. We cannot compete with that. We should not
    have to compete with that.
        Today Mack employs only 1100 people, and are sales are half of
    their 2000 level. The jobs lost are good jobs, with full healthcare and
    retirement benefits. In Vermont, these displaced workers have either
    found work in the service sector, with lower wages and few if any
    benefits, or they are still looking for work. Every week I hear about
    additional New England manufacturing jobs lost to China. These include
    a variety of companies that produce such diverse products as furniture,
    lawn and garden equipment and sports equipment.
        American manufacturing is not afraid of competition. There always
    has been and always will be lower cost countries. We are not opposed to
    free trade. In fact, we encourage it. We are not asking for tax relief.
    We are not asking for tariffs or trade barriers. All we are asking for
    is a level playing field, where the same rules apply for all
    participants. Currencies must be allowed to float. It is one of the
    levelers of the playing field. If a country's exports and trade surplus
    continue to grow, eventually their currency gets stronger and acts as a
    natural brake on the outflow of products. This is not being allowed to
    happen, and we are being asked to play a game we simply cannot win.
        Why doesn't Mack simply go to China, like many other U.S.
    manufacturing companies? There are a couple of reasons, the most
    important being our sense of community and loyalty to our people and
    the towns in which we work and live. We have been putting down roots
    for over 80 years. We have faced every challenge the ``global economy''
    has thrown at us and we have persevered. We have invested in our
    people, our plants and our equipment to be a world-class supplier to
    some of America's finest companies. We are an American manufacturer
    based in a small town in New England. We're proud of our past and
    believe it or not, confident in our future. We have re-focused on new
    markets and products that we feel will stay in the U.S. We are now
    manufacturing medical devices and instruments, office furniture and
    shower bases. The first question we ask ourselves about a potential new
    customer is ``Will they still be in the U.S. five years from now?'' If
    the answer is no we keep looking. I hope that we will still be asking
    that question five years from now.
        You will be amazed at the things that the American manufacturing
    sector can accomplish if we are simply allowed to compete. If the same
    rules apply to all the players, we always have and always will find a
    way to win the game. Last week the Florida Marlins defeated the New
    York Yankees despite a 3 to 1 disadvantage in payroll. How? 9 players
    to a side, 3 outs to an inning. That's all we're asking.
        Thank you for your time and consideration.

        Mr. PORTMAN. Thank you, Mr. Somple. That was a good
    analogy. Mr. Houghton probably was not appreciative of being
    reminded of that, being from New York, but I appreciate that.
    Mr. Trumka, welcome.

     STATEMENT OF RICHARD M. TRUMKA, SECRETARY-TREASURER, AMERICAN
      FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS

        Mr. TRUMKA. Thank you, Mr. Chairman, Members of the
    Committee. I thank you for the opportunity to testify today on
    the U.S.-China economic relationship on behalf of the 13
    million men and women of the AFL-CIO, and I particularly want
    to thank you for allowing me to be associated with this panel.
        Addressing the problems in the U.S. economic relationship
    with China is of enormous importance to our members. The U.S.
    bilateral trade deficit with China hit $103 billion last year,
    and the U.S. trade deficit with China is up another 22 percent
    in the first 8 months of this year compared to the same period
    last year. Our imports from China continue to outstrip our
    exports by more than 5 to 1, making this by far our most
    imbalanced trade relationship with any major trading partner.
        Meanwhile, the United States has lost more than 2.5 million
    manufacturing jobs since March 2001. While many factors
    contributed to this devastating job loss, it is clear that the
    Chinese Government's manipulation of its currency, violation of
    international trade rules, and egregious repression of
    citizens' fundamental democratic and human rights are key
    factors to an ongoing unfair competitive advantage. The Chinese
    Government is flouting its international obligations, and the
    Federal Government must act urgently to hold it accountable.
        Unfortunately, to date our government has failed to
    effectively stem the job losses resulting from the growing U.S.
    trade deficit with China. The Bush administration has refused
    to take concrete steps to ensure that the Chinese Government
    live up to its international obligations on trade, on currency
    manipulation, human rights, and has denied American businesses
    and workers import relief that they are entitled to under the
    law and, quite frankly, has taken positions at the WTO that
    would only worsen our relationship with China.
        As you may know, the Washington Post reported on Wednesday
    that the Chinese Government promised to purchase additional
    U.S. products, including planes, jet engines, and auto parts.
    This may do little to correct the enormous trade imbalances.
    China made similar promises prior to its accession to the WTO
    in 2001, but has largely ignored these commitments. A few new
    purchases are no substitute for real compliance with its trade
    obligations.
        Over the past 2 years, China has repeatedly and
    consistently failed to comply with WTO rules. The
    Administration rather than take advantage of the WTO's formal
    dispute settlement mechanism to address these violations has
    preferred to rely on prolonged discussions and informal
    consultation in its attempts, failed attempts, to guarantee
    China's compliance. The United States has yet to launch one
    formal WTO complaint against China for all these violations.
    China on the other hand has joined in the WTO challenge to the
    U.S. steel safeguard and has increased its use of antidumping
    actions against the United States.
        The Bush administration has also failed to take or make the
    TRM, established in China's accession agreement, an effective
    means of monitoring China's compliance with its WTO
    commitments. China has kept its currency, the yuan, pegged to
    the dollar at the same rate since 1994, and it is estimated to
    be undervalued by as much as 40 percent. This gives China an
    enormous competitive advantage, as the three people on the
    panel just testified, and creates an inherently unstable and
    unsustainable situation.
        The Chinese Government must allow the yuan to reflect
    underlying economic and market forces. It must end the current
    pay, and while the Chinese Government is reluctant to take this
    action is perhaps understandable our own government's failure
    to act more forcefully regrettably is not understandable to us.
    We call on the Administration to use all tools at its disposal,
    including initiating a WTO case, to send a clear message to the
    Chinese Government that the current situation is unacceptable
    and will not be tolerated.
        The Fair Currency Alliance, which we are a part of, will
    soon file a case against China for currency manipulation under
    section 301 of the U.S. trade law, the section that protects us
    against unfair trade practices by other countries. Mr.
    Chairman, if I might continue for just a minute on human
    rights. Thank you, sir.
        In addition to the unfair competitive advantage gained
    through currency manipulation, the Chinese Government's
    systematic repression of fundamental workers rights is a key
    contributor to the unfair advantage that Chinese exports enjoy
    in the U.S. market. Chinese workers' most basic rights are
    routinely repressed and they do not enjoy the political freedom
    to criticize, let alone change their government. Enforcement of
    wages, hours and health and safety rules is lax or nonexistent
    in many areas of the country. These abuses allow producers in
    China to operate in an environment free of independent unions
    to pay illegally low wages and to profit from the widespread
    violation of workers' basic human rights.
        I want to give you one classic example that I am familiar
    with. Chinese mine workers face conditions that surpass the
    absolute worst labor abuses that our country ever envisioned
    and endured. Research indicates that more than 10,000 people
    die in Chinese mines each year. Coal mines in China may be the
    most dangerous places in the world to work, but unlike American
    mine workers, Chinese mine workers are denied the right to
    organize and bargain collectively and are effectively denied
    any real meaningful health and safety regulations. Those
    policies amount to a deliberate and artificial suppression of
    wages, and the exploitation impacts American workers as well as
    those of other developing countries and artificially lowers the
    price of Chinese exports in the U.S. markets.
        Mr. Chairman, we have ample opportunities to address those
    issues. The Bush administration chose not to even raise the
    case of China before the U.N. Human Rights Commission in April
    2003 despite the fact that the United States had regularly
    raised that issue before.
        We really believe that something needs to be done and done
    quickly to help American workers and the American economy, and
    once again let me thank you for allowing me to be here and
    testify today, but also let me thank you for being associated
    with the rest of the panel.
        [The prepared statement of Mr. Trumka follows:]
         Statement of Richard M. Trumka, Secretary-Treasurer, American
          Federation of Labor and Congress of Industrial Organizations
        Mr. Chairman, Members of the Committee, I thank you for the
    opportunity to testify today on the U.S.-China economic relationship on
    behalf of the thirteen million working men and women of the AFL-CIO. As
    you know, addressing the problems in the U.S. economic relationship
    with China is of enormous importance to our members.
        The U.S. bilateral trade deficit with China hit $103 billion last
    year, up almost 25 percent since China was granted Permanent Normal
    Trade Relations status in 2000. The U.S. deficit with China is up
    another 22 percent in the first eight months of this year compared to
    the same period last year. Our imports from China continue to outstrip
    our exports by more than five to one, making this by far our most
    imbalanced trade relationship with any major trading partner.
    Meanwhile, the United States has lost more than 2.5 million
    manufacturing jobs since March 2001.
        While many factors contributed to this devastating job loss, it is
    clear that the Chinese Government's manipulation of its currency,
    violation of international trade rules, and egregious repression of its
    citizens' fundamental democratic and human rights are key contributors
    to an unfair competitive advantage. The Chinese Government is flouting
    its international obligations, and the U.S. government must act
    urgently to hold it accountable.
        Unfortunately, to date, the U.S. government has failed to act
    effectively to stem the job losses resulting from the burgeoning U.S.
    trade deficit with China. The Bush Administration has refused to take
    concrete steps to ensure that the Chinese Government live up to its
    international obligations on trade, currency manipulation and human
    rights, has denied American businesses and workers import relief they
    are entitled to under the law, and has taken positions at the World
    Trade Organization (WTO) that will only worsen our trade relationship
    with China.
        As you may know, the Washington Post reported on Wednesday that the
    Chinese Government promised to purchase additional U.S. products,
    including airplanes, jet engines, and auto parts. However, this may do
    little to correct the enormous trade imbalance. China made similar
    promises prior to its accession to the World Trade Organization in 2001
    but has largely ignored those commitments.
    Violations of WTO Rules Continue
        Over the past two years, China has repeatedly and consistently
    failed to comply with WTO rules. The Bush Administration, rather than
    take advantage of the WTO's formal dispute settlement mechanism to
    address these violations, has preferred to rely on prolonged
    discussions and informal consultations in its failed attempts to
    guarantee China's compliance. The U.S. has yet to launch one formal WTO
    complaint against China for all of these violations. China, on the
    other hand, has joined in the WTO challenge to the U.S. steel safeguard
    and has increased its use of anti-dumping actions against the United
    States.
        The Bush Administration has also failed to make the transitional
    review mechanism (TRM)--established in China's accession agreement--an
    effective means of monitoring China's compliance with its WTO
    commitments.
    Failure to Act on Currency Manipulation
        China has kept its currency--the yuan--pegged to the dollar at the
    same rate since 1994, and it is estimated to be undervalued by as much
    as 40 percent. This gives China an enormous competitive advantage in
    the U.S. market and creates an inherently unstable and unsustainable
    situation.
        WTO rules clearly prohibit currency manipulation to gain trade
    advantages inconsistent with GATT provisions. Article XV of GATT 1994,
    for example, provides that ``Contracting parties shall not, by exchange
    action, frustrate the intent of provisions of this agreement''
    (emphasis added). Currency manipulation nullifies tariff concessions
    made through WTO processes and amounts to a de facto illegal subsidy of
    Chinese exports. Deliberate undervaluation of the yuan vis-a-vis the
    U.S. dollar also violates the principle of most-favored-nation
    treatment, as it targets one country's currency, adversely impacting
    that country's trade. Certainly, the enormous bilateral U.S. trade
    deficit with China relative to other countries is evidence of the
    uneven impact of China's currency policies on its trading partners.
    China's choice to artificially bolster its own manufacturing sector at
    the expense of the United States (and other countries indirectly) is
    therefore a violation of its obligations under the WTO.
        The Chinese Government must allow the yuan to reflect underlying
    economic and market forces. It must end the current peg and cease its
    accumulation of U.S. dollar reserves. While the Chinese Government's
    reluctance to take this action is perhaps understandable, the Bush
    Administration's failure to act more forcefully in this regard is not.
        We call on the Administration to use all tools at its disposal,
    including initiating a WTO case, to send a clear message to the Chinese
    Government that the current situation is unacceptable and will not be
    tolerated. It is now clear that simple diplomacy and jawboning have
    utterly failed. The AFL-CIO has joined a coalition of labor and
    business to call on the Bush Administration to insist that the Chinese
    Government end its destructive manipulation of currency, or face trade
    sanctions. The Fair Currency Alliance will soon file a case against
    China for currency manipulation under section 301 of U.S. trade law--
    the section that protects against unfair trade practices by other
    countries.
    Inaction in the Face of Violations of Workers' and Human Rights
        In addition to the unfair competitive advantage gained through
    currency manipulation, the Chinese Government's systematic repression
    of fundamental workers' rights is a key contributor to the unfair
    advantage Chinese exports enjoy in the U.S. market. Chinese workers'
    most basic rights are routinely repressed, and they do not enjoy the
    political freedom to criticize, let alone change, their government.
        The Congressional-Executive Commission on China released its 2003
    annual report a few weeks ago. The Commission concluded that: ``Chinese
    citizens are detained and imprisoned for peacefully exercising their
    rights to freedom of expression, association, and belief. . . . Chinese
    workers cannot form or join independent trade unions, and workers who
    seek redress for wrongs committed by their employers often face
    harassment and criminal charges. Moreover, child labor continues to be
    a problem in some sectors of the economy, and forced labor by prisoners
    is common.'' In addition, the Commission found that people seeking to
    practice their faith were subject to harassment and repression, while
    freedom of speech and freedom of the press were denied.
        Enforcement of wages, hours, and health and safety rules is lax or
    non-existent in many areas of the country. These abuses allow producers
    in China to operate in an environment free of independent unions, to
    pay illegally low wages, and to profit from the widespread violation of
    workers' basic human rights. For example, Chinese mineworkers face
    conditions that rival some of the worst American labor abuses in
    American history. Research indicates that more than 10,000 people die
    in Chinese mines each year. Coalmines in China may be the most
    dangerous places in the world to work.
        Chinese policies amount to a deliberate and artificial suppression
    of wages. This exploitation impacts American workers, as well as those
    in other developing countries, and artificially lowers the price of
    Chinese exports in the U.S. market.
        During 2001 and 2002, the number of labor disputes and protests in
    China rose significantly. In response, the Chinese Government jailed a
    number of workers for demonstrating for their rights and cracked down
    on any organization that might support the beginnings of an independent
    trade union. The official labor union--the All China Federation of
    Trade Unions (ACFTU), which is subordinate to the Communist Party--
    continued to discourage strikes and work stoppages, and to negotiate
    sweetheart deals with employers.
        In the face of these grave problems, the Bush Administration chose
    not even to raise the case of China before the UN Human Rights
    Commission in April of 2003, despite the United States' regular
    practice of doing so previously. In addition, President Bush did not
    demand any specific improvements in human rights when he met with
    China's President Hu in the summer of 2003. Instead, the Bush
    Administration has only engaged in ``cooperative dialogueue,'' a
    strategy that has not worked. Since deciding to pursue a dialogueue
    instead of UN action or public pressure, Administration officials have
    noted ``backsliding'' and a ``deterioration in human rights'' in the
    country during 2003, including arrests of democracy activists, harsh
    sentences for labor organizers, and the suppression of independent
    media, church groups, and Tibetans.
        The Administration's failure to take concrete actions on human
    rights and workers' rights in China allows rampant violations to
    continue. Workers in China, the United States, and around the world pay
    the price for this inaction, while companies producing in China enjoy
    the profits.
        In addition to inaction on China's currency manipulation and
    workers' rights violations, the Bush Administration has failed to
    enforce U.S. trade laws effectively with respect to China, denying
    American businesses and workers the trade relief they are entitled to
    under the law. Despite the fact that the International Trade Commission
    (ITC) found that several U.S. industries have been harmed--including
    pedestal actuators and wire hangers.
        President Bush's repeated refusal to act on the ITC's
    recommendations left domestic manufacturers questioning the
    Administration's willingness to ever use the special safeguard
    mechanism. In both cases, the ITC evaluated all of the facts from both
    sides in finding that safeguard action was called for, and in both
    cases President Bush made a political decision to dismiss the findings
    and deny import relief.
        Another special safeguard mechanism created in China's WTO
    accession agreement with the U.S. deals exclusively with textiles. In
    July of this year, a group of textile industry associations filed
    petitions under the provision, seeking the re-imposition of import
    quotas on brassieres, gloves, gowns, and knit fabric from China. In
    each category, imports from China have jumped sharply after the
    elimination of quotas--for example, dressing gown imports rose 698
    percent in the 15 months since quota elimination, and glove imports
    jumped 291 percent during the same period. Yet the Commerce Department
    has already rejected the industry petition on gloves, and importers are
    urging that relief be denied in the other product categories as well.
    Inadequate Protection from Dumping
        One provision of our domestic trade law that U.S. companies have
    been able to use to secure some limited relief from unfair trade
    practices by China is in the area of anti-dumping. But much more could
    be done. Though the United States absorbs almost half of all of China's
    exports to the world, we account for only 15 percent of the anti-
    dumping measures imposed against China, according to the WTO. In
    addition, in many cases the duties imposed under U.S. anti-dumping
    measures regarding China have been inadequate to provide real relief to
    U.S. companies.
        In each of these cases, the Bush Administration had the opportunity
    to effectively enforce U.S. trade laws, but chose not to do so,
    choosing to side with the importers and the Chinese Government, at the
    expense of American workers and producers.
    Conclusion
        Rifts within the business community have contributed to the U.S.
    government's passivity and failure to act to date. Companies that
    produce in China for the U.S. market, retailers, and importers clearly
    benefit from an undervalued Chinese currency, as well as from the abuse
    of workers' rights. On the other hand, companies actually producing in
    the United States--whether for the domestic market or for export--face
    debilitating and unsustainable disadvantages from currency
    manipulation, illegal subsidies and dumping, and violation of workers'
    rights in China.
        American policymakers have a choice to make in trade relations with
    China. They can side with the importers and outsourcers, and stand by
    passively as China takes advantage of its WTO membership and access to
    the U.S. market, abusing its own workers and artificially undervaluing
    its currency in order to undercut American workers and domestic
    manufacturers. Or they can take a stand for American jobs and act now
    to ensure that China plays fair in the global economy.
        Thank you for your attention and for the invitation to appear here
    today. I look forward to your questions.

        Mr. PORTMAN. Thank you, Mr. Trumka. I appreciate the
    panel's testimony. We will start our questioning with Mr.
    Crane, Chairman of the Subcommittee on Trade.
        Mr. CRANE. Thank you, Mr. Chairman, and I want to thank our
    witnesses for appearing here today. Mr. Trumka, you have
    suggested that China maintains a policy of deliberate currency
    devaluation in order to make its exports competitive. What
    explains then the fact that China has maintained the same peg
    of its yuan to the dollar for over 10 years and that China's
    worldwide trade surplus is fairly small?
        Mr. TRUMKA. The fact that it floats with our currency no
    matter where our currency goes. I think all economists and all
    the evidence indicates that they are in fact pegging their
    currency to U.S. dollars, and I believe the case is
    irrefutable.
        Mr. CRANE. Well, then in effect you are saying we are the
    ones that are guilty, we are inflating our currency?
        Mr. TRUMKA. We are guilty for not challenging it.
        Mr. CRANE. No. We are guilty of inflating our currency and
    theirs remains the same relationship with ours.
        Mr. TRUMKA. No. The guilt is if you look at all the
    economic factors, their currency should have risen in the
    market but it hasn't. It has maintained the same peg to ours.
    When our currency goes up, theirs go up. When ours go down,
    contrary to all economic indicators, theirs goes down too.
        Mr. CRANE. Theirs goes down too because it is pegged to
    ours?
        Mr. TRUMKA. Correct.
        Mr. CRANE. If China were manipulating its currency for
    trade advantage, why wouldn't it allow the currency to fall
    further in order to develop a larger trade surplus?
        Mr. TRUMKA. Because that would ultimately hurt them as
    well. They like a 40-percent advantage. I think as these
    gentlemen just told you, with a 40-percent advantage they feel
    very comfortable being able to take over significant markets,
    particularly those here in the United States.
        Mr. CRANE. The next question is for the panel, anyone who
    wishes to respond. Earlier witnesses have testified that
    changing the exchange rate of the Chinese yuan will have a
    marginal effect on the price of Chinese exports to the United
    States because China adds relatively little value as an
    assembler or finisher of components imported from elsewhere. Do
    you folks have any response to these or other witnesses?
        Mr. HEAD. I would say that I do not agree with that. I
    think that when a currency appreciates, it makes the countries
    goods more expensive. You would look at that in the case of
    Europe. The goods coming from Europe today are more expensive
    than they were a year ago because the Euro has appreciated by
    20 percent and that makes their goods 20 percent more
    expensive. The Chinese yuan has stayed depressed because they
    purchase $600 million a day to keep it pegged to the dollar.
    That is currency intervention, and it keeps their currency
    depressed. They have to do that. That was reported in the
    Financial Times, and it is just an example of currency
    manipulation.
        I think that the example of Japan has been misused as well.
    Japan followed the same course of having dramatically
    undervalued currencies up until 1985. What you see is that they
    had dramatically overbuilt capacity and that during the next 10
    years their stock market didn't appreciate as they tried to
    siphon off the excess capacity that they built during the years
    that they had an undervalued currency.
        So, I would say no, I don't agree. I think that an
    undervalued currency makes Chinese goods significantly more
    competitive in American markets, and that is the reason they
    are doing it.
        Mr. CRANE. Do you think we have an undervalued currency?
        Mr. HEAD. Our currency has dropped against the Euro and the
    yen, and I think that is appropriate given the trade deficit
    that we have had. The trade deficit I do think takes away
    manufacturing jobs across the spectrum, and the falling of the
    dollar I think is appropriate and I think the policy of
    allowing the dollar to fall, moving away from strong dollar
    policy is a very good idea.
        Mr. CRANE. Mr. Trumka.
        Mr. TRUMKA. Thank you, Representative Crane. I would also
    like to add that our trading relationship with China is
    relatively in its nascent stages and one thing that must be
    established is the rules that we will continuously trade by.
    Pegging currency violates those rules. Not living up to the
    accession agreement violates those rules, and if we don't
    establish real rules at the beginning of this relationship, we
    fear that they will never be established given the traditions
    of the Chinese people.
        Mr. CRANE. Well, except can't we continue to engage in the
    same thing the Chinese are doing then? When I first came to
    Congress here, our dollar was worth 10 times what it is worth
    today. The dollar today is only worth 10 cents of what the
    dollar was worth back in 1970, and we continue that. Comments
    from anyone?
        Mr. HEAD. I would say that our dollar is determined by
    market forces. We allow our dollar to float. It is determined
    by economic principles, and those economic principles have
    brought the dollar to where it is today. When we abandoned the
    gold standard, which was a reasonably good standard, we went to
    a system of floating rates so that economic forces would
    determine currencies. To have a fixed rate within a generally
    floating rate economy or global economy is a--in order to
    maintain it, you have to intervene to keep it there. We do not
    intervene to keep our currency either low or high, and so I
    would say that it floats to the level that it should be.
        Mr. CRANE. I remember when you could buy an ounce of gold
    for $20 and today it is $385.
        Mr. HEAD. I think that the reduction of the value of the
    dollar has been influenced by economic forces that bring global
    trade into balance and when you intervene in that system, it
    takes it into imbalance.
        Mr. CRANE. It is also an advantage for the government to
    pay off its debts. Thank you. I yield back the balance.
        Mr. PORTMAN. Thank you, Mr. Crane. Ranking Member this
    morning, Ms. Tubbs Jones.
        Ms. TUBBS JONES. I love the way that sounds. Don't tell Mr.
    Rangel I said that. I will wait my turn, Mr. Rangel. Good
    morning, and thank you very much for coming here to testify
    this morning. I don't think I could say any better what I was
    trying to say on the first panel than what you all have said
    this morning, and each of you represent what I have been
    hearing from the businesses in my Congressional District that
    are not the multi-national businesses, that you all are
    struggling and you want help and you want encouragement, and I
    just want to commit that I am here to do what I can. If there
    are some issues that you would like to bring to my attention,
    please feel free to do so. I would really like to allocate my
    time to allow you to say whatever else you want to say versus
    asking you questions, and I guess I have 5 minutes. So, each of
    you can get a minute and a quarter. I do want to encourage you
    to continue to speak out and get your colleagues to speak out
    because it is a voice that must be heard on Capitol Hill from
    the small businesses who are struggling to stay afloat
    throughout our Nation, and I salute you for the work that you
    are doing. I am going to do all I can to be supportive. The
    AFL-CIO, keep on working. Mr. Galbraith, we will start with
    you, and we can just go down the line. You can say what you
    want to say, gentlemen.
        Mr. GALBRAITH. Well, I think it is important that we
    understand that we--the earlier panel talked about middle
    class. Middle class is what has been the economic driving force
    of this country and if we destroy the manufacturing jobs of
    this country we are in essence destroying our middle class,
    which removes our buying power, and I again think why are we so
    interested in raising other people's standard of living while
    we are lowering our standard of living in this country? Thank
    you.
        Mr. HEAD. I guess I would just comment that I believe that
    the situation is going to get worse. It is not slowing down. It
    is accelerating. I think the infrastructure that is in place to
    transfer U.S. jobs to China is growing more and more. I get
    calls from consultants that tell me they can take my business
    over to China. So, I see this problem getting worse and worse,
    and I think that the strength that we are seeing in the economy
    is somewhat illusory because it is great for people to go out
    and spend a lot of money, particularly on cheap stuff, but if
    our productive sector is being eroded, I think that is going to
    be a problem and I think it is going to make it hard for us to
    sustain an economic recovery. Thank you.
        Mr. SOMPLE. I think the first panel was indicating that the
    backbone of the American economy is the small and medium sized
    businesses, which is what we really represent, and I think we
    are the ones that have really been suffering the most over the
    last few years. It is not just us, it is our sub-tier
    suppliers, the people who make the tools and the dies.
        Someone referenced earlier that the Economic Reform Act,
    someone was going to buy a tool. Well, if they go buy that tool
    they will probably be buying it in China right now,
    unfortunately. I have about 200 tools under construction for
    various customers, and I am proud to say every one of them is
    under construction in the United States. That gets more and
    more difficult to do when we see some of the pricing that has
    been thrown out by these people. Again all I want to do is
    reiterate that at least from my point of view, and I think the
    people here share some of those thoughts, we are not here
    looking for tax breaks. We are not looking for any sort of
    restrictions. We are not looking for special deals. All we are
    looking for is make everyone play the game by the same rules,
    and if you do that American manufacturing will figure out a way
    to win the game. We always have in the past, but in this case
    the odds are just a little overwhelming. Thank you.
        Mr. TRUMKA. Thank you. The first thing I would do is point
    out to the Committee's attention; that is, the Congressional
    Executive Commission on China released its 2003 annual report
    just a few weeks ago. I would urge you to include that in the
    record because of the significant findings that it has about
    not only human rights and labor rights and health and safety
    rights but also a multitude of other things that the Chinese
    Government is doing with the lack of enforcement of wages and
    health care rules and safety rules. In addition to that, I
    was--we were very disappointed that yesterday the government,
    the Administration, certified China as not manipulating its
    currency, and I have to tell you that certification yesterday
    by the Secretary in our opinion both defies logic and defies
    the record, and it sends completely the wrong message to China.
        Ms. TUBBS JONES. Mr. Trumka, if you get a copy of that or
    if I can get a copy, I will seek unanimous consent to have it
    submitted to the record. I would just reiterate something that
    was said earlier today. I joined my colleague Mr. English in
    his motion on the floor the other night with regard to the
    China currency, and hopefully in a bipartisan way we will be
    able to continue to press this issue. I thank the Chairman for
    the opportunity to address you. Again, gentlemen, thank you so
    much for appearing here this morning.
        Mr. PORTMAN. The gentlewoman from Ohio has made a unanimous
    consent request that we include in the record of this hearing
    the Commission's report and, without objection, it will be in
    the record. The gentleman from New York, Mr. Houghton.

        [The information is being retained in the Committee files.]

        Mr. HOUGHTON. Thanks very much. This is a fascinating issue
    because it gets to our gut. It gets to the livelihood of
    millions of people, and the thing I am trying to do is to get
    over the hurdle rather than beating the horror stories and what
    do we do? It is very easy to say make everybody play by the
    same rules, but that is not easy. What are we going to do in
    Brazil about the environment? What are we going to do in China
    about child labor? Do we have control over that? I don't know
    that we do. We would like to. We would like to set the
    standards, we would like to have fair labor rates, we would
    like to have fair environmental standards, but it is hard
    getting inside a country to do that now.
        You can say, okay, so if you don't play by the rules that
    we set, then you can't trade with us. Well, that is one way of
    doing it, and what that does is it puts a wall around our
    country, and some of our European and Latin American and Asian
    competitors would love that because they can go in and exploit
    the market the way they want.
        So, the question is what do we really have control over?
    When you enter the world, and not by royalty agreements or just
    by exporting but by really reaching into countries to try to
    sell your product, then you have got to expect those people
    will come back into our country. The government doesn't export
    jobs. We don't have any jobs to export. It is private industry
    that is doing that. The people that you compete with, the
    people that are your suppliers, the people that are your
    customers, they are doing this. So, what do you say to the XYZ
    company and say you just don't do that because you are not
    playing by the same rules? That is tough. We can help on tax
    policy, and you can help in terms of quality and service and
    fast response and ideas and good technical ideas, but that
    really isn't going to be enough. If we go the section 201 and
    the section 301 route, that is a long time. I have been down
    that road, and that takes a long, long, long time. We are dying
    now. So, what are those things practically which are under our
    control that we can do to impact this whole situation? It
    really requires immediate action. I open that for an answer.
        Mr. SOMPLE. I think the panel this morning talked about a
    lot of issues, and you just brought up a lot of issues and we
    got into the Brazilian rainforest somehow. I really think just
    to try to simplify things, I think what you have heard has kind
    of been unanimous today, at least from this panel, is what you
    can do is sponsor a bill similar to the China bill, which is
    dealing with one specific issue which everyone agrees is one of
    the largest ones we are facing and basically tie some sort of
    punishment or whatever for them not abiding by their agreed-to
    WTO agreement to allow their currency to float. They are not
    doing that. Again, I am not a global economist, but I can read
    the USA Today and today in my hotel room was slid this, and I
    looked at foreign currency per dollar, and it has Thursday,
    Wednesday, 6 months ago, and a year, every major currency in
    the world. Every one, the numbers change. The China yuan
    8.2781, Thursday, Wednesday, 6 months ago, and a year ago. If
    you can do one thing, change that. Thank you.
        Mr. HOUGHTON. Fine. So, we change it. So, how does that
    affect somebody who competes with you? What do they do? Do they
    stop dealing with China? If they do, do they go to Malaysia, do
    they go to Singapore? How do we stop the overall erosion?
        Mr. TRUMKA. I think, first of all, there is no magic wand
    that you wave at this thing. I think it is several things that
    you have to do in tandem with one another. I think currency
    manipulation is obviously one very important thing. I think you
    also look at tax code and begin to reward manufacturers that
    produce here as opposed to rewarding people who take those jobs
    and go offshore. I think you also begin to enforce and demand
    enforcement of the trade laws that we have agreed to. It is not
    about whether we trade or not. It is about the rules that are
    in place when we trade. China has agreed to a set of rules, and
    they are not living by them.
        The USITC has found on several occasions, one in textiles,
    one with pedestal actuators, another one with metal hangers,
    that China was violating the trade laws. Our government refused
    to enforce those. It is more than just jawboning. You have to
    actively enforce it and you have to be serious about it. You
    have to tell them that the rules are the rules and everybody
    must play by them and establish that from day one. We have not
    done that. We wink at them. We pretend that they are rules,
    they violate the rules, and we continue winking at them. We
    lose when that happens. It is up to this esteemed body and the
    Congress in general to scrutinize trade bills as they come up
    and make sure that they are a good negotiated deal, that they
    are good to our country as they are to our trading partners.
        No one wants to say build a wall around the United States.
    What we want to say is establish rules that are fair to us and
    make sure that the rules are adhered to. It is like playing a
    football game----
        Mr. HOUGHTON. Just a minute longer, if I could. If you want
    to make sure the rules are adhered to, what club do you have?
        Mr. TRUMKA. Well, unfortunately with some of the trade
    agreements that we have already done, few. We still have
    antidumping laws. We still have the ability to persuade and
    demand things.
        Mr. HOUGHTON. Many of these things fall outside the dumping
    category?
        Mr. TRUMKA. Sure they do.
        Mr. HOUGHTON. For example, if you had very, very low wages
    it can be entirely legal outside the section 201 or section 301
    issues. How do we get at that?
        Mr. TRUMKA. Here is an example. A number of manufacturers
    filed a complaint with pedestal actuators, saying that China
    was illegally dumping--violating the trade rules, not just
    dumping but violating the trade rules. The USITC ruled
    unanimously. Our government then said unilaterally that it is
    not in our economic interest to enforce that agreement. Now,
    when you tell people you have rules, you don't enforce them,
    they will continue to violate them and we will continue to be
    put at a disadvantage.
        Again there is no magic wand that you can wave and make it
    go away. It takes a series of actions and it takes all of us
    working together to do that, working together, labor and
    management, to make more effective products, working together
    with both sides of the aisle to get better trade deals and to
    make sure that they are enforced.
        Mr. HOUGHTON. I would agree with that. Thanks very much.
    Thanks, Mr. Chairman.
        Mr. PORTMAN. Thanks, Mr. Houghton. Mr. Collins from
    Georgia.
        Mr. COLLINS. Thank you, Mr. Chairman. It is good to have a
    panel that all agree on a couple of things. No diversity on
    this one, except maybe in the area of those who actually run
    manufacturing and those who are actually part of labor, but
    they are still all the same.
        We all agree that we have heard testimony that the VAT in
    China has been misused through trade subsidies for Chinese
    companies. We have all heard about the currency and we all
    agree there are some problems in this area of currency. You
    made a very good example when you talked about the levels of
    the--the current value of the currency in China and how it has
    not changed month to month, day to day or year to year. This is
    all about competition, competition in the marketplace, but it
    is also about competition among workforces competing with other
    workforces in other nations. What are some of your employees,
    what are they telling you about how they perceive this
    situation?
        I believe it was you, Mr. Head, who said people understand.
    What are your employees telling you? What are they relating to
    you?
        Mr. HEAD. I would say that I think employees--this is a
    very frightening situation for employees and I think that they
    are very appreciative of the companies that are willing to stay
    loyal to them. I am saying there is a lot of companies that are
    willing to sell out employees and move to China for the
    subsidies that are offered and I think that we need to support
    the employers that are----
        Mr. COLLINS. That is what you think, and I don't have any
    problem with your thoughts, but what are your employees telling
    you? What are they telling you, Mr. Galbraith?
        Mr. GALBRAITH. Congressman, what our employees are telling
    us, I think for the first time the employees are saying someone
    is speaking up for me and what we keep telling them is that our
    leaders in Washington are concerned about their future and
    things will be done and that the WTO has some safeguards in
    there that says if you disrupt certain industries that certain
    things will be done. I know that each of you probably have been
    bombarded by e-mail from different textile employees in
    particular and we keep telling--even though they incur lost
    wages due to working short time, those are being laid off, but
    they are depending upon this government to give them an
    opportunity to compete fairly because wages are not the issue.
    I think every one of these gentlemen on this panel will say on
    wages we can compete with anyone in the world because our
    productivity is probably higher than anyone in the world. We
    have innovations and creativity that other nations don't have.
        Mr. COLLINS. How about Mack Molding?
        Mr. SOMPLE. Basically I would say that my workers are
    scared and they don't understand what is going on, and as we
    have had kind of an ongoing dialogue trying to educate people,
    I think there has been some anger, and the basic feeling comes
    down to one of that it is not fair and why isn't someone doing
    something about this? I would also agree that over the past
    several months I have been somewhat encouraged, and I have
    shared that with our workforce, that it sounds like the issue
    is actually being addressed and recognized and that maybe
    something good is going to come out of it.
        Basically the American manufacturing worker today is
    fearful for their job, they are fearful for their future, they
    are fearful for their 401(k) and everything that goes with
    that. I can't just go in and say, don't worry, things are going
    to be fine, because I don't know if they are going to be.
        Mr. COLLINS. A lot of those things you just named are non-
    production costs, they are benefits?
        Mr. SOMPLE. Absolutely.
        Mr. COLLINS. Benefits are something that you choose based
    on what we put forth as rules and law, but what are you telling
    them about other costs; that is, nonproductive costs such as
    taxes, such as regulations, such as the cost of protection in
    possible litigation cases, what are you telling your employees?
        Mr. SOMPLE. Well, we certainly don't want to be telling our
    employees that we are going to be trying to take our non-
    production costs down to the levels of other countries. They
    are aware that things like that make it more difficult to do
    business in the United States. Specifically, in my home State
    of Vermont it is even on the other extreme in terms of some of
    the environmental and some of the regulatory laws. If you want
    to try to build a new factory, good luck. By the time you
    figure out the paperwork, you have retired. So, I think our
    workers are aware that part of the--I don't want to call it the
    problem. Part of the thing that makes it a little more
    difficult to be competitive is the fact that we offer a lot of
    these benefits, and we want to continue to do that. We don't
    want to cheapen down our jobs as a way to compete. We want to
    get better at what we do, and we want to make investments where
    appropriate, whether it is in people and training or whether it
    is in equipment or facilities or technology, to try to be able
    to compete without eroding the benefit package.
        We have already done some things to our benefit package
    where our benefits basically aren't as good as they used to be
    a few years ago, particularly in the area of health care. We
    have higher deductibles and things like that and our workers
    understand that. They don't like it, but they understand that
    is the type of thing that is going on right now.
        Mr. COLLINS. Mr. Trumka, you have insisted on forcing
    people to play by the rules, and I don't think any of us object
    to the fact that they ought to play by the rules. They should.
    It is what the rules are made for, because I think Mr. Houghton
    made a very good point, that unless you have a big club it is
    very difficult to do so, and we have a big club. We have the
    market, but you also made a very interesting statement. You
    said that we need to reward manufacturers through tax codes.
    What do you mean?
        Mr. TRUMKA. I think that those manufacturers, those people
    that produce things here, if there is going to be rewards
    through the tax code, through tax deductions, tax credits,
    those are the ones that receive it. We believe, in our analysis
    of the tax code right now, that it is the opposite of that.
    Those that decide to take production facilities and move them
    offshore get the rewards of the tax code to the greatest extent
    and those that stay here get penalized for staying here. They
    get penalized in a number of different ways. They don't get the
    credits or the deductions that others do for going offshore.
    They pay increased health costs whenever those costs are
    socialized or controlled in other areas. They live by
    regulations that aren't enforced in other countries.
        The average manufacturing wage in China is 25 cents an
    hour. The legal minimum manufacturing wage is $56 a month, and
    the China Commission that I referred to earlier found out that
    it is not enforced.
        Mr. COLLINS. What I am hearing you say is you don't believe
    that the corporate tax rate or the tax rate should be reduced
    for all corporations, whether they be a manufacturing or
    whether they be a service provider, whether they be a retail or
    whatever, just those who will stay within the boundaries of the
    United States and manufacture. Is that what I am hearing you
    say?
        Mr. TRUMKA. I wouldn't be that dogmatic about it. What we
    are looking to say is take the tax code and remove incentives
    that encourage and reward people for going offshore. If you are
    staying here and you are producing your service or you are
    going to India to send that service back here, I think you
    ought to be treated differently. I think if you live here and
    you work here you shouldn't be able to have a mailbox in
    Bermuda and not pay any taxes here. I think those are all rules
    that when I talk to workers out there they are confused by
    that. They think that they are forced to play by a separate set
    of rules that others aren't playing by, and they think that
    responsible employers that work with them are being
    disadvantaged because those rules aren't being enforced and the
    tax code----
        Mr. COLLINS. You made a statement about a mailbox in
    Bermuda, but those who set up a mailbox in Bermuda leave the
    jobs here. They still pay tax here.
        Mr. TRUMKA. That is not necessarily so.
        Mr. COLLINS. I guess you can say it either way, but that
    was what you were referring to. Many of them do leave their
    jobs here. I believe, Mr. Somple----
        Mr. SOMPLE. I am jumping out of my skin here a little bit
    simply because I would love to be in the position of worrying
    about my tax burden again because that means that I am making
    money, and I think a lot of people in the first panel were very
    concerned about taxes. There is only one reason for that. I am
    not worried about taxes. I used to have a tax consultant who
    would come in every year and help me figure out what I was
    going to do, and I don't need him anymore. I am just trying to
    figure out a way to get over the profit line again, and then I
    can worry about taxes. So, I don't need a tax cut.
        Mr. COLLINS. Well, you might not--what was your opinion 12
    years ago?
        Mr. SOMPLE. I was of a totally different opinion 12 years
    ago.
        Mr. COLLINS. I hope you have a different opinion 5 years
    from now.
        Mr. SOMPLE. So do I. Believe me, right now I would love
    nothing better than to be paying taxes.
        Mr. COLLINS. It is a very difficult situation, but what we
    need to focus on is the 94 percent of the employed in this
    country and try to maintain their jobs and, if we do, we will
    create jobs for the others that want to work. Thank you.
        Mr. PORTMAN. Thank you, Mr. Collins. Mr. English from
    Pennsylvania.
        Mr. ENGLISH. Thank you, Mr. Chairman, and I have been very
    intrigued by the testimony of this panel. I want to say, Mr.
    Head, that for the editor you talked to who claimed that trade
    would not be a political issue in this cycle because people
    don't understand, I think that person should have been in Erie,
    Pennsylvania on Labor Day in the middle of our town square when
    400 people turned out in the rain to protest against China's
    predatory trade policies and especially its currency
    manipulation.
        So, from my perspective I think this is a big issue, it is
    a big concern, and it is a universal concern to people who care
    about the American economy.
        Mr. Somple, I realize you have laid yourself bare by
    confessing that you are not an economist. Within the Beltway
    that is a big disadvantage. I have been reading some of the
    testimony that has been submitted for the record by a couple of
    prominent inside the Beltway economists. One of them from the
    Cato Institute made this statement:

           ``There has been no wholesale movement of U.S. factories
    and investment moving across the Pacific to China. If the
    critics were right, U.S. multinationals would be falling over
    themselves to relocate capacity to China to take advantage of
    its low wages. In reality, U.S. investment in China has been
    stable and modest.''

        I would like you all to comment on that statement, and then
    if you wish to, perhaps list the top three things that Congress
    can do in your view to level the playing field for U.S.
    manufacturers. Mr. Galbraith.
        Mr. GALBRAITH. Well, I think it is very interesting when we
    say that these jobs have not been displaced. The textile
    industry has been displaced dramatically by China. You go
    through China today and you see new textile mills popping up
    all through China.
        To answer your other questions, what can be done, I still
    can go back to what everyone in this panel has alluded to, and
    that is the currency manipulation. If the currencies are equal,
    the Americans can compete with anyone. Our productivity in this
    country can compete with anyone. Let us get the playing field
    even. There are safeguard provisions that allow for disrupting
    industries. Let us look at those safeguards. Let us implement
    it, and I encourage you to look at it and do it rather rapidly,
    encourage our President to make this happen because every day
    that goes by more and more factories are closing in this
    country. Before I will get home today I just went through all
    through South America, through Honduras, through Guatemala,
    looking at partnerships of where we might be able to take more
    cost out of garments, but when I see job losses in this
    hemisphere and then I look in Mexico and I visit facilities
    where their standard of living had come up, granted it has.
    They have got it up to where they may make $2 an hour, but they
    are too expensive.
        Mr. ENGLISH. Mr. Head.
        Mr. HEAD. Yes. I am not sure where the Cato Institute gets
    that information because I think what we are to understand is
    that 65 percent of the exports that come out of China are with
    joint ventures from Western companies where the investment has
    gone into China. They have become the number one recipient of
    foreign direct investment. From my personal experience we have
    seen it in our customer base as well as our supply base, people
    moving to China. It has affected our business dramatically, and
    I would answer your question about what we should do by
    agreeing with these gentlemen that the currency manipulation is
    probably the biggest thing and that we should be taking
    aggressive action on it and in terms of the kind of club that
    can be used to do that, I would agree that the China bill is a
    very good one, not the answer, not the right answer, but
    potentially the type of policy motivation that can move the
    Chinese toward playing fair in the marketplace.
        Mr. ENGLISH. I take your point, and I thank you for your
    compliment. Mr. Somple.
        Mr. SOMPLE. One thing that may have happened with the
    multinationals not appearing to be flocking to China as fast as
    one might think, according to that report, there is a
    phenomenon that happened in the late 1990s and early 2000s.
    That is the phenomenon of the multinational contract
    manufacturers, and a lot of people in the high tech industry no
    longer manufacture their own products anymore. They have them
    made by these contract manufacturers. The contract
    manufacturers, the three largest in the world are Solectron,
    which is a Japanese company; Flextronics, which is a Taiwanese
    company; Celestica, which is a Canadian company. They all
    established manufacturing in the United States and all of those
    factories have now moved to China.
        So, basically it has almost been a backdoor migration of
    high-tech manufacturing jobs from American multinationals to
    contract manufacturers based in the United States to contract
    manufacturers now based in China. So, that is probably why it
    hasn't been as visible as you might think.
        Mr. ENGLISH. Mr. Trumka.
        Mr. TRUMKA. I would supplement what he just said by saying
    the Mexican Government is just complaining that 520 factories,
    previous U.S. factories that had migrated to Mexico, have now
    moved to China in the last 18 months. So, while they weren't
    directly--they didn't directly migrate from the United States,
    they had a short-term stop in Mexico and then went to China.
        The three things that I would say are currency enforcement;
    negotiate trade deals that have strong labor, environmental,
    and human rights provisions; and then enforce all the trade
    laws; overhaul the tax code to reward people who manufacture
    here.
        Mr. ENGLISH. On that last point, Mr. Trumka, would you
    support border adjustability in the tax code?
        Mr. TRUMKA. I am not sure what you mean by that.
        Mr. ENGLISH. Well, I will go into greater detail with you
    some other time, then. What I have always felt is that we
    should change our tax code to allow us to take the tax off of
    exports at the border as they leave and at the same time put an
    equal, comparable, and fair tax on anything that comes in from
    overseas. Border adjustability is allowed under the WTO, but we
    have never availed ourselves of the option. For that reason
    when you gentlemen try to sell products made in the United
    States overseas, you have to include in the price the cost of
    the U.S. tax system, whereas your competitors frequently don't
    have to. That seems to me to be one factor that we control.
        I want to thank all of you for your testimony, and I want
    to reiterate I want to thank the Bush Administration for
    strongly raising with the Chinese the issue of the yuan and its
    artificial peg. I realize we have heard testimony today from
    real live economists, unlike Mr. Somple, to the effect that
    maybe that isn't happening or it does not matter, but I think
    the balance of practical experience is that there is an
    enormous burden being placed on the U.S. manufacturing sector
    by the way the Chinese have been allowed to distort their
    currency notwithstanding their WTO commitment. I yield back the
    balance of my time.
        Mr. PORTMAN. Thank you, Mr. English. A final round of
    questions here, and I want to give all four of you a chance to
    respond. First, Mr. Trumka, let me say it was music to my ears
    to hear you talk about overhauling the tax code, but I would
    encourage you to think more broadly. Mr. English talked about
    the idea of having a border adjustable system that is, as was
    talked about earlier, an indirect tax. We talked about the VAT
    that the Chinese have at the 17-percent rate, roughly, and that
    is applied to all of the U.S. exports going over there but not
    to the Chinese exports coming back this way.
        They are not the only country that does this of course. All
    of our global trading partners do with maybe one exception,
    including the Europeans, and that is a differential that we
    deal with. Some economists say currencies will adjust, exchange
    rates will adjust, so it won't make much difference. I don't
    believe that to be true, and I think that would be something
    that you and some of your economists at AFL-CIO ought to look
    at as part of the answer.
        I also think we need to focus on the fact that in terms of
    manufacturers in this country, most of the manufacturing jobs
    here in this country are multinational company jobs and this
    also goes to the issue of these markets. I talked earlier about
    the fact that I thought it was insightful to say that China
    presents an opportunity as well as a threat. The opportunity
    obviously is this is a growing marketplace for U.S. products
    and U.S. jobs and U.S. workers, and as someone who represents
    thousands of GE aircraft engine workers in Cincinnati, Ohio,
    where their headquarters are, China is obviously their biggest
    potential market and their biggest opportunity and the biggest
    way for those workers, both hourly workers who actually still
    produce some things in Cincinnati but also those workers who
    are salaried workers who do the research, who do the accounting
    and do the legal work, and there are thousands of them.
        A company in my district Procter & Gamble has 20 percent of
    its workers in the United States only supporting international
    sales. Think about that. This again is thousands of workers. We
    have 14,000, Jeb, as you know, in our area.
        So, this is a complicated issue. You don't want to have a
    tax policy in place that disadvantages U.S. companies from
    being competitive in these global marketplaces. We have a great
    market in this country, but it is not where the growth is, and
    if we are to continue our standard of living and continue to
    allow the United States to be this leader in innovation, in
    entrepreneurship, and so on, we have got to compete in these
    other markets.
        If we are not there, other countries will be. That is what
    we talked about earlier. So, it is a complicated issue, because
    while I want to encourage people to keep jobs here, you also do
    not want to penalize those multinational companies because they
    are also adding tremendous value to our economy. Going to
    Bermuda is one way to get out of it.
        Another way to get out of it is they become foreign
    companies. We had the Chief Financial Officer, or Vice
    President for tax, for what was the Chrysler Company--it is
    DaimlerChrysler today, not ChryslerDaimler, primarily because
    of the disadvantages they perceive and that are real, I
    believe, in our tax code and the way we tax our international
    companies. I would much rather them be ChryslerDaimler.
        Mr. Head, you can respond--Mr. Trumka, if you want to that.
    I don't know if I have asked you a question.
        Mr. TRUMKA. I don't think I have enough time to go into
    that one.
        Mr. PORTMAN. Just broadening the view, but whatever the
    problem with China is, we are not as competitive as we need to
    be here as home.
        Mr. TRUMKA. I would just reiterate this, Mr. Chairman. We
    understand multinational corporations. We understand where they
    go, but they shouldn't be rewarded for going there. They
    shouldn't be allowed to go to China and not pay overtime and
    not pay a minimum wage. That is not the type of rewards we
    should encourage or allow or even tolerate, because what that
    is going to do is encourage a race to the bottom. You heard
    three responsible employers that are saying they want to pay
    their people decent wages and decent benefits. They shouldn't
    be disadvantaged because there were no regulations, health and
    safety regulations, no environmental regulations, and those
    companies shouldn't be able to take advantage of that situation
    and send stuff into this market to the disadvantage of
    everybody that plays by all the rules. We need to have all the
    rules enforced and enforced fairly.
        Mr. PORTMAN. Well, I think there has been a consensus here
    this morning about enforcing the rules. One of the questions
    is, what are those rules? With particular regard to the
    currency issue, we have heard from the experts on previous
    panels yesterday and earlier this morning that this is a
    difficult area because there is not a clear WTO violation with
    regard to pegging currencies. There is, however, the ability
    for us to influence that. I follow what Mr. English said. I am
    very concerned about it and I applaud this administration,
    including Secretary Snow, Secretary Evans, and the President
    himself for making that clear and for encouraging the Chinese
    at least to, as Mr. Trumka indicated earlier, say they were
    going to take certain steps not just with regard to purchases
    but with regard to the yuan. It has been more than 10 years now
    that they have done this. This is nothing new. Now we are
    beginning to see the effects of it, and we need to react to it.
        Mr. Head, earlier Mr. Malpass made some comments in
    response to my anticipation as to what this panel was going to
    say. I tried to lay out as best I could what I thought you all
    might say. He is not here to be able to respond to you. I wish
    he were. If you could respond to him, that would be helpful. He
    basically said, number one, it is not new, and number two, he
    questioned whether a relatively low yuan was hurting us. He did
    not get into great detail on that, but part of what he was
    saying is historically if you look at this, it is not going to
    encourage investment, the Japan example he used.
        Mr. Head, you talked earlier--rightly so--about the subsidy
    involved here and the benefit. I would say there is a benefit
    not just to companies that might import those products, but to
    our constituents, to all of us. Lower prices at the store are
    reflected in some of this and we have to acknowledge that as
    well. He talked about that too, that there is an economic
    relationship here.
        Would you all like to respond to Mr. Malpass for the record
    so that we have a little dialogue between the two of you? Mr.
    Head, you start and open it up.
        Mr. HEAD. Sure. I do think that we recognize, as Larry
    pointed out, that this subsidy--or if the currency were to
    rise, that prices would potentially rise in this country and
    that would be what would happen. I think that I would take the
    opinion that the lower prices, as they are based on what I
    would consider a subsidized rate, are artificial and
    unsustainable and that we shouldn't be depending on that.
        In terms of one of the points that Mr. Malpass made that
    stable rates facilitate investment and that China is using a
    new model, I understand that. I think that there have been
    proposals that China could appreciate their currency or revalue
    their currency. Nicholas Lardy, who is a very I think qualified
    commenter on that, had suggested that they appreciate their
    currency by 15 or 20 percent in order to take the burden off of
    their system. This is creating overheating in the Chinese
    economy, as you might expect, because it is undervalued. I
    think that those proposals would allow for the Chinese to
    maintain this so-called steady rate that allows international
    investors to invest.
        I take your point very well that foreign markets are the
    future for many companies, but when the playing field is
    imbalanced, when it is tilted against our favor, that does not
    help either domestic businesses or domestic businesses that
    want to expand their sales overseas.
        Mr. PORTMAN. Thank you. Other comments Mr. Galbraith?
        Mr. GALBRAITH. Yes. What we are talking about, the
    penetration of the Chinese into this market, let's talk about
    textile apparel for just one moment again. If the surge of
    textile apparels continues at the rate they are going to have
    when all the quotas go away in 2005--and they will--you are
    going to see an influx of apparel that we have never seen
    before. We are going to see the closing of manufacturing jobs,
    both in textile and apparel, that we have never seen happen
    since the Great Depression.
        Now, once--we all know how to compete in business. So, if I
    buy my way into the market by pricing my goods ultimately low,
    once I drive out my competition, where do you think my prices
    are going to go? So, when I said prices would go up, they will.
    If we destroy our manufacturing base in this country, I assure
    you the prices will go up again. Once competition is gone away
    and I own the market, then I will put and price my goods
    respectively.
        Mr. PORTMAN. Mr. Somple.
        Mr. SOMPLE. I think I would just sum it up in terms of
    whether or not a pair of blue jeans costs $20 or $25 really is
    not that important to somebody who does not have a job. That is
    what I am facing up in New England, as a matter of fact. I
    forget the company, but the longest continuously operating
    company in the State of Vermont announced last week they were
    closing down. They make machinery for the textile industry.
    They were down to 18 employees, and they had simply no one left
    to sell it to.
        Yes, but I think that the facts that goods costs a little
    bit less right now is artificial. They are artificially lower
    prices and that will eventually go away due to market
    conditions.
        Mr. TRUMKA. The other thing that I might just add quickly
    is I was a little astonished to hear him say that, as most
    economists kneel at the altar of the marketplace, that the
    marketplace should set that, the marketplace should set
    currency values. Yet when it came to currency and an obvious
    manipulation of a very, very large component of the
    marketplace, he was willing to brush that aside as if it does
    not matter.
        We think it does matter. We think it disadvantages our
    manufacturers. We think it costs us jobs, and we do not think
    it should be tolerated any longer.
        Mr. PORTMAN. Thank you. Any additional questions? Mr.
    Collins?
        Mr. COLLINS. We were talking about the 40-percent advantage
    they have, disadvantage we have based on the subsidy. Are you
    familiar with a bill that has been introduced, and it is in
    this Committee waiting for hearing, called the fair tax? The
    national retail sales tax? It would be a retail sales tax on
    goods and services. It would replace the income tax, payroll
    tax, all Federal tax withholding. It would still be if there
    was a State tax withholding, we have no jurisdiction over that.
        That same tax would be deducted from any exports because
    they would be retail sales, not wholesale. It would not be
    included in any export, not deducted but not included, and it
    would be added as a tax to all imports. Any thought on that?
        Mr. TRUMKA. I have--my own answer was we haven't had a
    chance to look at it. I don't know if you directed the question
    to me or not.
        Mr. COLLINS. Any of the four of you.
        Mr. TRUMKA. I haven't had a chance to look at that. We are
    willing to look at virtually anything that can help us with the
    situation we find ourselves in. Manufacturing in this country
    is in a crisis and things that we can do to help them turn that
    crisis around we are willing to look at. I haven't seen that
    specific bill.
        Mr. COLLINS. I would recommend you go to the Internet and
    look at it. It is called the fair tax. It does away with all
    Federal income tax, corporate tax, as well as the payroll tax.
    It adds a 23 percent, 22, whatever the numbers work out to be
    revenue neutral, to retail sales of goods and services, one-
    time sale only. No wholesale, no exports applied to it. It
    would apply to imports that are sold retail. I think that may
    move us back into more an advantaged situation than a
    disadvantaged situation.
        I would like each of you to look at that, and we can send
    the information on it from my office or you can get it from the
    Committee here and give us some feedback on it. I think it
    would be very--we need that feedback. It would be good because
    we are trying to work toward scheduling some hearings on the
    fair tax.
        Mr. GALBRAITH. Congressman, I assure you this panel--and I
    am speaking for all of them because I think we are willing, as
    my colleagues have said, to look at anything that will help us
    keep manufacturing competitive in this hemisphere.
        Mr. COLLINS. There have been studies done on the fair tax
    that indicate that if there were any expansion by companies
    here, that it would be here. What would be the reason for going
    elsewhere? Based on the tax code?
        Also it would also help to lure some manufacturing back
    here, because today oftentimes inversions are because of the
    tax code. There would be no need to invert. The tax code would
    not apply. We would be more competitive in the world market
    from the standpoint of exporting. The tax would not be
    included. It would be more competitive with the imports because
    the tax would be added.
        Tariffs were put on years ago to equalize the difference
    between nations and production costs, costs of living. We have
    just about done away with all of that, but this would make a
    more balanced level playing field. Called the fair tax. A
    national retail sales tax on goods and services. Thank you.
        Mr. PORTMAN. Thank you, Mr. Collins. We will have another
    hearing on tax policy, I hope, coming up. We had some good ones
    last year, and that was one of the topics raised: how to begin
    leveling that playing field internationally through consumption
    taxes.
        This panel has been helpful to our overall look at the
    relationship between United States and China and China's role
    in the global economy. Thank you gentlemen very much for being
    here. I am going to ask Mr. Houghton, the Chairman of the
    Subcommittee on Oversight, to pose the final questions to you,
    and then the hearing will adjourn. Mr. Houghton.
        Mr. HOUGHTON. Thank you. Mr. Chairman, as any politician, I
    am not sure I have a question; I would like to make a statement
    if I could, and if you want to challenge it, please do. First
    of all, thank you so much. This is not just an intellectual
    exercise, this is our livelihood. I have been in business for
    35 years, and I know the blood and the sweat and the agony and
    all the other things that go with it.
        The thing that we are facing--we have got a very unusual
    country. We have got high research response expenses, we have
    high educational expenses, we have high social expenses, and
    many other countries do not have that. We could call them on
    the subsidies they have. as far as the steel industry is
    concerned, that is unfair. If a country puts capital into an
    industry and we have to put private capital into an industry,
    it makes it unfair, and we can do things like that.
        We could have a philosophy of do unto others as they do
    unto us. If that is the case, we are going to close all of our
    borders because nobody is going to play by the types of rules
    and the standards that we have played by.
        So, the question is really: what are those things we are
    asking others to do and how are we using our comparative
    advantages? It is a messy area. It is not exact. There are no
    strict rules, but those are the conditions under which we have
    to operate. We all have to work together; business, the unions,
    the government, have to work together on this.
        Mr. Chairman, this is not just a one-shot dialogue. This is
    something that has to go on, because if we do not wrestle with
    this--and it is outside of the competitive dumping laws, it is
    entirely different, we have never had this thing before--that
    we are going to go down the drain. We cannot afford it.
        There are ways we can look at this thing and work together,
    but somehow we have got to take a look at what are the
    conditions that we have got to face, rather than just telling
    horror stories and what are those comparative advantages and
    what are the things we ask logically of our competitors on the
    outside. I hope we can continue to do that, and I thank you
    very much for letting me be part of this discussion.
        Mr. PORTMAN. Thank you, Mr. Chairman. Witnesses, again
    thank you for your input. As you know, you have the opportunity
    to submit additional comments for the record should you choose.
    We appreciate you being here, and this hearing is now
    adjourned.
        [Whereupon, at 12:20 p.m., the hearing was adjourned.]
        [Additional information for the record submitted by Mr.
    Crane follows:]

                                                   Washington, DC 20515
                                                      November 11, 2003
    Ms. Allison Giles
    Chief of Staff
    Committee on Ways and Means
    U.S. House of Representatives
    1102 Longworth HOB
    Washington, DC 20515

    Dear Allison:

        I would very much appreciate inclusion of the following article in
    the Committee Record for the recent China Trade Hearing.
        The article, a copy of which is attached, appeared in the November
    2003 Chicago Fed Letter, a publication of the Federal Reserve Bank of
    Chicago. It details how U.S. trade with China has grown dramatically in
    recent years, and how China's rapid economic growth has benefited U.S.
    consumers. For example, for many U.S. companies, the opening up of the
    Chinese market represents an opportunity for growth in exports of U.S.
    manufacturing goods and services, or for investment and production in
    China. At the same time, the article points to some of the challenges
    the growth in imports from China presents for domestic producers to
    lower costs to remain competitive in global markets.
        A copy of the letter is attached, and I thank you for its inclusion
    into the Committee Record.
                Sincerely,
                                                        Philip M. Crane
                  Representative in Congress from the State of Illinois
                                     ______

                   Midwest manufacturing and trade with China
    by William Testa, vice president and director of regional programs, Jay
         Liao, research intern, and Alexei Zelenev, associate economist
        U.S. trade with China has grown dramatically in recent years. The
    growth in imports, in particular, has raised some challenges for
    domestic manufacturers competing against lower-cost Chinese production.
    At the same time, households benefit from falling prices for imported
    goods, firms benefit from falling prices on intermediate components and
    parts, and U.S.-domiciled multinationals benefit from selling to and
    investing in the burgeoning Chinese market.
        As U.S. imports from China have climbed in recent years, some
    domestic manufacturers have voiced concerns about competing against
    low-cost Chinese goods in the U.S. market. At the same time, however,
    U.S. households benefit from falling prices for imported goods; firms
    benefit from falling prices on intermediate components and parts; and
    U.S.-domiciled multinationals benefit from selling to and investing in
    the burgeoning Chinese market. This Chicago Fed Letter examines our
    growing trade relationship with China, especially as it relates to the
    Midwest manufacturing economy.\1\
    ---------------------------------------------------------------------------
        \1\ We define the Midwest here as Illinois, Indiana, Michigan,
    Ohio, and Wisconsin, which is also known as the East North Central
    region.

             1. Import penetration of Chinese goods to U.S. regions
    ------------------------------------------------------------------------
                                          IP Level *         Percent Change
    ------------------------------------------------------------------------
                Regions                 2001       1997        1997-2001
    ------------------------------------------------------------------------
    East North Central.............       .023       .014               65.6
    ------------------------------------------------------------------------
    West North Central.............       .023       .014               65.0
    ------------------------------------------------------------------------
    South Atlantic.................       .024       .015               56.7
    ------------------------------------------------------------------------
    West South Central.............       .025       .016               58.9
    ------------------------------------------------------------------------
    East South Central.............       .027       .016               63.1
    ------------------------------------------------------------------------
    Mountain.......................       .028       .017               63.3
    ------------------------------------------------------------------------
    Pacific........................       .031       .020               56.8
    ------------------------------------------------------------------------
    Middle Atlantic................       .032       .021               53.1
    ------------------------------------------------------------------------
    New England....................       .039       .025               55.8
    ------------------------------------------------------------------------
    United States..................       .027       .017               59.5
    ------------------------------------------------------------------------
    * Figures are rounded to 1/1,000. IP is import penetration.

    China's growth
        Although the accuracy of Chinese gross domestic product (GDP) data
    is questionable, there is little doubt that China is experiencing rapid
    growth. Reported GDP growth averaged 9%-10% annually during the 1980s
    and 1990s.\2\ China has been able to sustain much of this growth
    recently, when many of the world's economies have slipped below trend.
    ---------------------------------------------------------------------------
        \2\ The World Bank, 2003, ICT's China at a Glance. Others estimate
    China's growth at 7%-8% per annum.
    ---------------------------------------------------------------------------
        An increased openness to trade and investment has led China's
    growth. Since 1990, China's exports have grown at an annual pace of
    14%; imports have grown apace.\3\ Foreign direct investment (FDI) in
    China has averaged $44 billion per year since 1995, originating from
    developed countries on every continent.\4\
    ---------------------------------------------------------------------------
        \3\ ibid.
        \4\ Ministry of Foreign Trade and Economic Cooperation of the
    People's Republic of China.
    ---------------------------------------------------------------------------
        Prior to the 1980s, very little trade and FDI could be observed
    between China and developed countries. However, economic reforms
    beginning in 1978 launched China onto a robust path of export-led
    industrial growth and urban development. These reform efforts reached a
    milestone with China's entry into the World Trade Organization (WTO) in
    2001. WTO membership promises greater attractiveness for China as a
    domicile for FDI, along with access to the markets of other member
    countries. In return, China has to comply with the rules of WTO
    membership, including nondiscriminatory tariff schedules on imports and
    the protection of intellectual property.
        To date, China's internal policies have favored the build-up of
    domestically owned, mostly state-owned, industrial plants. In addition,
    China has selectively encouraged FDI, especially in manufacturing. Many
    of these FDI operations produce goods that serve the Chinese market,
    but many more are platforms to export goods back to their country of
    origin or to other markets. Indeed, trade statistics for China are
    difficult to interpret because, for one thing, re-export of goods is
    quite common. For some products, such as computers and other
    electronics, high-value-added components are shipped into China from
    countries such as Taiwan and Japan for further processing and
    ultimately re-exported. Typically, this processing takes advantage of
    the very low relative wages in China. This sometimes leads to double
    counting of underlying export values from China. From the U.S.
    perspective, much of what we see as imports from China--especially in
    electronics--has other Asian country origins embedded in its value.
    U.S. trade with China
        From 1997 to 2002, trade volumes (combined exports and imports)
    between the U.S. and China increased at an average annual pace of
    12.5%, reaching $147 billion last year. In comparison, trade with
    America's North American Free Trade Agreement (Nafta) partner, Mexico,
    increased at a pace of 6.3% annually. As a result, in 2002 China became
    our fourth largest trading partner after Canada, Mexico, and Japan.
        Both exports and imports have grown rapidly, but China's imports
    into the U.S. have easily outpaced U.S. exports to China. Since 1989,
    the nominal dollar value of U.S. imports from China has multiplied more
    than eightfold, reaching $125 billion in 2002, allowing China to
    surpass Japan for the first time. China's manufactured exports to the
    U.S. represented 10.8% of manufactured imports for 2002.\5\
    ---------------------------------------------------------------------------
        \5\ U.S. Census Bureau, ``U.S. international trade in goods and
    services,'' No. FT-900, annual revisions issues.
    ---------------------------------------------------------------------------
        What has been the impact of rising imports on domestic U.S.
    manufacturing production? We sometimes think of rising imports as
    displacing production at home. Rather than displacing domestic
    production, however, rising imports may serve rising demand for some
    types of goods in the home country. So too, imports can consist of
    intermediate components that become embodied in domestic production of
    a final good. To the extent that such components are most cheaply
    sourced overseas, they may help keep domestic production competitive
    for the final good in the domestic market, or even allow domestic
    producers to export the final good to third country markets.
        To understand the extent that domestic production is being
    superceded by imports, economists measure ``import penetration'' as the
    ratio of imports from abroad relative to the domestic market, where the
    domestic market includes goods purchased in the home country,
    regardless of whether the goods are produced at home or abroad. We use
    an index that ranges between zero and one, with a value of zero meaning
    that all domestic purchases are produced at home and a value of one
    meaning that all domestic purchases are produced abroad. For 2001, we
    estimate China's manufactured imports to be 2.7% of the U.S. domestic
    market--defined as domestic production plus imports--up from .4% in
    1989.\6\
    ---------------------------------------------------------------------------
        \6\ China's import penetration is measured as: M(China)/(VS-X+M),
    or the ratio of Chinese imports to total domestic U.S. market, where X
    = all U.S. manufactured exports, M = all U.S. imports of manufactured
    goods, and M(China) = imports of manufactured goods from China. VS, the
    value of manufactured shipments in the U.S., is reported by the U.S.
    Census Bureau, Census of Manufactures and Annual Survey of
    Manufactures.
    ---------------------------------------------------------------------------
        There are several reasons to believe that the growth in import
    penetration overstates the potential displacement of U.S. manufacturing
    production by imports from China. This is especially so when we
    consider that, owing to China's economic growth, exports from the U.S.
    to China have also expanded, lifting domestic production beyond what it
    otherwise would have been. Exports to China grew from 0.5% of U.S.
    manufacturing output in 1989 to 1.5% by 2002.\7\ In addition, low-cost
    imports from China have restrained price increases and raised the real
    income of U.S. households, allowing them to purchase more goods--both
    domestic and foreign. An additional factor that is not easy to quantify
    is the extent to which China's exports to the U.S. are substituting for
    exports that would otherwise have entered the U.S. market from
    alternative low-cost countries.
    ---------------------------------------------------------------------------
        \7\ GDP by industry from the U.S. Bureau of Economic Analysis, U.S.
    Department of Commerce.
    ---------------------------------------------------------------------------
        U.S. manufacturing output growth has been weak, and year-over-year
    job growth in manufacturing has been negative for over 3 years.
    However, the bulk of the current U.S. manufacturing weakness cannot be
    attributed to rising imports and outsourcing. The overhang of excess
    capital goods investment and other production capacity continues to
    weigh on the pace of orders for new manufactured goods, as does the
    shallow U.S. economic recovery from the 2001 downturn. Moreover,
    flagging economic growth in developed countries in Asia, South America,
    and Europe continues to hold back U.S. exports. Most importantly, over
    the longer term, manufacturing jobs have grown at a slower pace than
    jobs in services, largely because productivity gains in manufacturing
    have exceeded those in most service industries.
        It is also important to note that, so long as it is based on real
    production cost differences between the U.S. and China, import
    displacement frees up resources and workers in low-value production to
    pursue higher-value and higher-skilled activities in the U.S. economy,
    thereby raising average wages and living standards. Developed nations
    specialize in producing a rich variety of goods and services, trading
    with each other, and thereby sustaining mutually high standards of
    living. One measure of the maturity of the trade relationship between
    developed countries is the Grubel-Lloyd Index, which measures the
    degree of intra-industry trade as a proportion of all trade. Between
    the U.S. and the UK, France, and Canada, for example, these indexes are
    quite high. For the U.S. and China, the index is lower, but it climbed
    significantly between 1989 and 2001.\8\
    ---------------------------------------------------------------------------
        \8\ The index is based on the ratio of net to gross trade across
    for each industry, averaged across all industries (at a country level):
          GL = 1/n a(1-|Xi-Mi|/(Xi+Mi)).
    ---------------------------------------------------------------------------
    China and the Midwest
        How important has China's emergence as a major trading partner been
    for the Midwest economy? One would expect growth in China's imports to
    have penetrated the region's domestic markets because the Midwest
    economy is more highly concentrated in manufacturing than other U.S.
    regions.\9\
    ---------------------------------------------------------------------------
        \9\ As measured by GDP by industry (and gross state product for
    states), the Midwest concentration in manufacturing exceeded the nation
    by 46% in 2001.
    ---------------------------------------------------------------------------
        We construct measures of China's import penetration for the range
    of finely disaggregated U.S. manufacturing industry sectors. Then, we
    compare overall import penetration between the U.S. and the Midwest by
    weighting these industry-specific national measures of import
    penetration by the employment importance of each industry in the
    Midwest.\10\ We find that the penetration of Midwest manufacturing by
    Chinese production remains smaller than at the national level. For
    2001, we estimate Chinese trade penetration of the Midwest to be 2.3%
    versus 2.7% for the whole domestic U.S. market (figure 1).\11\ These
    average levels of import penetration put into perspective that China
    remains, on average, a small-to-moderate player in many U.S. (and
    Midwest) markets for manufactured goods.
    ---------------------------------------------------------------------------
        \10\ Specifically, import penetration in state i = Sum over all
    industries j MPi, where MPi = Lij  MPj and Lij = state i's
    share of its own manufacturing employment employed in industry j, and
    MPj = U.S. import penetration of good j.
        State-level industry employment is drawn from the U.S. Dept. of
    Commerce, County Business Patterns, available (and used here) at the
    four-digit SIC (Standard Industrial Classification) level and the six-
    digit NAIC (North American Industrial Classification) level.
        This regional weighting of national penetration ratios assumes that
    1) local industries sell into the U.S. market, and 2) employment by
    industry accurately reflects industry production in each state.
        Imports and exports by country, which are mapped from international
    harmonized system categories into SIC and NAIC codes, are reported at
    http://data.econ.ucdavis.edu/international/. Also see Robert C.
    Feenstra, John Romalis, and Peter K. Schott, 2002, ``U.S. imports,
    exports, and tariff data, 1989--2001,'' National Bureau of Economic
    Research, working paper, No. 9387, December.
        \11\ The import penetration (IP) measure that we calculate above
    does not take into account the size of the manufacturing base in each
    region. In view of this, we weighted the regional IP by an index value
    based on the share of each region's overall GDP in the manufacturing
    sector. The import penetration thereby increased in regions with more
    concentrated manufacturing relative to the nation and decreased in
    regions with less concentrated manufacturing. The largest change was in
    the East North Central region; the IP measure increased by 38%, making
    that region's import penetration among the highest in the country. By
    contrast, the IP of the Mountain region decreased by 34% and ranked
    toward the bottom.
    ---------------------------------------------------------------------------
        However, China has become a dominant player in individual product
    categories, especially those that are very labor intensive. In
    particular, our estimates for 2002 suggest a Chinese market share for
    the U.S. of over one-half for certain categories of dolls and stuffed
    toys, fur and leather apparel, and women's handbags.
        These are not product categories in which the Midwest specializes.
    Still, many small Midwest manufacturers have begun to voice concerns
    about the difficulty of competing on price with production operations
    in China. These concerns may derive from several sources. In
    particular, the manufacturing sector is hurting in the U.S., with
    output and employment performing below trend since late 2000. It may
    also be that the Midwest's industry base has only recently begun to
    experience significant import competition from China (figure 1). For
    the 1997--2001 period, we estimate that the Midwest experienced
    relatively higher growth in import penetration from China than other
    U.S. regions--a 65.6% increase from its base, compared with 55.8% for
    New England, and 53.1% for the Middle Atlantic (see figure 1).
    Furthermore, the product categories that contributed the most to the
    climb in estimated import competition include ``all other motor vehicle
    parts,'' a category that is of critical importance to the Midwest.
    Other important categories that have seen strong import growth are
    institutional and metal furniture (especially in Michigan), printed
    circuit assembly, and household appliances.\12\
    ---------------------------------------------------------------------------
        \12\ We corroborate these numbers by examining average annual
    growth in U.S. imports from China for both the U.S. and Midwest (top
    industries are proxied by rankings of industry employment in the
    region). For an aggregate of the import categories for the 30 most
    prominent categories measured at both four-digit level and five-digit
    level product codes, we find greater import growth in the Midwest than
    in the nation.
    ---------------------------------------------------------------------------
        To illustrate the price pressures currently being experienced by
    U.S. auto parts suppliers, automakers have reportedly been asking
    suppliers for the ``China price'' on their purchases.\13\ Some
    suppliers have been asked to relocate or outsource at least some
    operations to China--either to better serve customers overseas or to
    stay price-competitive in domestic sales.
    ---------------------------------------------------------------------------
        \13\ See Robert Sherefkin and David Sedgewick, 2003, ``Ford, GM
    push vendors toward China: `World price' frenzy threatens U.S. jobs,''
    Crains Automotive News, June 23, pp. 1, 38.
    ---------------------------------------------------------------------------
        So far, overseas shifts of factories and capital from the U.S. to
    China have been substantial, but far from extraordinary. U.S. flows of
    foreign direct investment into China have climbed rapidly, doubling
    since the mid-1990s.\14\ However, for 2002, this FDI accounted for just
    8% of total FDI into China, with countries of the Pacific basin
    investing much more in aggregate. In particular, FDI from Hong Kong,
    Japan, Korean, and Taiwan accounted for 42% last year. For these
    countries, investment represents a way to cut costs and stay
    competitive. Often, their production operations involve reshipments and
    trade across multiple countries, with components and parts sent to
    China for (labor-intensive) assembly or further processing and then
    shipped home or exported overseas. In this way, China functions for
    Asian manufacturing companies much as Mexican maquiladora plant
    locations do for many U.S. producers.\15\
    ---------------------------------------------------------------------------
        \14\ Chinese agencies report annual FDI figures four times higher
    than reported by U.S. agencies.
        \15\ A recent theme has been that Mexico is losing favor as a
    location of production to China. See ``The sucking sound from the
    East,'' in The Economist, July 26, 2003, pp. 35-36. Domestic automakers
    often have labor-intensive parts of their production value chain, such
    as the wiring of interior consoles on automobiles for example,
    performed in Mexico and shipped back north for final installation into
    the automobile.
    ---------------------------------------------------------------------------
        Likely because of its distance from the U.S., China has not tended
    to function as a platform for U.S. manufacturers to produce goods for
    the U.S market. In the latest reported year, 2000, only 13% of the
    sales of U.S. multinationals producing in China were shipped back to
    the U.S. Instead, two-thirds of their products were sold to the Chinese
    market. The pattern is even more pronounced for machinery and
    chemicals, both of which are important industries in the Midwest.
    However, some U.S. FDI affiliates in China may serve to contract with
    China-owned plants for export to the United States. This phenomenon is
    not reported on nor has it been investigated to date.
        With its robust development and rapid growth, China has become a
    growing market for U.S. (and Midwest) exports. But while U.S. exports
    to China have grown rapidly since 1988, they as yet comprise only 1.5%
    of the value of U.S. manufacturing production. Some regions, such as
    the Far West, have parlayed their concentration in computing equipment
    and other electronics up to a 3.6% production share. However, the
    Midwest exports only .6% of its manufacturing production to China.
    Conclusion
        China's rapid economic growth has benefited U.S. consumers. And,
    for some U.S. companies, the opening up of the Chinese market
    represents an opportunity for growth in exports of U.S. manufacturing
    goods and services, or for investment and production in China. At the
    same time, the growth in imports from China is challenging domestic
    producers to lower costs to remain competitive.
        Michael H. Moskow, President; Charles L. Evans, Senior Vice
    President and Director of Research; Douglas Evanoff, Vice President,
    financial studies; David Marshall, team leader, macroeconomic policy
    research; Daniel Sullivan, Vice President, microeconomic policy
    research; William Testa, Vice President, regional programs and
    Economics Editor; Helen O'D. Koshy, Editor; Kathryn Moran, Associate
    Editor.
        Chicago Fed Letter is published monthly by the Research Department
    of the Federal Reserve Bank of Chicago. The views expressed are the
    authors' and are not necessarily those of the Federal Reserve Bank of
    Chicago or the Federal Reserve System. Articles may be reprinted if the
    source is credited and the Research Department is provided with copies
    of the reprints.
        Chicago Fed Letter is available without charge from the Public
    Information Center, Federal Reserve Bank of Chicago, P.O. Box 834,
    Chicago, Illinois 60690-0834, tel. 312-322-5111 or fax 312-322-5515.
    Chicago Fed Letter and other Bank publications are available on the
    World Wide Web at http://www.chicagofed.org.

        [Submissions for the record follow:]
                              Statement of AdvaMed
        AdvaMed represents over 800 of the world's leading medical
    technology innovators and manufacturers of medical devices, diagnostic
    products and medical information systems. Our members are devoted to
    the development of new technologies that allow patients to lead longer,
    healthier, and more productive lives. Together, our members manufacture
    nearly 90 percent of the $71 billion in life-enhancing health care
    technology products purchased annually in the United States, as well as
    50 percent of the $165 billion in medical technology products purchased
    globally. Our industry enjoys a trade surplus of over $7 billion vis-a-
    vis our trading partners.
    Global Challenges
        Innovative medical technologies offer an important solution for
    industrialized nations, including China, Japan and European Union
    members that face serious health care budget constraints and the
    demands of aging populations. Advanced medical technology can not only
    save and improve patients' lives, but also lower health care costs,
    improve the efficiency of the health care delivery system, and improve
    productivity by allowing people to return to work sooner.
        However, when regulatory policies and payment systems for medical
    technology are complex, non-transparent, or overly burdensome, they can
    significantly delay or deny patient access to the latest, state-of-the-
    art innovations. They can also serve as non-tariff barriers, preventing
    U.S. products from reaching patients in need of innovative health care
    treatments.
        AdvaMed applauds the ongoing efforts of Congress and the
    Administration to hold China to its international trade commitments. We
    thank the Ways and Means Committee and the House for their leadership
    in holding this hearing and for their interest in leveling the playing
    field for American companies in the important China market. AdvaMed
    also supports the pursuit of additional U.S. trade agreements with key
    global markets in Latin America and the Asia Pacific regions, and would
    welcome the opportunity to provide input into this process to ensure
    the furtherance of U.S. trade in the medical technology sector.
        AdvaMed believes the U.S. Trade Representative's Office, the U.S.
    Department of Commerce and Congress should continue to monitor
    regulatory, technology assessment and reimbursement policies in foreign
    health care systems, including the increasingly important China market,
    and push for the creation of transparent, open and inclusive decision-
    making processes. We look to Congress and the Administration to
    actively oppose excessive regulation, government price controls and
    arbitrary, across-the-board reimbursement cuts imposed on U.S. medical
    devices and diagnostics in China and elsewhere.
     Continued U.S. Leadership Urgently Needed to Fight Trade Barriers in
            China
        For the medical technology industry, the Bush Administration's
    efforts with China under the U.S.-China Joint Commission on Commerce
    and Trade are critical for allowing U.S. medical technology firms
    broader access to the burgeoning Chinese health care market. Moreover,
    the nascent U.S.-China Health Care Forum initiative, led by the U.S.
    Department of Commerce and supported by AdvaMed and many of its health
    care partners, holds great promise as another vehicle for addressing
    many of the trade- and health policy-related barriers confronting U.S.
    medical technology firms in China.
        China has quickly become an important market for the U.S. medical
    technology sector. While solid statistics are not widely available yet,
    AdvaMed estimates that the Chinese market for medical technology is
    approximately $3 billion and growing rapidly. It is on pace to surpass
    some of the key European markets for medical technology in a few short
    years. As global leaders, U.S. medical technology firms already account
    for a significant portion of sales in China and are poised for greater
    growth there. The position of these firms underscores the importance of
    ongoing efforts with the U.S. government to open the Chinese market
    further to life-saving and life-enhancing medical technologies.
    Key Areas of Concern in China
        AdvaMed and its member companies have identified a number of real
    and potential barriers to doing business in China. While most of the
    barriers pertain to unnecessary or redundant regulatory requirements,
    there are increasingly concerns in the areas of reimbursement and
    intellectual property. AdvaMed looks forward to working with Congress
    and the Administration to address these barriers, thereby helping U.S.
    medical technology firms and helping improve patient access to medical
    technology in China.

          A Timely and Costly Product Registration Process--China's
    state-sponsored testing laboratories handle product registration and
    testing. These labs are inefficient and often unable to handle the
    increasingly enormous workload generated by the introduction of new
    technologies. This adds substantial costs and time to the process of
    selling new medical technology in China. The Chinese Government should
    be encouraged to implement its own requirement that the State Food and
    Drug Administration accept ``third party'' review of products when
    state laboratories are unable to perform testing in a timely fashion.
          Redundancy in the Registration Process--China should
    eliminate the duplicative testing requirements of the various state
    agencies involved in the regulation of medical technology. In some
    cases, U.S. medical technology firms must comply with the requirements
    of more than three state agencies. This adds to the time and cost of
    getting technologies to the marketplace in China.
          Antiquated Type Testing Requirements--China should move
    toward the internationally-recognized quality systems approach to
    regulation, which focuses on auditing manufacturing processes rather
    than type testing individual product samples to ensure quality
    products.
          Lack of Transparency in Decision-Making--As part of its
    commitments to the World Trade Organization, China agreed to adopt a
    reasonable period for stakeholder comment on any contemplated laws and
    regulations. In the area of medical technology, this type of promised
    transparency and openness is not apparent. China should be held to its
    commitments in this regard by notifying stakeholders--including
    industry--of new laws and regulations and allowing an ample time for
    comment.
          Inappropriate Price Controls--Recently, the Shanghai
    Pricing Bureau proposed mandatory price ceilings for medical
    technology, as a way to address concerns related to alleged excessive
    margins charged by distributors. The resulting prices would have served
    as a disincentive to sell medical technology in the important Shanghai
    market. In addition, the pricing bureau would have required proprietary
    business information from U.S. firms with no assurances that the
    information would have been protected. After a series of discussions,
    AdvaMed, in conjunction with the local American Chamber of Commerce and
    U.S. Government representatives, was able to get Shanghai authorities
    to accept a mutually beneficial alternative. There is some concern that
    authorities in Shanghai may be failing to live up to its end of the
    agreement; therefore, careful monitoring on the part of industry and
    the U.S. Government will be critical.

           In the future, China should be encouraged to steer clear of
    onerous price control mechanisms like the aforementioned Shanghai
    scheme, with an eye toward establishing payment mechanisms that take
    into account the following principles:

            All manufacturers of medical technologies should have
    an opportunity to submit a dossier that contains a recommended
    reimbursement level with supporting data;
            All manufacturers (as well as any interested
    stakeholders, i.e. physicians, patients, etc.) should have the
    opportunity to provide input into the reimbursement decision-making
    process through discussions with appropriate officials;
            Reimbursement decisions should be made transparently
    and within a reasonable 30-90 day timeframe;
            Reimbursement decisions should fully reflect the
    medical, quality of life and economic benefits of medical technology;
    and
            All manufacturers should have the opportunity to appeal
    a reimbursement decision before it is made final.

          Counterfeiting of Medical Technology--AdvaMed's member
    companies continue to identify instances of counterfeiting in China.
    This undercuts the ability of U.S. medical technology firms to sell in
    the marketplace and may also pose a serious safety threat to Chinese
    patients. China should be encouraged to beef up its national crackdown
    on the production and sale of counterfeit medical technologies.
          Parallel Trade of Medical Technology--The re-importation
    into China of medical technology is becoming a concern of AdvaMed's
    member companies. Re-importation can present serious safety concerns,
    particularly when there are product complaints or adverse events
    involving medical technology not imported by the manufacturer or its
    authorized representative. Typically, these re-imported products are
    expired or mislabeled and come without the necessary technical support,
    thereby raising the risk of damage or unfitness for use.
    Conclusion
        AdvaMed appreciates the commitment of Congress to work with the
    Administration and industry to expand trade opportunities with China.
    We look to the President and members of the House Ways & Means
    Committee to aggressively combat barriers to trade in China. AdvaMed is
    fully prepared to work with Congress, the U.S. Trade Representative's
    Office, and the U.S. Department of Commerce to help monitor, enforce
    and advance existing and future trade agreements with China.

           Statement of Brad Smith, American Council of Life Insurers
    Overview
        The U.S. insurance industry strongly supported PNTR for China
    because the Chinese accession package was extremely broad and deep, and
    when fully implemented holds the promise of opening the vast Chinese
    insurance market to U.S. insurance and retirement security providers.
    We were aware from the outset that no agreement is self-implementing,
    and that the key to realizing successful profit from Chinese accession
    to the WTO is an efficient and transparent implementation process.
        With the ongoing leadership and support of the U.S. Government
    trade negotiators and facilitators, ACLI and our property casualty
    counterparts at the American Insurance Association have established
    what we consider to be a positive implementation dialogueue with the
    Chinese Insurance Regulatory Commission (CIRC), which has already led
    to a much improved communications and transparency process for U.S.
    insurers in China.
        Based on draft regulations just released by CIRC, we are cautiously
    optimistic that our primary concern to date (unjustifiably high
    capitalization requirements) has largely been addressed. As the next
    step, we have submitted a detailed list of additional questions to
    which we are seeking clarification from CIRC. We are optimistic that
    the United States Trade Representative (``USTR'') will be able to
    schedule a meeting to review this agenda by the end of the year.
    Background
        China's formal membership in the World Trade Organization offers
    great promise and opportunity for life insurers. The ACLI and the
    broader U.S. Insurance industry, especially our property casualty
    counterpart--the American Insurance Association, were strong supporters
    of Permanent Normal Trade Relations (PNTR) for China because the
    insurance liberalization commitments contained in China's schedule of
    specific commitments and ``Working Party Report'' were broad and deep,
    holding the promise of opening the Chinese market to U.S. insurance
    companies and pension providers. Through experience with bilateral
    insurance agreements in Japan and South Korea, we knew at the time of
    China's accession that no agreement is self-implementing, and that the
    most important part of the opening of the Chinese insurance market
    would be in the implementation phase.
        With China now in the WTO, through the good offices of the U.S.
    Trade Representative, the U.S. Commerce, State and Treasury
    Departments, and through the communications of many interested members
    of Congress, we (ACLI and AIA) have begun the process of establishing a
    dialogueue with the Chinese Insurance Regulatory Commission (CIRC)
    about the implementation of their liberalization commitments.
    Establishment of regular, straightforward two-way communication is, in
    our opinion, the best way to avoid possible misunderstandings,
    frustrations or disappointment about China's liberalization process.
        The task before CIRC is substantial, as it is in everyone's
    interest that the Chinese insurance market not only be open but well
    run and prudentially sound. Our intent is therefore to make a positive
    contribution to this process, by providing CIRC and other Chinese
    decision makers our comments on their implementing regulations, and
    where appropriate, include technical research to help them in setting
    standards that meet the test of prudential justification.
        Individual company experience with CIRC varies greatly. Some
    describe relations as perfect and others describe them as frustrating,
    but our member companies support this constructive engagement approach
    for the same reasons many companies have funded representative offices
    all over China, some going back for more than ten years. The Chinese
    market is seen to have tremendous potential, and many U.S. companies,
    like our international competition, see entry into China as key to a
    global strategy. Recent industry press headlines such as ``Chinese
    Insurance Premium Grew 33% For First Seven Months'' and ``China Will Be
    Second Largest Insurance Market by 2032, Says IBM'', typify stories of
    the growth of the market since first being liberalized in 1992--we
    intend to be part of that.
        With regard to China's implementation of their WTO insurance
    commitments, while the process is moving forward, the lack of clarity
    in the regulatory process has slowed and confused the fulfillment of
    China's insurance liberalization obligations.
        Since joining the WTO in December of 2001, Chinese insurance
    regulators have promulgated five sets of regulations with the stated
    intention of implementing China's WTO insurance commitments. The first
    set went into effect in early February of 2002 and provided a general
    framework for the regulatory structure but offered little specificity
    regarding the implementation of their liberalization commitments.
    Procedures for branching, capitalization and solvency regulation and
    other fundamental processes by which U.S. insurers could procure a
    license and begin operations were not included. U.S. insurers provided
    an analysis of these regulations for USTR, pointing out the vagaries of
    the regulation as well as several specific regulatory articles that
    could be inconsistent with China's WTO obligations. USTR then met with
    Chinese regulators to communicate these questions and concerns and were
    told additional regulations would be forthcoming.
        Chinese regulators subsequently released a second set of
    regulations in late February 2002 to further clarify the licensing
    procedures. USTR again communicated directly with CIRC regarding
    questions and concerns, which still had not been clarified. CIRC
    informed USTR of further forthcoming regulations and stated that China
    would fully implement their WTO liberalization commitments.
        Concurrent with this informal bilateral dialogueue, USTR had
    requested answers to a detailed set of the same questions at the
    Transitional Review Mechanism discussion in the WTO Committee of Trade
    in Financial Services. This engagement has been continued at each
    subsequent CTFS meeting, with the same questions being echoed by the
    Governments of Canada, the European Union, Australia, South Korea and
    Switzerland.
        Based on both the formal requests in the CTFS and the informal
    bilateral dialogueue, in October of 2002, Ambassador John Huntsman
    requested a meeting with CIRC that would be open to a small number of
    U.S. and Chinese insurance industry representatives as well as USTR
    representatives. At the suggestion of USTR, it was decided to focus
    exclusively on the highest priority issue--capitalization levels
    required of an initial establishment of a foreign insurer, and
    subsequent capitalization required when additional branches would be
    opened.
        Our concerns were that the regulations were unclear because of
    conflicting overlap from multiple regulations, and because the amounts
    called for were well outside of prudentially justifiable international
    norms, thus creating a barrier to entry for many U.S. insurers. Our
    objective for the meeting was to seek clarification of the specific
    requirements, and to provide information on international benchmarks
    for prudentially justifiable capitalization levels. Thanks again to
    USTR, the U.S. Embassy in Beijing and the U.S. Commerce Department, on
    December 13, 2002 we participated in a meeting in Beijing with CIRC,
    Chinese industry representatives and a U.S. Government and industry
    delegation headed by Deputy Assistant USTR, Charles Freeman.
        Our presentation, attached for entry into the record, was entitled
    ``A Recommendation for Revisions to the Capitalization Requirement
    Rules for Life Insurance Companies Operating in China'', highlighted
    just how far outside international norms China's capitalization levels
    were, and presented a model that our consultant, Watson Wyatt Insurance
    Consulting Limited, felt might be more appropriate for the Chinese life
    insurance market. CIRC listened, agreed that our worst-case projection
    of the capitalization requirements was currently correct, stated that
    there were plans to revise the relevant regulations, and agreed to
    consider our views.
        Meanwhile, we discussed our capitalization concerns with other
    service industry groups in the U.S., Canada, Europe and Japan, fellow
    members of the ``Financial Leaders Group'' and found that our
    capitalization concerns were not unique. Service sectors such as
    banking, securities, auto finance and express delivery are facing
    similar problems. Thus, in February of 2003, the Financial Leaders
    Group delivered a letter to Chinese officials commenting on the
    prudentially unjustifiably high capitalization levels in many services
    sectors, including insurance, and the issue was again highlighted at
    the CTFS meetings in Geneva by the Quad Governments. CIRC subsequently
    stated that additional regulations to fulfill China's WTO
    liberalization commitments would be forthcoming.
        It should be noted that neither of the first two insurance
    regulations were publicly released in draft for public comment. The
    U.S. industry provided comments anyway: No formal response was
    received.
        On July 31, 2003 a third set of regulations (``The Draft Trial
    Implementing Rules on the Regulations of the PRC on the Administration
    of Foreign-Invested Insurance Companies'') were placed on the CIRC
    website with a request for public comment by August 15. To our
    surprise, on August 18, 2003, another set of regulations (``Draft
    Administrative Regulations on Insurance Companies of the People's
    Republic of China'') was also posted to the CIRC website requesting
    public comment by September 16. In both instances, we translated the
    draft regulations and circulated them widely within the U.S. insurance
    industry.
        Also, in both instances, we submitted formal written responses to
    CIRC within the requested time frame. We commended them for their
    public outreach, and stated that their openness supports our firm
    belief that the most important factor contributing towards the
    successful development of the Chinese insurance sector will be the
    institutionalization of a regular and robust public dialogueue. We
    expressed our hope that this initiative can be expanded through
    increased communication and cooperation with interested international
    companies and industry associations, and committed ourselves to provide
    professional and timely responses to CIRC on an ongoing basis. We also
    stated that a dialogueue on these drafts and/or any revised drafts that
    CIRC circulates for additional comment would be an excellent basis for
    continuing the dialogueue we began last December in Beijing.
        The major notable development in these recent drafts is a
    significant lowering of the required capital for initial establishment
    and full national operations, which, if implemented, bring the
    capitalization requirements closer to the acceptable range of
    international comparables for some lines of business and business
    models. This is a major step forward for CIRC, which we feel supports
    the benefits of continued dialogueue. We plan to extend this dialogueue
    to now include our other priority areas of concern.
        Continuation of this dialogueue must be two-way. Many of our
    concerns involve confirmation of our understanding of the meaning of
    vague or conflicting regulations. So that this dialogueue is as clear
    as possible, we hope to receive written responses to our inquiries from
    CIRC. This has also been requested by USTR. We look forward to a
    meeting in Beijing to focus on this agenda by the end of the year, and
    greatly appreciate USTR's efforts to schedule it.
        Top priorities we would like to have included in the dialogueue
    agenda are (by category of type of issue):
    Fundamental Assumptions
        We seek confirmation of the following fundamental assumptions,
    which are key to our understanding of the prudential intentions of the
    Chinese Insurance Regulatory System.
    Fundamental Assumption--1
        That CIRC is undertaking, through measures to date and in the
    future, an approach consistent with the PRC's WTO obligations regarding
    market access, national treatment and transparency, and that the only
    discrimination (differences) between provisions for domestic and
    foreign insurance companies is where there is a clear and necessary
    prudential justification. Furthermore, that it is the goal of CIRC is
    to have one set of regulations and procedures for domestic and foreign
    companies, so that the regulations are consistent with China's WTO
    commitments.
    Fundamental Assumption--2
        That there are three (3) documents/rules/regulations relevant to
    this exercise. They are (working back from the present): (A) the Draft
    Insurance Company Administrative Regulations (hereinafter the
    ``Measures.''); (B) the Draft Trial Implementing Rules on the
    Regulations of the PRC on the Administration of Foreign-Invested
    Insurance Companies, July 31, 2003 (hereinafter ``Implementing
    Rules''); and (C) The Administrative Regulations on Foreign-Invested
    Insurance Companies of the PRC, Feb. 2002 (hereinafter the
    ``Administrative Regulations'').
    Fundamental Assumption--3
        That the three documents are each intended to accomplish a specific
    regulatory function and that there is no intentional overlap or
    conflict between the provisions of the three documents, especially with
    regard to the application of measures as between domestic and foreign
    companies.
    Fundamental Assumption--4
        That only the ``Implementing Rules''; and the ``Administrative
    Regulations'' are applicable specifically to foreign companies.
    Fundamental Assumption--5
        That the ``Measures.'' are relevant to all companies both domestic
    and foreign equally without discriminatory interpretation.
    Implementation Gaps
        We would like written responses to three questions regarding gaps
    in the regulations where they should reference major elements of the
    implementation of China's WTO liberalization commitments:
    Implementation Gap--1
        It should be noted in the ``Implementing Rules'' that several
    existing joint venture companies have foreign registered capital
    interests that are above 50%. It should be confirmed that these
    companies, and any subsequent foreign companies approved by CIRC to own
    more that 50%, are grandfathered in accordance with China's WTO
    commitments, and that such companies will be allowed to expand
    geographically (through branches and sub-branches) in their current
    ownership structure.
    Implementation Gap--2
        Prior to China's WTO accession, a number of foreign insurance
    companies were allowed to establish operations in the PRC. All of these
    companies were requested by the Chinese Government to incorporate as
    operational branches, not as subsidiaries.
        However, in both of the two new sets of draft regulations (the
    ``Administrative Regulations,'' and the Implementing Rules''), there
    does not appear to be any article that addresses the maintenance and
    development of these branch operations. We believe a section should be
    added explaining the administrative procedures under which a
    ``guaranteed branch/sub-branch structure'' should be allowed to
    operate. (By ``guaranteed branch/sub-branch structure'' we mean
    branches and sub-branches whose solvency is guaranteed and supported by
    the total assets of the parent company.) The branch/sub-branch
    structure is a well-established international norm appropriate for
    application in China. Accordingly, regulations should be developed to
    govern those branches already established in China and such future
    branches that may be established in China. We recommend that these
    regulations conform to the internationally accepted branch/sub-branch
    operating structure.
        Indeed, in most countries and in accordance with international
    norms, when insurance companies enter foreign markets, they are allowed
    to establish an initial branch or home office and then expand to new
    locations throughout the country through a network of sub-branches.
    These sub-branches report to the original branch or home office.
        This branch/sub-branch structure is supported by, and legally tied
    back to, its corporate parent. Thus, branch operations should not be
    treated as if they were separate, stand-alone entities. Likewise,
    because a branch/sub-branch structure is supported by its parent
    corporation's assets, the company should not have to re-capitalize when
    expanding to a new location. This branch/sub-branch operating structure
    is an established international norm and a widely accepted principle of
    operation.
        For property casualty insurance companies the ability to expand by
    sub-branch is particularly important. Foreign insurance companies
    should be allowed to expand geographically in the Chinese insurance
    market in accordance with established international norms and operating
    practices (i.e., through the use of the internationally accepted
    branch/sub-branch structure). Specifically, foreign insurance companies
    should be able to establish a branch (with a reasonable initial
    capitalization) backed up by the strength of the parent organization,
    and be allowed to expand throughout the country--in accordance with
    China's timetable for the phase-out of geographical restrictions--
    through the establishment of sub-branches. The establishment of sub-
    branches should not be limited to the immediate, licensed region or
    territory. Also, the company should not have to separately capitalize
    each new location.
        We also request clarification with respect to branch boundaries. We
    believe that it is more efficient to establish provincial-level
    branches rather than only municipal-level branches. Domestic companies
    are able to operate at the provincial level with access to all cities
    and localities in the province. To date foreign companies have received
    approval to operate at only in one specific city. Foreign companies
    like their domestic counterparts should have provincial level licenses.
        The proposed rules are also silent as to their impact on existing
    insurance company operations, including existing branches. It is,
    therefore, assumed that branches and other insurance company operations
    that exist today may, but are not required to, continue to operate
    under the conditions and approvals that existed prior to this rule,
    including but not limited to operations, financial structure, capital
    and mode of establishment. This understanding should be confirmed.
    Implementation Gap--3
        In addition to its insurance and reinsurance liberalization
    commitments, China committed to liberalize its pension market within
    five years of joining the WTO. To date, no regulations or laws have
    been released in anticipation of the opening of this important market
    sector. CIRC or other relevant authorities, should begin a public
    comment process well in advance of the approaching phase in deadline to
    gain the broadest level of comment and support for this fundamental
    undertaking.
    National Treatment Questions
        In addition to the questions on fundamental assumptions and the
    further information needed to fill the implementation gaps, we would
    also like to receive confirmations from CIRC on the following specific
    questions regarding national treatment.
    National Treatment Question--1
        RE: Article 3 on the August 18th Draft of Administrative
    Regulations on Insurance Companies of the People's Republic of China.
    If we understand this correctly we interpret it to say that with
    respect to branch boundaries for foreign invested insurance companies,
    that they are treated the same as domestic companies which we
    understand are defined at the provincial-level (On May 21, CIRC
    approved Min Sheng Life to prepare 4 branches in Beijing, Nanjing,
    Hangzhou, and Shijiazhuang. (Source: China Insurance News, June 2003)
    If this is a correct understanding we believe that it is more
    efficient, and is a major step forward for CIRC in fulfilling their
    mission to implement China's WTO national treatment obligations.
    Domestic companies are able to operate at the provincial level with
    access to all cities and localities in the province. To date foreign
    companies have received approval to operate at only in one specific
    city. Foreign companies like their domestic counterparts should have
    provincial level licenses.
    National Treatment Question--2
        RE: Article 11 on the August 18th Draft of Administrative
    Regulations on Insurance Companies of the People's Republic of China.
    If we understand this correctly, we interpret it to say that with
    respect to branch applications for foreign invested insurance
    companies, that they are treated the same as domestic companies which
    we understand can apply for any number of branch approvals
    simultaneously with no limit to the number of branches a company may be
    granted at any given time.
    National Treatment Question--3
        RE: Article 13 of the August 18th Draft of Administrative
    Regulations on Insurance Companies of the People's Republic of China.
    As there is no reference to any waiting period, we request confirmation
    in this article that no waiting period exists before licensed insurance
    companies, domestic or foreign, can apply for branch or sub-branch
    licenses.
    National Treatment Question--4
        RE: Article 99 of the August 18th Draft of Administrative
    Regulations on Insurance Companies of the People's Republic of China.
    As it is so vague, we are concerned that Article 99 could be used to
    justify discrimination against foreign insurers, contrary to China's
    WTO commitments on national treatment. Accordingly, we would urge
    confirmation that the scope of Article 99 is limited solely to matters
    where the prudential justification will be clearly explained and
    limited to as least discriminatory as possible.
    Prudential Justifications
        In addition to the questions on fundamental assumptions, the
    further information needed to fill the implementation gaps, and
    questions of national treatment we would also like to receive responses
    from CIRC on the following questions of prudential justification.
    Prudential Justification--1
        RE: Article 6 (b) of the August 18th Draft of Administrative
    Regulations on Insurance Companies of the People's Republic of China.
    We would like to understand the prudential reasoning behind the
    capitalization requirements. We believe that RMB200 million is too
    prescriptive in nature and may be much higher than international norms
    with respect to specific business models and risks being assumed. We
    feel that CIRC should be granted the discretion to lower this amount
    where it feels appropriate. Also, we request clarification of the scope
    of the initial establishment of RMB 200 million. Please confirm that
    this includes the right to establish sub-branches without limitation as
    to numbers.
    Prudential Justification--2
        RE: Article 12 of the August 18th Draft of Administrative
    Regulations on Insurance Companies of the People's Republic of China.
    We would like to understand the prudential reasoning behind the
    branching capitalization requirements of RMB20 million for each
    additional branch. We feel this is duplicative, contrary to China's WTO
    commitments, and has no prudential justification. Additionally we feel
    it is an inefficient use of capital, which will raise the cost of
    products to Chinese consumers.
        In summary, it is vitally important that all parties work together
    in a clear and open manner to ensure understanding of CIRC's
    implementation process. Any measures China implements that give the
    impression of falling short of its WTO commitments and denying U.S.
    insurance companies meaningful market access in China could create
    hostility. Thus, it is in the interests of CIRC to continue a
    meaningful two-way dialogueue to make the implementation of China's WTO
    insurance commitments as smooth and positive as possible.
        ACLI and our industry colleagues appreciate the hard work and high-
    level leadership of USTR and the other relevant U.S. Government
    agencies that have helped establish and grow this dialogueue with
    China. Likewise, the industry greatly appreciates the ongoing support
    of Members of Congress. We consider ourselves still at the beginning of
    a complex process, and will look forward to an ongoing relationship
    with your committee as we proceed through the years to come. While we
    do not know when China's draft regulations will enter into force, it is
    our hope that our dialogueue, with your and the government's
    assistance, will produce a transparent and effective body of
    regulations comporting with China's strong and admirable WTO
    commitments. We will report to you as circumstances develop.
        Thank you for your interest and consideration in this matter.

                 Statement of American Iron and Steel Institute
        The American Iron and Steel Institute (AISI), on behalf of its U.S.
    member companies, is pleased to provide written comments to the House
    Committee on Ways and Means regarding U.S.-China economic relations.
        China's trade surplus with the United States, which is expected to
    be close to $140 billion in 2003, is unsustainable. The unsustainable
    U.S. trade deficit with China has its roots not in genuine Chinese
    comparative advantage, but in illegal and unfair Chinese trade
    practices. It is time to use our most valuable asset--the U.S. market--
    as leverage to level the international playing field and force China to
    compete on a fair trade basis.
        In recent years, as more and more manufacturing facilities move
    offshore, we have become increasingly concerned about the phenomenon of
    the ``disappearing customer.'' In particular, we have become concerned
    about the flight of domestic metalworking customers to countries such
    as China that rig their currencies, cheat on the rules and manipulate
    the ``market'' value of inputs and that relationship to eventual price.
        China alone is not responsible for the U.S. manufacturing base
    having lost over 2.8 million jobs since 2000. However: (1) illegal and
    unfair Chinese trade practices have contributed significantly to the
    structural challenges facing U.S. manufacturers; (2) they have had a
    devastating impact on our entire manufacturing base; and (3) unless we
    recognize and address this problem, we will face even greater damage to
    U.S. manufacturing and living standards. To begin to reverse the
    damage, AISI supports--as a start--enactment of the NAM policy agenda
    to reduce the cost of doing business in the United States, level the
    international playing field and promote innovation and investment.
    Unfortunately, this agenda--especially on trade--will not be nearly
    enough to reverse the current negative trends.
    China and the Need for a Bold and Innovative U.S. Trade Policy
        As the U.S. steel industry recently told the Commerce Department:
    only bold and innovative public policy can reverse these negative
    trends. In trade policy, we need to do more than jawbone our trading
    partners, promote exports and sign new free trade agreements (FTAs). To
    compete against China and other mercantilist states, we must:

          Enact policies that will actually reduce the
    unsustainable U.S. trade deficit;
          Recognize the vital importance of the import side of the
    U.S. trade equation;
          Be willing to use the U.S. market as leverage;
          Use Section 301 to address the problem of currency
    manipulation;
          Enforce aggressively all U.S. trade laws and trade
    agreements;
          Strengthen significantly U.S. trade laws;
          Counter ``industrial targeting'' by China and others
    countries;
          Resist trade law weakening through international
    negotiations;
          Achieve fundamental reform of the flawed WTO dispute
    settlement system;
          Pass legislation to set up a WTO Dispute Settlement
    Review Commission;
          Retain the Continued Dumping and Subsidy Offset Act.

        We also believe that, as part of the solution, we should take
    better advantage of the potential unrealized synergies in North America
    in terms of manufacturing. In this regard, we believe it would be
    useful to explore the potential for beneficial policy coordination
    among the governments of the United States, Canada and Mexico in an
    effort to promote more manufacturing in the U.S. and North America.
    China and Steel
        For decades, steel has been at the cutting edge of international
    trade disputes, and it will remain so in any discussion of the future
    of U.S.-China trade relations. To put things in perspective, China is
    now the main driver of the world steel industry. It is by far the
    largest, and fastest growing, producer and consumer of steel in the
    world. Steel production in China now accounts for one fourth of total
    world steel production, and steel output in China will soon surpass
    that of Japan and the United States--combined. China is also currently
    the world's largest steel importing nation. It has the ability by
    itself to help cause a sudden, sharp rise--or fall--in world steel
    export prices. It is currently helping to lift steel prices globally
    off their previously very depressed levels. At the same time, it is
    helping to cause a worldwide spike in the cost of freight rates for
    bulk cargo ships and in the cost of steelmaking inputs around the
    globe. China this year is expected to account for just under a third of
    world steel consumption--and roughly 5.2 of the 6.4 percentage point
    growth in global steel demand.
        Against the background of continued, massive global excess capacity
    in steel, China is pursuing major steel capacity expansions, aided by
    government financing. Many of these expansions involve the re-use of
    antiquated, and often environmentally unfriendly, facilities.
    Notwithstanding China's dynamic growth, there are real concerns about
    over-investment in steel and other industrial products. Outside
    analysts are already predicting that excess supply in cold rolling and
    galvanizing steel processes could reach 12 million tons this year. In
    view of the enormous growth in Chinese steel capacity and in Chinese
    steel consumption in recent years--if the Chinese economy were to
    weaken even slightly--this could unleash a flood of steel into an
    already saturated global market. That, in turn, could cause significant
    harm to world steel markets, including serious damage to the U.S. steel
    industry recovery.
        China continues to implement a range of policies in the steel
    sector that, whether WTO illegal or not, distort the market and could
    result in injury to the U.S. steel industry. These measures
    traditionally include:

          Massive subsidies provided through export and import
    substitution programs;
          State-orchestrated mergers and debt-for-equity swaps;
          Encouragement of output restraint cartels;
          Rebating of a value added tax in a manner designed to
    foster exports in a number of designated sectors, including steel.

        Of particular concern is that many Chinese steel companies--at
    least 65 by the end of 2002--remain under the de facto control of the
    government. These state-owned-enterprises (SOE's) accounted for around
    50 billion RMB (about $6 billion) in capital expansion expenditures in
    the Chinese steel industry in 2002, which continued to contribute to
    the Chinese steel industry's overcapacity in key steel product lines.
        Low-interest-rate financing continues to be a concern in China's
    steel industry. The government of China recently targeted six
    industries to receive interest-rate subsidies, including steel, which
    was the largest recipient of the interest-rate subsidy. Both private
    and state-owned steel companies continue to have access to low-cost
    funds from state-owned banks that have a strong incentive to lend to a
    ``designated industry'' such as steel. Another area of concern is the
    Chinese Government's intervention in the domestic price-setting
    mechanism. This interference has caused steel prices in China to
    fluctuate widely in a manner that does not accord with market
    economics.
        China, the world's largest steel producing and consuming nation,
    has the potential to be the most disruptive force in world trade in
    steel and many other products going forward. Therefore, the extent to
    which China is--or is not--playing fairly by the rules is of extreme
    importance to steel and other U.S. industries.
    China and the OECD Steel Negotiation
        Negotiations are currently underway in the OECD to conclude a
    multilateral Steel Subsidies Agreement (``SSA''). An SSA would
    establish multilateral disciplines on steel subsidies, which would
    augment those in the existing WTO agreements. In these negotiations,
    China has insisted that it be relieved of some of its WTO obligations
    as the ``price'' of Chinese accession to the SSA. This is totally
    unacceptable and politically unthinkable. With an annual trade surplus
    approaching $140 billion with the U.S., China is in no need of further
    preferential treatment--either in the WTO or in the SSA.
        Specifically, the government of China has insisted that the Chinese
    steel industry be: (1) granted ``market economy'' status with regard to
    antidumping measures; (2) guaranteed that there will be no use of the
    ``special safeguard'' against Chinese steel products; and (3) accorded
    preferential treatment on subsidy discipline, given China's status as a
    ``developing country.'' AISI, among other steel associations in North
    America, has urged total rejection of these demands.
        We support the position of the U.S. and other governments that
    China's WTO commitments are not a subject for the SSA negotiation. This
    negotiation must not be used to relieve China of its WTO accession
    obligations. Accordingly, China should not be granted market economy
    status in steel antidumping cases; it should not be guaranteed that
    there will be no use of the ``special safeguard'' mechanism against
    Chinese steel products; and it should also not be accorded status as a
    ``developing country,'' and given preferential treatment of any kind in
    the SSA. Chinese measures constitute some of the most significant
    current market distortions in the global steel industry. They require
    additional discipline, not preferential treatment.
        It is essential that China comply with its WTO commitments and
    eliminate its direct and indirect subsidies to steel. At a time when
    China and its steel industry are already deriving a major artificial
    competitive advantage from having a significantly undervalued currency,
    the focus of OECD discussions with regard to China should be on
    ensuring that China takes no action that contributes to global excess
    steel capacity.
        Actions that should be avoided include permitting steel cartel
    activities that insulate the Chinese market and have the effect of
    subsidizing China's steel industry.
    China and WTO Compliance
        AISI and its North American members believe that China must:

          Comply fully with all of its WTO commitments;
          Stop its illegal and unfair currency manipulation;
          Eliminate its targeted export incentive programs;
          End direct and indirect subsidies to steel and other
    ``strategic'' industries;
          Open its markets fully to imports of manufactures.

        At the same time, the United States and other WTO members must:

        1.  Retain an unchallenged right to apply nonmarket economy
    antidumping methodology until steel and other key sectors of the
    economy in China are no longer under government regulation or control;
        2.  Maintain an unchallenged right to apply ``special safeguards''
    to injurious import surges from China;
        3.  Monitor very carefully China's WTO commitments with regard to
    its stated intention to eliminate quantitative restrictions,
    limitations on ``trading rights'' and other trade-distorting practices.
    China and WTO-Authorized Trade Remedies
        China continues to implement an array of market-distorting
    practices that may require action by the U.S. government pursuant to
    WTO-authorized trade remedies. For example: (1) the Chinese Government
    continues to promote exports of steel and other manufactures through
    targeted tax rebates and other incentives; and (2) the government of
    China continues to funnel massive government subsidies into targeted
    industries such as steel, which it deems to be ``strategically
    important.''
        In cases where these and other Chinese measures cause or threaten
    to cause injury to U.S. industry, the government of the United States
    should apply remedial measures authorized under the WTO. These include
    antidumping and countervailing duties, as well as the anti-surge
    measures set forth in the terms of China's accession to the WTO.
        Given its current nonmarket economy status for purposes of U.S.
    trade law, the Commerce Department at this time is not allowing Chinese
    subsidies to be offset pursuant to U.S. countervailing duty law. Until
    such time as Chinese subsidies are countervailable under U.S. trade
    law, the U.S. government must utilize the nonmarket economy provisions
    of U.S. antidumping law to offset such injurious effects as may occur
    from imports of Chinese steel into the U.S. market.
        Resort to the anti-surge mechanism established under the terms of
    China's accession to the WTO may be necessary should other U.S. trade
    remedies prove inadequate to offset fully the adverse effects of
    market-distorting practices in China.
        The disciplines established through the WTO, however, can only be
    fully effective with a properly functioning system of dispute
    resolution. Unfortunately, the flaws and weaknesses that characterize
    the current dispute settlement system further diminish the prospect
    that China's market-distorting measures will be subject to effective
    discipline.
        Recent panel decisions on the application of trade remedies have
    exceeded agreed upon WTO standards and limits on panelists' authority,
    a trend that is weakening agreed disciplines on subsidies and other
    market-distorting practices. The dispute resolution process is
    insufficiently transparent and excludes participation by adversely
    affected private parties. The panel selection process is in urgent need
    of reform. A complete overhaul of the WTO dispute resolution process is
    a prerequisite to the establishment of adequate disciplines on market-
    distorting practices in China and elsewhere.
    China and Currency Manipulation
        We disagree strongly with the latest Department of Treasury report
    that, through a very tight reading of current law, fails to identify
    China or any other country as manipulating its currency. Whether it is
    the pegging of a currency to the dollar (by China) or extensive
    government intervention in exchange markets (by Japan, South Korea,
    Taiwan), currency manipulation by foreign governments is real--and it
    is a major problem for U.S. industry.
        China continues to keep its currency pegged to the U.S. dollar at
    the rate that existed in 1995--undervalued by as much as 40 percent.
    The pegging of China's currency to the dollar is, in effect, a form of
    currency manipulation. It has been devastating to steel and its
    manufacturing customers in North America. The pegging of China's
    currency to the U.S. dollar at an unrealistic and very weak rate (and
    thus, the record buildup of Chinese foreign reserves) has been a key
    contributor to the crisis in U.S. and North American manufacturing.
    This is a serious irritant in the United States-China trade
    relationship. The solution is a significant revaluation of the yuan--
    and thereafter, to allow it to float.
        Unsound currency relationships, such as the one that exists between
    the yuan and the dollar, are having a major impact on steel's ability
    to compete directly or indirectly, in the global marketplace. The
    domestic customers of the steel industry are facing this and other
    long-term structural challenges. They are experiencing damaging
    negative trends, such as increasing imports and decreasing exports,
    that have nothing to do with the steel--or with the President's steel
    tariffs. Many of steel's domestic customers are deciding they can no
    longer compete by producing in the U.S. and North America. They are
    moving production facilities offshore--especially to China. There,
    steel prices are higher and the steel distribution system is
    inefficient--but labor and environmental costs are much lower, and
    producers who want to export get a further ``subsidy'' from the
    significantly undervalued Chinese currency.
        As the pressure from OEMs in China increases, it is forcing more
    and more U.S. and North American manufacturers to join the exodus just
    to survive. This trend of the ``disappearing customer'' is having a
    serious negative impact on the steel industry in the United States and
    North America. It is a longer-term threat to steel demand in North
    America, and to the prosperity of North America's economy and living
    standards. What the Congress should be concerned about is that--unless
    this negative trend is reversed--it will be more difficult in the
    future to resolve difficult social problems in the United States,
    including our serious retirement and health care issues.
        It will also be more difficult to effect further trade
    liberalization. When offshore governments manipulate their currencies
    or engage in competitive currency depreciations to enhance their export
    competitiveness, it impairs significantly the benefits to steel and
    other U.S. and North American manufacturers from new initiatives to
    liberalize trade. Government manipulation of exchange rates and large
    or sudden changes in currency values have a far greater impact on trade
    flows than do technical provisions in agreements to liberalize trade.
    We have asked our government negotiators to keep this important factor
    in mind.
        The practice of currency manipulation is especially worrisome when
    it forces other countries to undervalue their currencies in order to
    keep their own economies export-competitive. This chain reaction, which
    starts with China, is a major problem for U.S. manufacturers, including
    steel. Because exchange rate manipulation by Asian governments has had
    a devastating impact on the U.S. and North American manufacturing
    base--and since China is ``the linchpin''--AISI is a member of the
    ``Fair Currency Alliance.'' We support the effort to prepare and file a
    Section 301 case against China to address the unfair competitive
    advantage that China is deriving--and damage that its currency
    manipulation is doing across diverse sectors of the U.S. economy.
        In addition, AISI is supporting numerous bills and resolutions on
    this issue. These include: the recently passed H. Res. 414, sponsored
    by Rep. Phil English (R-PA), which the House approved 411-1; HCR 285,
    sponsored by Rep. Donald Manzullo (R-IL); HR 2989, sponsored by Rep.
    Ernest Istook (R-OK); and HR 3058, sponsored by Rep. English.
    Conclusions
        No one knows how to compete with a China that can sell finished
    goods in the U.S. and other export markets for less than the cost of
    the raw materials. However, China's competitive advantages are not all
    ``genuine.'' Subsidies, cartels, currency manipulation and other
    illegal and unfair practices play a role. There is not one single
    policy change that will solve our manufacturing crisis. Rather, we need
    a range of bold and innovative public policies--including a much more
    aggressive policy on trade.
        The President imposed steel tariffs under Section 201 of U.S. trade
    law a little more than 19 months ago. He took this bold action, because
    he recognized that market forces--and a level international playing
    field--did not exist for steel. The Administration has recently
    expressed a renewed commitment to ensure a level international playing
    field for all U.S. manufacturers. It has said that it intends to make
    sure that China fulfills its WTO commitments and plays by the rules. It
    has announced the establishment of an ``Unfair Trade Practices Team''
    at the Department of Commerce. The way to send a clear message to China
    and other mercantilist states that the United States is truly committed
    to a level playing field for U.S. manufacturing would be keep the
    President's steel tariffs completely intact for the full, intended
    three-year term.
        Steel remains at the cutting edge when it comes to understanding
    United States-China economic relations. The opponents of the
    President's Steel Program have cited the President's steel tariffs as a
    reason why U.S. manufacturers are moving operations to China. This is
    false on its face. Steel prices and the President's steel tariffs have
    nothing to do with the flight of U.S. manufacturing to China--because
    steel prices are higher, and steel quality is lower, there. This is a
    time to understand what is really going on, and why. It is not the time
    to make steel or any other industry a scapegoat.
        We need to confront the real challenges facing U.S. manufacturers.
    Unless current trends can be reversed, the name of the game will
    continue to be, ``If you can't beat them, join them.'' In this regard,
    the recent announcements of North American vehicle manufacturers that
    they would like to see substantial auto parts production in China--
    notwithstanding the higher steel prices there--should serve as a wake-
    up call to all.
        AISI appreciates the opportunity to provide this written submission
    to the Ways and Means Committee on an issue of critical importance to
    America's steel industry.

              Statement of Carus Chemical Company, Peru, Illinois
    Introduction

        Carus Chemical Company (``Carus'') of Peru, Illinois is a small
    family-owned company founded in 1915. Carus has 205 U.S. employees.
    Carus is the only remaining U.S. producer of potassium permanganate, a
    chemical that has important applications, including drinking water and
    wastewater treatment, and contaminated site clean-up.
        Carus is the world's most efficient and environmentally responsible
    producer of potassium permanganate due to our economies of scale and
    patented process improvements. For over 50 years, we have continually
    worked to refine our process, to improve our utilization of key
    chemical inputs, to enhance our energy efficiency, and to reduce our
    impact on the environment. As a result of these efforts, our production
    process meets and exceeds all applicable U.S. environmental standards.
    In contrast, other producers, specifically those in China, still use an
    inefficient, energy-intensive and environmentally damaging process
    dating from well before the 1970s.
        Carus and its employees have very serious concerns about the
    unwillingness of Chinese enterprises to abide by existing international
    trade rules, particularly rules against the dumping of products. Our
    experience in recent years has repeatedly demonstrated that some
    Chinese enterprises simply do not take these rules seriously and will
    do whatever they can--including making up data, forging documents and
    seriously misleading U.S. authorities--in an effort to evade the
    antidumping laws. We also have broader policy concerns about the
    inability of existing U.S. trade laws and trade policies to prevent the
    continuing erosion of our U.S. manufacturing base. In particular, we
    are dismayed at continued reports that modern, efficient and
    environmentally sensitive facilities that provide good jobs to U.S.
    workers are being forced to give way to inefficient and environmentally
    damaging Chinese plants operated by enterprises that have little regard
    for their workers or for rules of fair trade.
    Conduct of Chinese Enterprises in Dumping Cases

        Since 1983, the United States has had in place an antidumping duty
    order against unfairly priced potassium permanganate from China. The
    dumping order was and is necessary because Chinese firms continue to
    sell potassium permanganate on the world market at prices that are
    below the market economy cost of raw material and energy inputs.
        In recent annual reviews of the dumping order, dishonest Chinese
    enterprises, aided by equally unscrupulous U.S. parties, have
    aggressively sought to eliminate the dumping duty on their potassium
    permanganate imports. These parties have used a variety of fraudulent,
    illegal and abusive tactics--including the forging of key Chinese
    documents, fraud on U.S. Government investigators and violations of
    important U.S. laws and regulations. Our experience has included the
    following appalling examples:

        1.  The annual review for 1999 of Chinese producer Zunyi Chemical
    Factory involved a single test shipment to U.S. importer Wego Chemical.
    This shipment was smuggled into the US from China in a shipping
    container and falsely labeled ``tools and toys.'' Because potassium
    permanganate is a hazardous oxidizer, this violated numerous U.S. laws
    and regulations on the import and transport of hazardous materials into
    the United States. It also placed the container ship and its crew in
    considerable danger. (It is of note that potassium permanganate is a
    potentially incendiary substance that has been found in the homes of
    the Unibomber as well as terrorists in Frankfurt, Germany. It is also a
    precursor chemical controlled by the Drug Enforcement Administration
    (``DEA'') that can be used for cocaine production.) Despite this
    illegal conduct, Commerce Department rules and practice allowed the
    case to be continued and awarded a lower margin for Zunyi with no
    apparent consequences for this illegal conduct.
        2.  In the new shipper review for 2000, the Commerce Department
    conducted a 16-month review of the Chinese producer Groupstars. This
    included a two-week on-site verification at Groupstars' multiple sites
    in China. Carus raised a number of serious concerns about Groupstars,
    but the Commerce Department was unable to uncover supporting evidence
    at verification. Later on, however, the Commerce Department dismissed
    the review when Carus, after extensive and costly participation in the
    review, proved that Groupstars had forged a key business license and
    had thus lacked standing to request the new shipper review in the first
    place. Other than the dismissal of the review, Groupstars has
    apparently suffered no consequences for this outright fraud, while
    Carus incurred over $250,000 in legal costs. Since the dismissal of the
    2000 review, even more outrageous information has surfaced about
    Groupstars' conduct in that review. Groupstars' U.S.-based officials
    have since admitted in certified statements to the Commerce Department
    that they ``made up'' their key claims in the 2000 review and even lied
    about the actual producer. The record also shows that Groupstars
    falsified accounting documents and production records to back up these
    false claims and certified to the Commerce Department that these
    documents and records were bona fide. All of this, in turn, means that
    the Commerce Department spent some two weeks traveling to and verifying
    Chinese plants that had absolutely nothing to do with Groupstars'
    actual 2000 production. Last year, Congressman Jerry Weller asked the
    Commerce Department Inspector General to look into this clear evidence
    of extensive fraud on the U.S. Government. We also encourage the
    Committee to review the record of this appalling case.
        3.  Given the absence of any consequences arising from this fraud
    and the apparent absence of any meaningful deterrents, Groupstars
    sought another review for 2001. In that review, Groupstars continued to
    make false and misleading statements to the Commerce Department. For
    example, Groupstars and its lawyers submitted copies of sensitive
    Indian company internal documents, which they certified were obtained
    from the public record of a trade case in India. However, the Indian
    company protested and informed the Commerce Department in writing that
    these documents were company confidential and believed to be stolen.
    Groupstars also certified usage data that was impossible for its
    production process. In addition, the record of the review was filled
    with evidence of false and misleading financial and accounting
    practices and collusion with producers and claimed customers. Although
    the Commerce Department eventually ruled against Groupstars in the 2001
    review, it did so only after affording Groupstars numerous
    opportunities to correct false and misleading information and only
    after Carus was required, at considerable expense, to demonstrate that
    Groupstars' technical, financial and sales information was not
    credible.
        4.  Under its current regulations, the Commerce Department
    apparently has no direct authority to levy administrative sanctions
    against parties that are willing to falsify required certifications and
    engage in other fraud and fabrication to evade dumping duties. These
    illegal activities waste the limited financial and human resources of
    the Commerce Department and impose unnecessary costs on U.S. taxpayers.
    Such fraudulent behavior has also cost Carus, a small company, over
    $550,000 since early 2000. Had we not devoted considerable effort and
    expense to uncovering this misconduct, Carus could well have been put
    out of business, with the direct loss of over 200 U.S. jobs and the
    loss of other jobs in our Illinois Valley region and throughout the
    United States.

        These repeated and serious abuses show that Chinese enterprises
    simply do not take our dumping laws seriously. Carus does not believe
    that our experience in this regard is unique--we understand that other
    U.S. manufacturers and producers have faced similar misconduct in other
    trade cases involving China. We have also seen recent press reports
    detailing outrageous abuses of the Commerce Department's verification
    process by unscrupulous enterprises in China.
        All of the above points to the need to make changes in the dumping
    laws and how they are administered, particularly in certain China
    cases. Among other things:

        1.  In the current economic and political environment in China,
    some dishonest Chinese enterprises and their U.S. importers have strong
    incentives to engage in fraud and deception in U.S. dumping cases.
    Standard Commerce Department investigation and verification techniques
    apparently are not always sufficient to address the serious threats
    posed to U.S. producers by these unscrupulous parties. Carus
    appreciates the difficult task facing the Department of Commerce and
    its employees in investigating Chinese parties who are intent on
    eliminating current dumping duties through dishonest and abusive
    conduct. Carus is concerned, however, that the Commerce Department may
    not always have the resources and legal, regulatory, and other powers
    that it needs to address this conduct. Congress and the Commerce
    Department need to tighten policies and practices to assure that
    dishonest and suspicious parties are more thoroughly investigated and
    that the Commerce Department's investigators have all appropriate
    resources, including specialized expertise in Chinese financial,
    business, technical and legal matters. Additionally, Congress and the
    Commerce Department should consider steps to provide greater assurance
    that Chinese information and record-keeping systems are legitimate and
    reliable (e.g., by insisting on audited and certified financial
    information as is required of firms in the United States).
        2.  Commerce Department policies and procedures should ensure that
    fraud or other illegal conduct uncovered during the course of dumping
    investigations is actively investigated and, where appropriate,
    referred for prosecution. The prosecution of those responsible for
    defrauding the U.S. Government in trade cases could be a powerful
    deterrent to future fraud. Additionally, it is important to examine
    whether changes in applicable law or regulations are necessary to help
    the Commerce Department combat such conduct, particularly if a firm
    engages in the repeated submission of false certifications and other
    abusive conduct on a repeated basis. For example, Congress and the
    Commerce Department should seriously consider the establishment of a
    specialized office to investigate serious fraud allegations in dumping
    cases. In addition, Congress should also consider authorizing the
    Commerce Department to impose administrative sanctions on parties and/
    or counsel that repeatedly file and certify false information. Without
    meaningful deterrents, dishonest exporters and importers will not take
    our dumping laws seriously. In particular, unscrupulous Chinese
    enterprises and related U.S. parties will continue to have every
    incentive to seek low duties by repeatedly filing and certifying false
    and misleading information with the Commerce Department.
        3.  Chinese exporters and their U.S. allies are increasingly
    ``gaming the system'' in their efforts to eliminate current dumping
    duties. For example, in our cases, Carus has seen the abusive filing of
    a new shipper review to obtain a zero cash deposit. This review request
    was based on highly questionable domestic sales to U.S. purchasers and
    on business licenses that were ultimately shown to be forged. Congress
    and the Commerce Department should undertake a systematic review of
    longstanding policies and practices in non-market cases to determine if
    changes are required to address this increased ``gaming'' by Chinese
    entities.
        4.  The Chinese Government should also bear some responsibility for
    conduct of Chinese enterprises in U.S. dumping cases. China benefits
    greatly from the current $120 billion imbalance in trade with the
    United States and has repeatedly touted the significance of its
    membership in the World Trade Organization. If China wishes to be a
    responsible member of the World trading community, it should take steps
    to address fraud and other serious misconduct by corrupt Chinese
    enterprises in the dumping process. Among other things, the United
    States should seek commitments from China to enforce China's own laws
    against Chinese enterprises that are shown to have engaged in such
    serious misconduct as forging official business documents and
    falsifying financial information.
    China's Continuing Threats to U.S. Manufacturing

        In addition to our specific concerns about the Administration and
    enforcement of U.S. dumping laws against deceptive Chinese enterprises,
    we are also disturbed by the overall course and direction of the U.S.
    trading relationship with China and the continued threats posed by
    China to the U.S. manufacturing sector. In instance after instance,
    highly efficient U.S. businesses that provide good jobs to American
    workers and operate in an environmentally responsible manner are being
    threatened and marginalized by dirty and inefficient Chinese operations
    run by Chinese enterprises that have little or no concern for the
    health and well-being of their workers or the environment of the
    surrounding communities. This trend is of particular concern to the
    U.S. manufacturing and chemical sectors. Although Carus has so far been
    able to fend off attacks against the current antidumping duty order for
    permanganate, neither we nor most other U.S. producers can afford to
    defend against a continuous onslaught by unscrupulous Chinese
    enterprises. This already difficult and prohibitively expensive task is
    made even more difficult when such enterprises are aided by China's
    currency policy and by the Chinese Government's inability or
    unwillingness to effectively enforce even basic environmental, safety,
    and labor standards.
        The U.S. Government must act to confront the serious threat that
    China poses to the U.S. manufacturing sector. Among other things, the
    United States must seek to prevent abuses by Chinese enterprises by
    aggressively enforcing all of our own laws, including laws on matters
    such as the shipment of hazardous chemicals and the safety of imported
    products. (In the specific case of potassium permanganate this requires
    continued vigilance by the DEA of China's international sales of this
    important precursor chemical.) Moreover, the United States must press
    China to better enforce its own substantial body of enterprise laws and
    environmental, health, and labor laws to assure that Chinese exporters
    do not gain unfair trade advantages by engaging in conduct that is
    illegal in China itself. Finally, the United States should give serious
    consideration to revamping international trade rules and/or U.S. laws
    and practices to address these kinds of abuse. For example, it might be
    appropriate to include some limited form of environmental, health, and
    safety cost in the calculation of normal value in dumping cases where
    enterprises attempt to gain unfair advantages in trade by violating by
    applicable national law or other requirements. Alternatively, Congress
    should consider expressly authorizing the application of the
    countervailing duty laws to China and encouraging the Department of
    Commerce to investigate whether selective waivers from or the selective
    enforcement of China's environmental, safety or labor laws may
    constitute a countervailable subsidy in specific cases.
        Carus urges Congress and the Administration to take aggressive
    steps to address concerns raised by imports from China. These steps
    should address particular problems that we and others are facing under
    the dumping laws as well as key overriding issues in the U.S.-China
    trade relationship. This is no mere academic exercise. Rather, the fate
    of many competitive and efficient U.S. businesses hangs in the balance.
    In the case of Carus, the continued survival of our company, the jobs
    of our 205 U.S. employees and the economy of the Illinois Valley region
    all critically depend on how Congress and the Administration respond to
    these important concerns.
        Carus is a strong proponent of free and fair trade. However, U.S.
    trade policy with China must be based on the principle of fraud-free
    trade and on responsible conduct by China and Chinese enterprises.
    Carus and our employees thank the Ways & Means Committee for the
    opportunity to highlight these critical issues.

                Statement of Daniel T. Griswold, Cato Institute
        There is no minimizing the fact that the last three years have been
    brutal for U.S. manufacturing. Output is only now slowly recovering
    from its plunge in 2001, and 2.7 million fewer Americans work in
    factories today than three years ago. The real debate is about why
    we've suffered this slump in manufacturing output and employment,
    whether the cause is trade with China or other factors closer to home,
    and what if anything Congress can and should do about it.
        First, some perspective: American manufacturing is not about to
    disappear. We are not ``deindustrializing'' or ``losing our
    manufacturing base.'' Our nation remains a global manufacturing power.
    Despite the recent slump, manufacturing output is still up 40 percent
    from a decade ago, according to the Federal Reserve Board's monthly
    index of manufacturing activity. Manufacturing output today is double
    what it was in the early 1970s and triple what it was in the 1960s.
    Figure 1 shows the growth in U.S. manufacturing output since the mid-
    1980s. As you can see, manufacturing output actually accelerated after
    implementation of NAFTA and the Uruguay Round Agreements in the mid-
    1990s. In fact, U.S. industry added a net half million manufacturing
    jobs in the five years after NAFTA. American companies are world
    leaders in hundreds of sophisticated products, and they run neck and
    neck with German companies as the world's leading exporters of
    manufactured goods. This is not the profile of a nation losing its
    industrial base.
        Second, trade with China or the rest of the world is not to blame
    for the manufacturing recession and loss of jobs. The problem is not
    too much trade but not enough domestic demand and growth, especially
    investment and business spending. What put the kibosh on U.S.
    manufacturing was the dot-com meltdown, slumping business investment,
    lingering uncertainty from the war on terrorism, corporate scandals,
    and slow growth abroad. Critics of trade are quick to blame imports,
    but the real story is that import growth has been negative or sluggish
    during the last three years. Only now are monthly import numbers
    finally recovering to their previous levels of pre-recession 2000.
        Conventional wisdom would tell us that more imports mean less
    domestic output. Every widget we import means one less widget made and
    fewer widget workers employed, or so we are told. But for manufacturing
    as a whole, the reality is quite the opposite. Figure 2 shows the
    growth of manufacturing imports to the United States and U.S. domestic
    manufacturing output for each year since 1988. As you can see, in those
    years where manufacturing imports grew the fastest, so did domestic
    manufacturing output. In the booming 1990s, when manufacturing output
    was growing the fastest, manufacturing imports were surging by double
    digits. In 2001, when manufacturing output fell, so did manufacturing
    imports. We seem to either enjoy years of strong growth in imports and
    output or endure years of weak growth in imports and output.
        The reason is straightforward. Imports and output both rise and
    fall with domestic growth and demand. An expanding economy creates
    demand for both domestic production and imports. And as U.S. companies
    expand production, they import more intermediate goods for assembly and
    capital machinery to make their plants more efficient. The positive
    connection between imports and output exposes the protectionist mirage
    that raising new barriers to imports will somehow promote domestic
    output. That mirage rests on the false assumption that if we can just
    reduce imports, through tariffs and currency adjustments, we can make
    those widgets ourselves and employ more workers. But a combination of
    falling imports and rising domestic production does not appear to be a
    realistic option. In our economy today, trade and prosperity are a
    package deal. When we prosper, we trade; when we trade, we prosper.
        Why have so many manufacturing jobs been lost in the past three
    years? Two reasons stand out: A cyclical downturn in the economy
    reduced demand for manufactured goods, and amazing advances in worker
    productivity have allowed American companies to produce more goods with
    fewer workers. American factories are using the Internet, just-in-time
    inventory, and new technologies--all spurred by international
    competition--to raise worker productivity. American factories are
    producing three times the volume of manufactured goods they did in the
    mid-1960s with fewer workers because today's workers are three times
    more productive. And we all know that productivity growth is the only
    long-term foundation for rising prosperity.
        Despite those underlying realities, China has become the focus of
    economic anxiety, just as Japan was 15 years ago. Imports from China do
    compete with products made by certain U.S. factories and they do
    displace a relatively small number of U.S. workers. Along with the
    dislocation it causes, trade with China delivers huge benefits to the
    U.S. economy. First and most important, American families benefit as
    consumers. China is a leading supplier of imported clothing, shoes,
    furniture, toys, sporting goods, and consumer electronics. Those are
    products poor and middle-class families commonly buy at a discount
    store, where Chinese imports keep prices down and raise the real wages
    of American workers. American producers also benefit from the lower-
    cost inputs from China, such as machine parts, office machines, and
    plastic moldings. Those inputs allow American-based manufacturers to
    retain their competitive edge in global markets.
        Imports from China have indeed grown rapidly in recent years, but
    they are nothing like a flood. In 2002, Americans bought $125 billion
    worth of goods made in China--10 percent of our total imports and a
    small fraction of our $10.4 trillion economy. There is nothing alarming
    about Americans spending about one penny of every dollar of our income
    on products made by the one-fifth of mankind that lives in Mainland
    China.
        There has been no wholesale movement of U.S. factories and
    investment moving across the Pacific to China. If the critics were
    right, U.S. multinationals would be falling over themselves to relocate
    capacity to China to take advantage of its low wages. In reality, U.S.
    investment in China has been stable and modest. According to figures
    compiled by the Bureau of Economic Analysis at the U.S. Commerce
    Department, from 1999 through 2002, American manufacturers directly
    invested an annual average of $1.2 billion in Mainland China, and that
    figure has not been going up. In fact, it went down last year to about
    $500 million.
        That modest investment in China compares to an annual average of
    $16 billion in outward U.S. direct manufacturing investment in the
    European Union during that same period, $3.8 billion of that in the
    Netherlands alone. In other words, American companies invest three
    times more each year in manufacturing in the tiny Netherlands,
    population 16 million, than they invest in all of China. Our
    manufacturing investment in China is less than 1 percent of the $200
    billion invested each year in America's domestic manufacturing
    capacity. And it is overwhelmed by the average net inflow of $20
    billion in foreign direct manufacturing investment to the United States
    each year.
        If low wages drive U.S. manufacturing investment to go abroad, then
    why does the large majority of outward investment go to other high-
    wage, high-standard countries? Most of our outward FDI flows to other
    rich countries because wages account for a relatively small share of
    the cost of production. Other considerations for investing are the size
    of local markets, skills and education levels of workers, political and
    economic stability, the rule of law, and the reliability of the
    infrastructure. As many American companies can attest, investing
    profitably in China and other developing countries remains a
    challenge--because of their underdeveloped infrastructure and legal
    systems, undereducated workforces, remaining trade barriers, and
    limited consumer markets.
        That leads to my final point: How can we hope to see hundreds of
    millions of people in China and India become middle-class consumers of
    U.S. products if we do not allow them to participate in the global
    economy?
        Critics of trade with China ignore the country's growing appetite
    for consumption and imports. While China is the world's fourth leading
    exporter, it is also the world's sixth leading importer. It has become
    the engine of demand growth in East Asia. It is rapidly becoming one of
    the world's top markets for automobiles. And China has now displaced
    the United States as the world's top importer of steel. In fact, by
    soaking up global steel supplies and lifting global steel prices, China
    has become the U.S. steel industry's best friend. While America's total
    exports to the rest of the world were falling in 2002, our exports to
    China rose 14 percent.
        And what do the people and government of China do with all those
    dollars they earn from exports to the United States but do not spend
    buying our goods and services--the infamous bilateral trade deficit?
    They invest those dollars in the United States, typically in U.S.
    Treasury notes. That investment helps finance the U.S. federal budget
    deficit, keeping domestic interest rates lower than they would be
    otherwise and freeing private U.S. savings for investment in the
    private sector. So our trade with China is blessing us three times
    over, through low-cost imports, through rising demand for our exports,
    and through capital inflows that keep our domestic interest rates low.
    It is truly a win-win-win relationship for the United States.
        For all those reasons, imposing tariffs on Chinese goods in the
    name of helping U.S. manufacturing would be a disaster. It would be a
    direct tax on American working families, especially those on modest
    incomes. It would drive up costs for U.S. companies that depend on
    parts, supplies, and other goods from China to remain competitive in
    global markets. It would reduce demand for U.S. exports and for U.S.
    Treasury bills, depressing domestic production and driving up interest
    rates. Equally important, punitive tariffs aimed at China would sour
    U.S. relations with an important country in an important part of the
    world as we try to wrestle with global terrorism and North Korea's
    nuclear ambitions.
        Pressuring China to readjust or float its currency poses dangers of
    its own. China's currency has been pegged to the dollar for a decade
    now. When the dollar appreciated relentlessly in the 1990s, so did the
    Chinese yuan. When other Asian currencies plummeted in value during the
    financial crisis in 1997-98, the yuan stayed fixed to the dollar. As
    the dollar has gradually depreciated since early 2002, so too has the
    yuan. Just about everybody, including the Chinese Government, expects
    China to eventually adopt a floating currency and open its capital
    market just as virtually all advanced nations have done. But China's
    banking system is a mess and its capital controls keep hundreds of
    billions of dollars worth of domestic savings effectively trapped
    inside the country. If China were to move too rapidly toward free
    capital flows and a floating currency, it could precipitate a collapse
    of its banking system, the flight of billions in savings, and a rapid
    depreciation of its currency. We could soon regret getting what we
    asked for.
        If Congress and the Bush administration want to help U.S.
    manufacturing, they should focus their efforts on promoting a more
    robust economy and renewed confidence in the business sector. Declaring
    war on imports will only hurt American families, producers, and the
    overall economy at the expense, not the salvation, of manufacturing and
    jobs.
                                     ______

          [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Statement of the Customs Bond Committee of the American Surety
                                  Association
        The Customs Bond Committee of the American Surety Association
    (``ASA'') appreciates the opportunity to submit this testimony for the
    record in connection with the Ways and Means Committee Hearing on
    United States--China Economic Relations and China's Role in the Global
    Economy.
        The American Surety Association is a trade association comprised of
    insurance companies, and their agents, authorized by the Department of
    Treasury to guarantee US government obligations. A standing committee
    of ASA is the Customs Bond Committee. members of the committee
    represent surety companies that underwrite over 70% of all surety bonds
    currently on file with the Bureau of Customs and Border Protection
    (``Customs''). Members maintain offices throughout the country,
    principally in major port cities. Through the customs bonds they
    underwrite, ASA members ensure that importers--including importers of
    Chinese products--honor their legal responsibilities.
        The issue we would like to raise with the Committee has to do with
    fraudulent Chinese imports into the United States, and how various
    illegal schemes are employed to avoid antidumping duties that are in
    place on agricultural products. These schemes undermine the
    effectiveness of antidumping laws to protect injured US domestic
    industries targeted by the fraudulent imports, and coincidentally,
    jeopardize the availability of surety bonds for legitimate Chinese
    trade, and perhaps for a broader spectrum of United States trade.
        Antidumping duties are a statutory mechanism to increase the cost
    of selling a foreign product in the US marketplace that was originally
    sold for export to the US at a price less than the product is sold in
    the domestic market of the exporting country (i.e., at a price less
    than the ``fair market value'' or ``normal value'' in a non-market
    economy). If foreign sales for export at less than ``fair'' or
    ``normal'' value result in economic injury to a US industry, then
    antidumping duties are assessed to ``level the playing field.''
        For more than two centuries the US government has required
    importers to post security in one form or another to facilitate the
    import process while providing sound assurances of compliance with all
    import laws, and especially, to assure the collection of proper duties,
    taxes and fees when the final assessment is made by Customs. In lieu of
    depositing cash with Customs and restricting valuable working capital,
    importers in virtually all cases use corporate surety bonds (``customs
    bonds'') to meet their statutory security requirements. Because of the
    security provided by the bonds, imports are released to the importer by
    Customs soon after arrival and avoid unnecessary port congestion and
    delay. Importers file the necessary paperwork and pay estimated duties
    within 10 business days after the merchandise is released from Customs.
        Surety bonds are a unique form of security. A surety bond is a
    contract between three parties: the principal, who is the party that
    undertakes an obligation, the surety, who guarantees the principal will
    perform the obligation, and the obligee, who obtains the benefit of the
    bond. In the case of customs bonds, the importer is the principal, and
    the obligee is the United States. In the event a bonded importer fails
    to perform its obligations to Customs, Customs will seek performance
    from the surety. The surety will seek indemnification from the importer
    for any expense it incurs in performing its obligations under its bond.
    Surety companies do not willingly provide bonds to importers who they
    believe will not perform all their bonded obligations, unless they
    takes steps to protect their exposure in advance, generally by holding
    collateral, such as a bank letter of credit or taking a deposit of
    cash.
        For the added creditworthiness and qualification a surety provides
    to the principal and to the benefit of the obligee, the surety collects
    a nominal premium from the principal. Because the overwhelming majority
    of customs bonds are not backed by collateral, importers find customs
    bonds to be an attractive means of fulfilling statutory requirements
    with minimal impact on the their limited working capital. The
    historically low loss activity has resulted in this combination of
    favorable and non-restrictive pricing and underwriting standards that
    importers find favorable. What we will present to you in our testimony
    could lead to situations that greatly restrict the surety industry's
    capacity to provide customs bonds to the importing public at low cost
    or for all types of importations.
        Because of increased export activity and the non-market nature of
    China, Chinese exports to the US are the subject of numerous
    investigations into unfair trade practices; most notable are the
    antidumping investigations. Many products subject to antidumping
    investigations have antidumping duty rates that greatly exceed the
    actual entered value of the product (i.e., in excess of 100% of entered
    value). When the antidumping duty cash deposit requirement approaches
    or exceeds the entered value, Chinese shippers and importers are more
    likely to develop schemes to avoid the requirement of making these
    substantial cash payments.
        Within the last year, ASA members have uncovered two fraudulent
    import schemes used to avoid the requirement to make a cash deposit of
    antidumping duties on certain Chinese agricultural products: abuse of
    the ``new shipper'' rules and forging documents to falsely identify the
    shipper or manufacturer. Following the discovery of this fraud, many if
    not all of the major US surety companies have chosen not to knowingly
    underwrite antidumping duties for garlic, crawfish, mushrooms, or honey
    from China. This discovery forebodes crippling losses for the US surety
    industry, continued unfair competition to the US industries sought to
    be protected by the antidumping laws, and the closure of markets to
    Chinese agricultural industry vis a vis the refusal of the US surety
    industry to underwrite customs bonds for Chinese agricultural products.
    All parties will continue to lose greatly unless the US surety
    industry, Customs, the International Trade Administration of the
    Department of Commerce (``ITA'') and Congress, work together to close
    the loopholes in the antidumping laws that allow the fraud to continue.
        (1) Abuse of the ``New Shipper'' rules. The first scheme involves a
    Chinese shipper (exporter) subject to a high antidumping duty deposit
    rate. Such an exporter may set up a ``new'' shell company in China to
    act as a new shipper, and in some cases, also a shell company in the US
    to act as the importer. This ``new'' shipper seeks a ``New Shipper''
    status from the ITA. He ships a few orders to the US market as a ``New
    Shipper'' and requests the ITA to undertake a ``New Shipper Review'' of
    his export sales price.
        The undertaking of a ``New Shipper Review'' qualifies the importer
    for the privilege of posting a bond in lieu of making a cash deposit of
    the high antidumping duty rate. This bonding privilege continues while
    the detailed investigation proceeds. In the interim, this ``new''
    shipper then ships a large volume of product. At the same time, other
    shippers may attempt to ``counterfeit'' the ``new shippers'' identity
    by submitting counterfeit invoices in order to take advantage of the
    bonding privileges. While ITA investigates, the customs bonds secure
    the estimated antidumping duties on the shipments.
        Under this process, shippers or importers can operate for about 9-
    12 months and avoid the requirement of posting a high cash antidumping
    duty deposit at the ``PRC-Wide Rate'' (376.67% for garlic; 223.01% for
    crawfish; 198.63% for mushrooms; and 183.80% for honey). When the ITA
    finishes its investigation, it publishes its Final Results of the New
    Shipper Review. These results are formed after the ITA reviews the
    sales for export and import activity over the period. If the ``New
    Shipper'' cannot substantiate that it qualifies for a lower antidumping
    duty adjustment (``rate'') than the ``PRC-Wide'' rate, ITA will assess
    and instruct Customs to collect the ``PRC-Wide'' rate'' on all the
    previous entry transactions from this new shipper. Subsequently, the
    shipper or importer, or both, ``disappear'' never having had any
    intention of paying the antidumping duty increases. Many times there is
    a revenue shortfall inadequately secured by surety bonds and cash
    deposits. In such cases, the government must write off uncollectible
    debt. All parties lose. The US industry that sought to be protected,
    the US surety industry, the law-abiding Chinese shippers and the
    legitimate importers of Chinese products, all continue to be injured by
    these fraudulent trade practices. All the while, the illegal shippers
    and importers obviously benefit.
        (2) Forging Documents. The second scheme, referenced in brief
    above, involves the misappropriation of the name and identity of a
    legitimate Chinese exporter, which has a low/zero antidumping duty
    margin. This can be easily accomplished with today's desktop publishing
    capabilities, which allow for the preparation of ``counterfeit''
    invoices. This scheme is carried out until either the counterfeit
    transactions are caught by the legitimate exporter (as a result of a
    loss of sales in the US) or by the ITA and ``Customs'' when it becomes
    apparent that the transactions reported by the legitimate exporter to
    the ITA pale in comparison to the evidence of sales/imports available
    to Customs.
        ASA members have attempted on several occasions to gain the
    cooperation of Customs and the ITA to target and eliminate these
    fraudulent schemes. Generally, the agencies have rejected our requests.
    For example, both of the above schemes have been utilized against
    exporter Huaiyang Hongda (Hongda) in the antidumping case on Chinese
    garlic. The impact of these illegal schemes could be minimized and
    curtailed in the future through the Administration of the antidumping
    review of the Chinese garlic for the current period under review (2001-
    2002). By reviewing the sales and shipments of the Chinese exporter
    Hongda, the ITA stands to learn more about the schemes and how to
    develop effective techniques to counter them. However, the ITA has
    rescinded its review of Hongda in the current Administrative Review.
    ASA recommends that the ITA reconsider its decision to rescind the
    Administrative Review and undertake a thorough review of this problem.
    Hongda's review presents the most immediate and clear ``test case'' for
    the ITA to resurrect confidence in its antidumping procedures with
    respect to China. In light of the schemes, overriding public interest
    dictates that the ITA take advantage of this opportunity and conduct a
    review of Hongda and other shippers of Chinese agricultural products
    who are, or can be identified by the surety community as, participating
    in or being victimized by the aforementioned schemes. A failure to
    fully address these issues head on by the ITA will result in the
    continued injury both to the domestic industry seeking protection, as
    well as to the US surety industry.
        ASA also recommends that the United States government encourage the
    Chinese Government to take an active involvement in monitoring the sale
    and export of commodities subject to US imposed antidumping duties.
    Such involvement may require the implementation of a visa program for
    verification of producer shipments. ASA members stress their
    willingness to arrange and/or participate in the development of
    independent verification programs on the United States side among the
    sureties, the legitimate Chinese shippers and Customs. If appropriate
    measures are not taken to curtail the schemes used to circumvent
    antidumping duties, surety companies will face staggering losses and/or
    will be forced to severely restrict access to customs bonds for these
    commodities in this trade lane, and domestic interests will continue to
    suffer unchecked unfair competition. This, in turn, will severely
    impact United States/China trade relations as law-abiding Chinese
    exporters will exit the market because their import customers will
    cease buying in the face of the crippling levels of liquid working
    capital which they would unnecessarily be required to pledge to
    continue importing.
        Thank you again for the opportunity to submit comments on this very
    important issue. I look forward to working with you and your staff to
    address these critical matters.

       Statement of Tom Hopson, Five Rivers Electronic Innovations, LLC,
                             Greeneville, Tennessee
        I, Tom Hopson, am the President and CEO of Five Rivers Electronic
    Innovations, LLC. Five Rivers is a major U.S. manufacturer of color
    television sets and is the only color television manufacturer left in
    the United States that is American-owned. Our factory is located in
    Greeneville, Tennessee.

    ALTHOUGH A TELEVISION MANUFACTURING INDUSTRY STILL EXISTS IN THE UNITED
    STATES, THOUSANDS OF MANUFACTURING JOBS IN THE U.S. HAVE BEEN LOST
    BECAUSE OF THE FLOOD OF IMPORTS FROM CHINA, PUTTING THE U.S. TELEVISION
    INDUSTRY IN JEOPARDY

        Some people in the United States are under the mistaken impression
    that there is no television industry left in the United States.
    According to our estimates, however, as recently as 2002, the U.S.
    television industry employed approximately 10,000 to 15,000 people who
    were manufacturing televisions or components for televisions. In fact,
    many people would be surprised to learn that before 2000, more
    televisions were made in Tennessee than in any other state.
        Like many other U.S. industries, however, manufacturing jobs in the
    U.S. television industry have taken a huge hit as Chinese imports have
    flooded the U.S. market. The surge in large-screen television imports
    from China over the last two years and in the most recent months is
    shown in the table below.

     IMPORTS OF LARGE SCREEN TELEVISIONS, PROJECTION TELEVISIONS, AND HDTVS
                           FROM CHINA 2000-Sept. 2003
                               (Quantity in Units)
    ------------------------------------------------------------------------
                                                   Jan.-Sept.    % Increase
         2000           2001           2002           2003        2000-2002
    ------------------------------------------------------------------------
          15,940         56,295      1,291,820      1,493,728          8004%
    ------------------------------------------------------------------------

        Our Greeneville, Tennessee plant has been making television sets
    since 1963. In 1997, Fiver Rivers, a privately-held company, purchased
    the plant from Philips. For many years, we have been proud to continue
    on in the tradition of Magnavox and Philips making TVs in the United
    States and we believe we make an excellent TV. TVs from other
    countries, particularly from Mexico, had played an increasing role in
    the U.S. market. Nevertheless, we are an extremely efficient producer
    and we have concentrated our efforts in a product where we were most
    competitive--large and very large screen televisions, usually defined
    as having a viewing picture of greater than 21 inches. Based on our
    extensive experience in this industry, we had always been able to
    participate in the U.S. market and make a satisfactory return.
        The situation changed dramatically--for the worse--in 2001, and has
    continued to deteriorate. Imports of large screen TVs from China have
    created havoc in the U.S. marketplace. In my 24 years in the television
    business, I have never seen a similar or more worrisome situation.
        We believe we have a highly-efficient, low-cost operation. Yet, we
    are finding that we are simply not able to compete with the flood of
    imports from China. The deterioration that has occurred in the
    marketplace has taken place very quickly. While we always knew that the
    Chinese were building substantial capacity to produce TVs, we began to
    really feel the impact of this substantial capacity in the U.S.
    marketplace during the second quarter of 2001. At that time, we began
    to witness first hand the flood of low-priced imports that were coming
    in from Asia, and China in particular. By the end of 2002, they had
    become the dominant force in the marketplace, driving prices lower and
    lower.
        Of course, competition is no stranger to the U.S. television
    industry. Over the past thirty years, the U.S. television industry has
    experienced substantial competition from overseas, and has consolidated
    and changed ownership. But as I noted earlier, Five Rivers had been
    successful in competing with producers not only from the U.S. but with
    product from other countries, particularly Mexico. But, the nature of
    this newest competition from China has been different. In just the past
    few months, we have seen our business change from a thriving business
    to a struggling one. We have seen a drop in our sales, in our prices,
    in our production volumes and in our capacity utilization. We have had
    to go to a four-day work week and we have laid off workers.
        Not only have manufacturing jobs been lost at Five Rivers, but
    other manufacturers who make TV sets and their components have
    experienced substantial harm as well. For example, Sharp Manufacturing
    Company had a television plant in Memphis, Tennessee that has now
    stopped making televisions altogether. Sanyo, a TV set manufacturer in
    Forrest City, Arkansas, has laid off hundreds of workers. Orion
    America, Inc. closed a TV set manufacturing plant in Olney, Illinois
    earlier this year. Countless other TV suppliers have also shut down
    operations and/or laid off workers.
        As this review shows, the problems caused by Chinese imports have
    created havoc in the U.S. marketplace. First, the sheer volume of these
    imports in a short period of time causes U.S. producers to lose sales.
    Also, the low prices of these imports forces U.S. producers to lower
    their prices on all makes and models of our TVs just to stay in the
    business. This causes serious financial problems. As volume and prices
    drop, the manufacturers are forced to layoff more and more workers. The
    national decline in manufacturing jobs are simply a reflection of the
    reality facing the U.S. television manufacturing sector.
        Much discussion has occurred in the press about potential changes
    in the TV industry, including new technologies and digital
    broadcasting. In the years ahead, we believe that the television
    industry will continue to evolve, first to digital TV capable of high
    definition broadcast, and then, perhaps to different, non-CRT based
    technologies. We want to stay in this business and must have the
    investments in place to stay abreast of these changes. We believe we
    make an excellent product that can compete fairly with any other
    product in the world. But, the U.S. television industry is facing the
    same problem that many other U.S. manufacturing industry's are facing--
    a flood of unfairly-traded products from China.

    THE U.S. TELEVISION INDUSTRY, INCLUDING FIVE RIVERS AND TWO UNIONS, HAS
    SOUGHT RELIEF FROM THESE UNFAIRLY TRADED IMPORTANT THROUGH A DUMPING
    PETITION; EFFECTIVE AND STRONG ENFORCEMENT OF OUR U.S. TRADE LAWS IS
    ESSENTIAL TO ENSURING THAT U.S. MANUFACTURING JOBS STAY IN THE UNITED
    STATES

        The U.S. television industry is now seeking relief from these
    unfair trading practices in an antidumping case that was filed in May
    of this year. The Commerce Department and the International Trade
    Commission are currently and diligently conducting this investigation
    to determine the degree to which Chinese imports are being dumped here
    in the United States and to assess the harm that these imports are
    causing. To us, the harm is self-evident. Manufacturing jobs are being
    lost almost on a daily basis as Chinese products flood the U.S. market.
    We hope that this Committee closely examines and considers all options
    available to it, including ensuring that U.S. trade laws remain strong.
    Otherwise the fate of the U.S. television industry as well as the fate
    of many other industries in the United States will be all too easy to
    predict.
        I appreciate the opportunity to submit these comments.

                                                The Heritage Foundation
                                                   Washington, DC 20002
                                                       October 20, 2003
    Congressman Bill Thomas
    Chairman of Committee on Ways and Means
    U.S. House of Representatives
    1102 Longworth House Office Building
    Washington, DC 20515

    Dear Congressman Thomas:

        I am writing to express the views of The Heritage Foundation on
    America's economic relations with China in connection with the upcoming
    hearing on October 30-31 in the Ways and Means Committee on this
    subject.
        A proposal to allow the U.S. government to impose tariffs on China
    if the yuan is not revalued, may appeal to workers' fears, but it makes
    no economic sense. It will simply harm millions of American consumers.
    The loss of American manufacturing jobs cannot be blamed on China. That
    decline has been occurring for over two decades, and reflects a shift
    from manufacturing to services. Many of the jobs are being lured to
    countries whose currencies are clearly not undervalued. The proposed
    tariffs will therefore only prop up uncompetitive industries and create
    false economic signals that will keep U.S. workers and investors from
    migrating to new industries where they now have the biggest impact.
        I have attached a copy of a Heritage Executive Memorandum (No. 902
    of October 3, 2003) entitled ``Undervaluing the Damage of a Tariff''
    for your further reference.
                Sincerely,
                                                          Michael Franc
                                   Vice President, Government Relations
                                     ______

                      Undervaluing the Damage of a Tariff
                   Marc A. Miles, Ph.D., and Ana Isabel Eiras
        Some Members of Congress have recently found a scapegoat for lost
    manufacturing jobs: the yuan, the currency of the People's Republic of
    China. Their proposed bill (S. 1586) would allow the U.S. government to
    impose a tariff on imports from China if China fails to revalue the
    yuan. This bill is an example of flawed economic analysis leading to
    bad policy. Higher tariffs on Chinese products will hurt millions of
    U.S. consumers and, even worse, will not address the real issue--
    China's strict controls on capital flows.
        Instead of supporting higher tariffs, the Bush Administration
    should pressure China to relax controls on capital flows, allowing
    reserves now accruing to leave the country in search of better returns
    abroad. The Administration should also work with China to eliminate
    remaining Chinese tariffs and non-tariff barriers so that the Chinese
    can import more. A move toward greater economic freedom in China, not
    less economic freedom in the United States, will bring sustained
    benefits for both China and the U.S.
        A Short-Sighted Tactic. While the argument for raising tariffs on
    Chinese products to safeguard the U.S. manufacturing sector may appeal
    to workers' fears, it makes no economic sense. In a recent letter to
    the editor in The Wall Street Journal, Senator Joseph Lieberman (D-CT)
    blamed China's manipulation of the yuan for ``American manufacturing
    hemorrhaging jobs.'' That faulty statement could get votes, but a
    policy based on it would harm millions of American consumers and the
    overall health of the U.S. economy for at least three reasons:

          China is not the cause of lost manufacturing jobs.
    According to the U.S. Department of Labor, manufacturing jobs have been
    declining for almost two decades, but not because of increased trade
    with China. China is not the only country with cheaper jobs and lower
    manufacturing costs. Mexico, several Central American countries, and
    some other Asian countries also have cheaper labor and production costs
    than the U.S., and few would argue that this is due to an undervalued
    currency. The U.S. decline in manufacturing jobs is the result of
    increased productivity. In plain English, with new technologies the
    U.S. is producing more with less labor--an indication of economic
    health, not economic sickness.

             The loss of manufacturing jobs also reflects a shift from a
    manufacturing-based economy to a service economy based on human
    capital, akin to the 19th century shift from an agricultural to a
    manufacturing economy. Those losing jobs in manufacturing can be
    trained for work in the service sector. Job creation in the services
    sector has increased by almost 70 percent since 1991.
             In addition, the loss of manufacturing jobs reflects choices
    made by Americans. For the past century, manufacturers in the Northern
    states have complained about job migration to the South. To encourage
    economic development and raise living standards, Southern states
    generally adopted less stringent labor, pro-union, and pro-
    environmental regulations than their Northern neighbors, resulting in
    lower wages for employees and greater flexibility and potential profits
    for employers. Today, when developing countries are faced with a
    similar choice between stricter regulations or feeding people,
    regulations lose their attractiveness and wages remain lower. Forcing
    unwanted regulation on these countries may stem job migration, but only
    at the cost of reduced economic freedom and more hunger in developing
    countries.

          Trade barriers hurt the economy. Trade barriers raise the
    price of imports for U.S. consumers while protecting uncompetitive
    economic sectors. The artificially high wages in these less productive
    industries discourage workers from moving into more competitive
    sectors, such as financial services or information technology, thereby
    reducing the overall efficiency of the U.S. economy.
          China's exchange rate is not the problem. While many
    economists argue that the yuan is currently undervalued--perhaps by as
    much as 40 percent relative to the dollar--there is simply no clear way
    to know whether this is true. However, even if the yuan is undervalued,
    raising tariffs is certainly not the solution. This would raise the
    price of Chinese imports, effectively playing favorites among
    Americans--making certain U.S. manufacturers ``winners'' at the expense
    of millions of U.S. consumers while harming workers in industries that
    depend on Chinese imports. Such a policy would distort, rather than
    help, the U.S. economy.

        What the Bush Administration Should Do. The Bush Administration
    should actively oppose calls by Members of Congress to raise tariffs on
    Chinese products. More tariffs will both compromise the health of the
    U.S. economy and hurt millions of consumers, workers, and producers who
    rely on imports. If Congress passes a law raising tariffs, President
    Bush should veto it.
        The Administration should also work with China to remove trade and
    outbound investment barriers in China. Once Chinese investors have more
    choices, they can be encouraged to invest in the United States--at a
    potentially higher return--which would stimulate U.S. job creation.
        Conclusion. The U.S. is trending toward a more services-oriented
    economy and increased productivity in the manufacturing sector. This
    shift will encourage U.S. workers to train for opportunities in the
    rising services sector. The loss in manufacturing jobs, therefore,
    reflects a long-term trend, not the effects of China's current exchange
    rate.
        Imposing tariffs on Chinese products is a shortsighted policy that
    will not create more U.S. jobs overall but will hurt millions of U.S.
    consumers. To improve the economy, the Administration should instead
    negotiate a rapid reduction of Chinese trade tariffs. If China balks,
    the Administration and Congress should reassess policies on technology
    to China.
        A move toward greater economic freedom in China, not less economic
    freedom in the United States, will bring sustained benefits for both
    China and the U.S.
        --Marc A. Miles, Ph.D., is Director of, and Ana Isabel Eiras is
    Senior Policy Analyst for International Economics in, the Center for
    International Trade and Economics at The Heritage Foundation.

                Statement of Leo and Jean Hunt, Naples, Florida
        This statement is to notify you that we are FOR REVOKING the
    PERMANENT NORMAL TRADE RELATIONS FOR CHINA. We are losing too many jobs
    and experiencing a tremendous balance of trade deficit because of
    Chinese currency manipulations and PNTR.
        Thank you for your consideration in this important matter.

    Statement of International Mass Retail Association, Arlington, Virginia
        The International Mass Retail Association (IMRA) welcomes this
    opportunity to present comments for the record as part of the Ways and
    Means Committee's hearing on U.S.-China Economic Relations and China's
    Role in the Global Economy.
        By way of background, IMRA is the world's leading alliance of the
    fastest growing and most innovative retailers and their product and
    service suppliers. IMRA's members represent more than $1 trillion in
    sales annually and operate more than 100,000 stores, manufacturing
    facilities and distribution centers nationwide. Its member retailers
    and suppliers have facilities in all 50 states, as well as
    internationally, and employ millions of Americans.
        Virtually all of IMRA's members, both retailers and suppliers, rely
    on international trade to conduct their businesses. Our members depend
    on imports for both finished consumer products and inputs to production
    for merchandise that will eventually be sold at retail. They also seek
    opportunities to expand retail outlets in countries that are open to
    U.S. investment and expand market access for American products.
        IMRA recognizes the plight of U.S. manufacturers and hopes that
    this hearing will focus on the larger U.S. economic picture and actions
    that can productively reinvigorate the many sectors which are
    inherently linked through trade.
        IMRA is concerned that much of the current discussion targets China
    for the slower pace of U.S. economic recovery in certain sectors. China
    is an important source of supply as well as an avenue for retail
    investment. We would urge Congress to carefully analyze any proposal to
    ``correct'' trade imbalances or currency exchange rates through tariffs
    or other forms of government intervention. Such actions in free markets
    will not meet the ultimate objective of raising disposable income for
    working American families, decreasing consumer prices and accelerating
    the pace of economic recovery. We believe such ``corrective'' actions
    aimed at China would have the opposite effect.
    The Retail Industry Makes Markets for Manufacturers
        Without retailers, wholesalers and consumers, manufacturers would
    have no markets. Consumers, whether retail customers or industrial
    users of inputs, drive free-market economies. The distribution
    industry, including IMRA's members, makes the consumer market.
        Manufacturers are inherently linked to the industries that create
    and serve the markets--industries like retailing, wholesaling,
    warehousing, distribution, transportation, advertising and marketing.
    Indeed, manufacturers (especially those making consumer products)
    depend on the retail sector. And the retail sector is a powerful
    economic engine in the United States. Consider that:

          According to Bureau of Labor Statistics, the retail
    industry represents about 12% of the non-farm workforce in the United
    States. This exceeds the 11% of workers represented by the
    manufacturing sector. When the wholesale trade, transportation and
    warehousing sectors, which are essential to goods distribution and
    market creation, are taken into account, the distribution sector
    accounts for almost 19% of the U.S. workforce.
          It is simply a myth that service sector jobs (and
    distribution sector jobs specifically) are inferior to jobs in
    manufacturing. Indeed, the retail sector pays higher hourly wages than
    some manufacturing sectors. For example, according to the Bureau of
    Labor Statistics, average hourly wages for retail workers in September
    2002 were $11.81. Textile, apparel and leather workers all earned less.
    The average wage for all manufacturing was $15.41, which is higher than
    retail wages, but wholesale and transportation wages, which are
    essential to goods movement and market creation outstrip manufacturing
    wages at $17.12 and $15.86, respectively.

        Retailers are the customers of manufacturers. There may be many
    reasons a manufacturer finds it difficult to compete, and in most
    instances the cause cannot be attributed to unfair competition by
    imports. Global competition, especially as applied to foreign sources
    of supply, is often the scapegoat for other systemic problems in an
    industry, such as an industry's failure to respond to its customers'
    needs.
        Markets are driven only in part by price. Quality, style, features
    and responsiveness equally motivate demand. When a manufacturer can no
    longer respond appropriately to its customers or its market, customers
    are forced to seek alternate sources of supply. Price may drive this
    change, but other factors such as transportation costs, reliability,
    ability to meet niche marketing demands, security concerns,
    responsiveness to the retailer's demands or just-in-time inventory
    controls are all factors that affect sourcing decisions. In a free
    market, the ability of consumers and customers to seek retailers and
    suppliers who are responsive to their ever-changing needs and demands
    is the key to success.
        Government regulation of this relationship between a customer and
    the source of supply will artificially disrupt the market, adding costs
    and inefficiencies to the system. More importantly, such policies as
    protective tariffs, which are aimed at helping one small group of
    producers, always have negative downstream impacts on consumers and
    consuming industries.
        For example, many of the domestic suppliers supporting action
    against China have relationships and interests with suppliers in
    Brazil, Malaysia and elsewhere outside China. Thus, any action against
    China will disproportionately benefit those domestic suppliers to
    detriment to the purchasers from China. In effect, these policies are
    designed to force customers to buy from a single source, to raise
    prices, disrupt the orderly development of trade and to limit choice in
    the marketplace.
        If such policies actually worked, they might make some sense in the
    short term. History has shown that protectionist policies rarely
    achieve their intended goal and usually have the opposite effects.
    Government intervention in markets usually leads to many unintended
    consequences, such as restricting market demand and causing sourcing
    shifts to other countries, which drives up prices and penalizes both
    consumers and retailers.
        It is worth noting that a manufacturer's need to respond to their
    markets also leads many of them to make foreign investments. An
    increasing number of successful U.S. manufacturers have invested
    heavily in large consumer markets in order to become more responsive to
    customer demand.
        For example, according to the Bureau of Economic Analysis, the
    United States invested about $1.5 trillion abroad in 2002, of which
    $393 billion was in the manufacturing sector. Of this investment, fully
    $67 billion went to Europe with its vast consumer markets. China
    attracted a tenth of this amount, because China, even with its vast
    population, does not have a large and wealthy consumer market. The
    table below shows the correlation between the size and wealth of a
    market (as measured by per capita GDP) and foreign U.S. investment in
    manufacturing.

     ------------------------------------------------------------------------
                                                                  U.S.
                                          Per Capita GDP     Manufacturing
                                               1999         Investment 2002
                                                               (Millions)
    ------------------------------------------------------------------------
    Singapore                                     $26,300            $16,944
    ------------------------------------------------------------------------
    Japan                                         $23,100            $12,213
    ------------------------------------------------------------------------
    France                                        $22,600            $20,645
    ------------------------------------------------------------------------
    Canada                                        $22,400            $67,209
    ------------------------------------------------------------------------
    Germany                                       $22,100            $27,825
    ------------------------------------------------------------------------
    UK                                            $21,200            $47,285
    ------------------------------------------------------------------------
    Australia                                     $21,200            $10,781
    ------------------------------------------------------------------------
    Mexico                                         $8,300            $19,172
    ------------------------------------------------------------------------
    South Africa                                   $6,800             $1,183
    ------------------------------------------------------------------------
    China                                          $3,600             $6,161
    ------------------------------------------------------------------------
    India                                          $1,720             $2,963
    ------------------------------------------------------------------------
    Source: Bureau of Economic Analysis and World Bank

        Successful manufacturers do not seek government help to limit
    competition. They embrace the supply and distribution chains, recognize
    that their retail customers are closest to the consumer market, and
    work in partnership to respond to changing market demands.
    Trade with China
        China is an important source of supply for such consumer products
    as electronics, small appliances, toys, apparel, footwear and
    furniture. Imports from China have been growing steadily in the five
    years since 1999 with the opening of markets, trade liberalization and
    duty reductions following the Uruguay Round and China's accession to
    the WTO in 2001. This growth is not unexpected, and should not be
    characterized as an ``import surge.'' It should be considered as part
    of the orderly development of trade among trading partners. Indeed,
    China's share of manufactured imports increased from 9.53% of all U.S.
    imports in 1999 to 13.37% in 2002--indicating that China is growing,
    but hardly dominating U.S. imports for manufactured products.
        Retailers and their suppliers source in China for many reasons,
    including quality and diversity of products. Price, as driven by labor
    and currency issues, is just one factor. Transportation costs from
    China have declined as major ocean carriers increase their service to
    areas of the mainland and as port infrastructure grows and makes China
    a more attractive alternative.
        In addition, the events of September 11, 2001 have forced many
    retailers and their suppliers to evaluate their supply chains and
    consolidate suppliers to those who are able to meet their demand for a
    safe and secure supply chain for a reliable and high-quality product at
    a reasonable price. China has a significant security advantage over
    other possible sources of supply in Southeast and Central Asia.
    Finally, the last several years has seen a significant increase in the
    quality and reliability of Chinese products, causing consumers and
    retailers to choose them.
        Indeed, many of China's leading exports are in product categories
    where the products have enjoyed reduced duties or become duty-free,
    where there is little or no U.S. production, or where the United States
    maintains significant import restraints.
        The following chart shows China's the top ten 2002 export
    categories by value. A few comments are worth making about some of key
    consumer product exports from China:
    Top Ten Categories of Imports from China

    ------------------------------------------------------------------------
      HTS                                                     2002 Imports
    Chapter                   Description                       (value)
    ------------------------------------------------------------------------
         85  Electrical machinery and equipment; sound       $24,256,900,810
              recorders and reproducers, television
              recorders and reproducers, parts and
              accessories................................
    ------------------------------------------------------------------------
         84  Boilers, machinery and mechanical               $20,202,307,445
              appliances; parts thereof..................
    ------------------------------------------------------------------------
         95  Toys, games and sports equipment; parts and     $14,436,614,342
              accessories thereof........................
    ------------------------------------------------------------------------
         64  Footwear, gaiters and the like; parts of        $10,241,858,412
              such articles..............................
    ------------------------------------------------------------------------
         94  Furniture; bedding, cushions etc.; lamps and     $9,920,730,695
              lighting fittings; illuminated signs,
              nameplates and the like; prefabricated
              buildings..................................
    ------------------------------------------------------------------------
         62  Articles of apparel and clothing                 $4,463,625,320
              accessories, not knitted or crocheted......
    ------------------------------------------------------------------------
         42  Articles of leather; saddlery and harness;       $4,436,699,609
              travel goods, handbags and similar
              containers; articles of gut (other than
              silkworm gut)..............................
    ------------------------------------------------------------------------
         39  Plastics and articles thereof...............     $3,761,319,108
    ------------------------------------------------------------------------
         90  Optical, photographic, cinematographic,          $2,754,415,278
              measuring, checking, precision, medical or
              surgical instruments and apparatus; parts
              and accessories thereof....................
    ------------------------------------------------------------------------
         61  Articles of apparel and clothing                 $2,606,277,288
              accessories, knitted or crocheted..........
    ------------------------------------------------------------------------
    Source: U.S. International Trade Commission database

        Toys: Most toys are imported into the United States at zero duties
    because the handful of high-end toy makers in the United States could
    not possibly meet consumer demand for these products, especially during
    the holidays at price points acceptable to the ultimate consumer.
    China's toy exports increased by 18% from 1999 to 2002 at a time when
    imports from other sources of supply decreased by 12%. Clearly imports
    of toys from China are not displacing workers in the United States, but
    China's growth is coming at the expense of other exporters.
        Footwear: Like toys, there are only a few shoe producers in the
    United States, making mostly high-end products. Virtually all athletic
    shoes are imported. Chinese trade in footwear grew 5% from 1999 to 2002
    at a time when imports from the rest of the world declined by a little
    over 6%. China is not harming U.S. producers or displacing U.S.
    footwear workers.
        Handbags and Leather Goods: China's imports of leather goods grew
    12% between 1999 and 2002 at a time when exports from the rest of the
    world declined by almost 19%. Once again, China appears to have taken
    market share away from other foreign sources of supply, not from U.S.
    manufacturers.
        Consumer Electronics: Imports of consumer electronics and
    electrical machinery from China include both finished products and
    inputs to production that support manufacturing jobs in the United
    States in the computer and high-tech fields. Many of these products
    have enjoyed duty reductions or become duty free, thus increasing
    overall imports. In addition, as in the case for imports of toys,
    handbags and footwear, China's growth in consumer electronics has come
    at the expense of other Asian suppliers, most notably Japan, as the
    chart below shows.

    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

        Apparel: Imports of finished wearing apparel from all sources
    continues to grow. Overall trade growth is significantly the result of
    the domestic industry employing outward processing arrangements that
    have moved significant production to countries with significant trade
    preferences (such as Sub-Saharan Africa and the Caribbean). China's
    trade in woven apparel (HTS Chapter 62) increased 8% from 1999 to 2002
    while imports from the rest of the world declined by 4%, indicating
    that some of China's growth in this category has come at the expense of
    other suppliers. Imports of knitted apparel (Chapter 61) increased 15%
    while imports from the rest of the world increased only 3%.
        Nevertheless, U.S. apparel makers as represented by their trade
    association have not complained about this import growth. Indeed, many
    U.S. producers are themselves actively outsourcing production to remain
    responsive to the consumer market. More important, domestic producers
    of these products are already protected by an extensive system of
    import quotas which have been in place since the 1960s. These quotas
    will be lifted in their entirety on January 1, 2005 under the terms of
    the Agreement on Textiles and Clothing for all WTO member countries.
    China will be subject to a special textile safeguard negotiated under
    its WTO accession that ensures that trade in this category will be
    managed by the U.S. government for several more years.
        It is important to note that imports from around the globe,
    including imports from China, serve to keep consumer prices low.
    Working American families trying to stretch their incomes get a huge
    benefit from low prices on everyday products like clothing, shoes and
    toys. Indeed, apparel prices have traditionally increased at a slower
    rate than general inflation based on years of Consumer Price Index
    data. No doubt, competition in the market is one important factor in
    keeping consumer prices low.
    The Chinese Currency
        Much has been made recently about the ``unfair'' value of the
    Chinese yuan with some U.S. manufacturers demanding that government
    take action to ``level the playing field.'' Some proposals to do this
    would include imposing punitive tariffs on imports from China, a
    proposal that would blatantly violate the World Trade Organization and
    serve to punish consumers and industries that consume production inputs
    from China. Moreover, such action would likely to result in direct
    retaliation closing opportunities for U.S. exporters. IMRA strongly
    opposes such heavy-handed politically motivated ``solutions'' as
    contrary to our legal commitments in the international community.
        Most economists acknowledge that even if the Chinese relaxed or
    removed the current peg and the value of the yuan increased, it is not
    clear how this would impact U.S. manufacturing, if at all. IMRA
    believes a revalued yuan might increase export opportunities for the
    United States and other developed countries. It should also be noted
    that U.S. exports to China grew at a faster rate between 1999 and 2002
    than Chinese imports to the United States. It does not appear that the
    U.S. exporters are clamoring for a revalued yuan; it is the domestic
    producers that are seeking it on the grounds that imports are harming
    U.S. manufacturing.
        While increasing the value of the yuan could increase jobs in
    export sectors (not necessarily manufacturing, since the U.S. is
    largely an agricultural exporter), there is no evidence to suggest or
    reason to believe that increasing the value of the yuan would have a
    dramatic impact on other kinds of manufacturing jobs in the United
    States. While imports from China would surely become more expensive, it
    is reasonable to believe that sourcing for products such as toys,
    consumer electronics, footwear and wearing apparel would not revert to
    U.S. suppliers but would instead go to alternate foreign suppliers.
        At the same time, increased import prices will have a general
    inflationary impact not only on finished goods, but on inputs to
    production that support many jobs in the United States. Increasing the
    value of the yuan could also have serious adverse implications for
    other Asian economies. Chinese inputs used in these third countries
    will become more expensive in turn, making third-country products more
    expensive. This would in effect take money out of the wallets of
    Americans and would put a serious drag on one of the few bright spots
    in the U.S. economy--consumer spending.
        IMRA strongly believes that attempts to ``level the playing field''
    via tariffs or other protectionist measures will be counter-productive.
    To the extent that the United States believes China's currency is a
    problem, it should pursue changes in international arenas, such as the
    WTO, and through bilateral discussions and not by punishing importers,
    consumers and industries that rely on parts and components made in
    China. Congress should not put itself in the position of trying to
    centrally plan our economy by picking specific industries to
    ``protect'' at the expense of other industries, workers and the
    American consumers who have been carrying the U.S. economy.
        IMRA fully believes that China should live up to its commitments
    made as part of its accession to the World Trade Organization (WTO). If
    China is failing to implement certain commitments, such as market
    access, the U.S. should then pursue cases within the WTO. IMRA would
    like to see China move beyond its commitments on market access for
    retail stores. Opening the Chinese market further and allowing U.S.
    retailers to own and operate more than the currently permitted 30
    stores, would not only help U.S. retailers, but also those U.S. product
    suppliers who sell their products in China through U.S. retailers.
        It is worth noting that domestic industries have a panoply of U.S.
    trade remedies at their disposal, including general safeguards, a
    special safeguard for textiles and apparel, a special China product
    specific safeguard and regular dumping and countervailing duty laws.
    These remedies not only increase the price of imports (always at the
    expense of consumers, consuming industries, and the distribution
    sector, but also allow U.S. producers to share in the additional
    tariffs collected. These processes allow a full airing and analysis of
    the economic benefits and pitfalls that underlie such actions through
    essentially adversarial actions. If a domestic industry believes it has
    been injured by trade from China, it has many avenues of recourse at
    its disposal. None of which are as heavy handed as a blanket import
    tariff designed to ``correct'' currency values.
    Conclusion
        The U.S. retail industry, along with the suppliers and customers
    that it serves is an essential part of the U.S. economy. Like
    manufacturers, retailers employ as many workers in good jobs with
    decent benefits and working conditions. We offer opportunities for
    entry-level employment, management training and part-time
    opportunities. Retailing is one of the most important employers of non-
    skilled workers in the United States, and retailers serve the American
    market for consumer goods, which ultimately drives the U.S. economy.
    Retailers also serve the global market for consumer goods and bring
    U.S. products to the foreign markets, such as China, where they
    operate.
        Foreign competition allows the market to allocate resources to
    productive industries. Where U.S. manufacturers can no longer produce
    affordable products, the retail consumer can choose the best source to
    meet the consumer demand based on many factors. Absent this choice, the
    retailer and consumer would curtail demand. Imports from China are an
    important component of the mix of products available. These imports
    increase customer choice, market variety, and increase demand by making
    products available to a wider range of consumers at a lower cost. As a
    result, the nation's consumers benefit. Attempts to set prices
    artificially through import restraints or tariffs would rob American
    consumers of disposable income, curtail retail and distribution sector
    employment and backfire as an attempt to speed economic recovery in the
    manufacturing sector.

    Statement of Ralph J. Pontillo, Manufacturers' Association of Northwest
                        Pennsylvania, Erie, Pennsylvania
        I am pleased to submit testimony on behalf of the Manufacturers'
    Association of Northwest Pennsylvania's (MANP's) Board of Governors and
    its members regarding the United States-China economic relations and
    China's role in the global economy. In my testimony, I would like to
    discuss China's currency manipulation, intellectual property theft,
    unfair tariffs and taxes, and trade imbalance.
        I would also like to acknowledge Rep. Phil English (R-Pa.) for
    leading the charge in Erie, Pennsylvania, as well as in Washington,
    D.C., among his colleagues in Congress against the unfair trade
    practices of China. He also played a vocal role in our recent Labor Day
    rally drawing more than 500 people and national and international media
    attention protesting China and other foreign countries' unfair trade
    practices.
        The MANP is the largest regional employers' association of its kind
    in the country, comprised of more than 6,000 member companies in 17
    counties of northwest Pennsylvania. I can tell you that no other issue
    comes close to commanding the attention that China is receiving from
    our membership base.
        We believe that unless China and other foreign countries engaged in
    unfair trade practices are required--and we mean required in the
    strongest terms possible--to play by the established world trade rules,
    our ability to survive as American manufacturers is lost.
        It is critical that our government immediately respond to these
    disturbing facts and impose sanctions on China that will force the
    Chinese to comply with the economic engagement rule of law. We remain
    confident that given a fair and level playing field, American
    manufacturers can effectively compete worldwide. We are equally
    confident that unless China is required to play by the rules, the
    United States and its manufacturing base will suffer long-term
    consequences. The implications of these consequences will have far-
    reaching effects on our nation's future.
        The MANP firmly believes that American economic and military
    strengths are directly linked to manufacturing. And make no mistake: We
    continue to believe that China's markets represent incredible market
    opportunities for American manufacturers. However, compelling arguments
    of unfair trade practices demand a forceful response that foreign
    governments' illegal market manipulation will result in economic
    sanctions by the United States. Anything less threatens American
    manufacturers.
    Importance of U.S. Manufacturing
        It is vital to understand the importance of manufacturing. U.S.
    manufacturing is the heart of a significant process that generates
    economic growth and has produced the highest living standards in
    history. Manufacturing's innovation process is the key to past, present
    and future prosperity and higher living standards. The intricate
    process starts with an idea for a new product or process, prompting
    investments in research and development (R&D). R&D successes lead to
    investments in capital equipment and workers, as well as ``spillovers''
    that benefit manufacturing and other economic sectors. This process not
    only generates new products and processes, but also leads to well-
    paying jobs, increased productivity and competitive pricing. Yet while
    this process produces wealth and higher living standards, most of it is
    hidden from view and poorly understood.
        According to an article titled ``Securing America's Future: The
    Case for a Strong Manufacturing Base'' by Joel Popkin and Company,
    manufacturing's innovation process provides enormous benefits for the
    entire U.S. economy:

          First, manufacturing grows the economy. Manufacturing
    growth spawns more additional economic activity and jobs than any other
    economic sector. Every $1 of final demand for manufactured goods
    generates an additional $0.67 in other manufactured products and $0.76
    in products and services from nonmanufacturing sectors.
          Secondly, manufacturing invents the future. Manufacturers
    are responsible for almost two-thirds of all private sector R&D--$127
    billion in 2002. Spillovers from this R&D benefit other manufacturing
    and nonmanufacturing firms. R&D spillovers are enhanced by geographic
    proximity.
          Manufacturing productivity gains are historically higher
    than those of any other economic sector--throughout the past two
    decades, manufacturing averaged twice the annual productivity gains of
    the rest of the private sector. These gains enable Americans to do more
    with less, increase our ability to compete and facilitate higher wages
    for all employees.
          Manufacturing provides more rewarding employment.
    Manufacturing salaries and benefits average $54,000, higher than the
    average for the total private sector. Two factors in particular attract
    workers to manufacturing: higher pay and benefit, and opportunities for
    advanced education and training.
          Lastly, manufacturing has been an important contributor
    to regional economic growth and tax receipts at all levels of
    government. During the 1900s, manufacturing corporations paid 30
    percent to 34 percent of all corporate taxes collected by state and
    local governments, Social Security and payroll taxes, excise taxes,
    import and tariff duties, environmental taxes and license taxes.

        Meanwhile, other nations, recognizing that a strong manufacturing
    base is the proven path to a world-class economy, have been learning
    from the American example and are forging their own innovation
    processes to compete with ours.
        America's manufacturing innovation process requires a critical mass
    to generate wealth and higher standards of living. If the U.S.
    manufacturing base continues to diminish at its present rate, that
    process may deteriorate beyond repair and with it, the seedbed of our
    industrial strength and competitive edge.
        Since 1998, America has lost more than 2.8 million manufacturing
    jobs, and thousands of U.S. manufacturers have downsized, closed plants
    or moved offshore. This past June was the 35th straight month of jobs
    lost in the manufacturing sector.
        In northwest Pennsylvania, plant closings, downsizing and companies
    moving offshore have contributed to losing thousands of local
    manufacturing jobs. What is contributing to this decline? Unfair
    foreign trade. China, as well as other countries, is unmistakably
    violating free trade agreements.
        China is a member of the World Trade Organization (WTO) and,
    therefore, has promised to comply with global trade rules. China has
    violated many sections of the Trade Act of 1974. Some more general,
    loosely defined ``unreasonable'' infringements are actions that deny
    fair and equitable opportunities to establish an enterprise, injure
    intellectual property rights and deny market opportunities. This is not
    about protectionism; it's about giving American manufacturers a fair
    shot, an even playing field.
    China: The New Great Wall
        To the north of Beijing, a huge wall extends more than 3,700 miles
    to the east and west. This is the Great Wall of China. The wall is a
    testament to China's history and is perhaps a testament to its future.
    The MANP believes the wall both literally and figuratively illustrates
    the old adage that the more things change, the more they stay the same.
        China by all accounts is a closed society. Despite scores of
    scholarly explanations of Chinese society, little is known about the
    complex inner workings of this vast communist country. Further, what
    information is available is closely controlled by the country's central
    government. The Great Wall is much more than a man-made wonder of the
    world: It is a telling example of a society that carefully restricts
    what comes in and what goes out, precisely the purpose of a wall.
        It appears that China is building a new wall today, and its
    implications are no less staggering than the one built throughout a
    period of more than 2,000 years. The wall the Chinese are building
    today is an economic wall that accomplishes the same objective as the
    first--a barricade to control what comes in the country and what goes
    out of the country.
        Unfortunately, China is not, by all accounts, playing by the rules.
    This fact has disturbing implications, not only to our domestic economy
    and to our defense, but also to the world's economy and defense.
    China's new Great Wall consists of an ongoing attempt to capture key
    industrial markets (keeping something in) and simultaneously
    restricting access to its markets (keeping something out).
        The People's Republic of China is a one-party rule by the Chinese
    Communist Party. The Chinese Government plays a pervasive role in
    virtually every aspect of business activity. Extensive government
    intervention was a key component of China's centrally planned economic
    system. The state allocated resources, set production targets for all
    productive units, provided all financing, owned all assets, appointed
    all managers to its enterprises and generally commanded all economic
    activities. Since 1997, significant economic reform has occurred within
    its borders, but as dramatic and energizing as recent reforms have been
    for the Chinese economy, the government still controls all important
    aspects of its commerce, including ownership of key plants, land,
    employment and wages. It also controls and operates the banking system,
    telecommunications and long-distance transport.
    Currency Manipulation
        It is estimated that the Chinese yuan is undervalued by as much as
    40 percent. Simply stated, when a country artificially maintains a
    lower value on its currency, the more competitive its products become
    in world markets. This means Chinese goods can be up to 40 percent less
    expensive than they should be relative to U.S. goods. China's unfair
    currency manipulation is costing U.S. manufacturers billions of dollars
    in lost orders.
        Controlling the banking system and the value of its currency is
    central to China's economic strategy. The Chinese yuan--the most
    undervalued currency in the world--is pegged to the dollar and
    protected by capital controls. Using sophisticated methods, UBS, a
    Swiss bank, calculates the yuan is more than 20 percent undervalued
    against the dollar. The prime accusation against China is that the
    country unfairly maintains an undervalued currency in order to make its
    exports competitive.
        In 2001, China's exports rose by 23 percent to $266 billion and
    accounted for 4.4 percent of all world exports. When you consider that
    America's biggest bilateral trade deficit is with China ($103 billion
    in 2002), it is not difficult to see why many American manufacturers
    are seriously concerned that China may not be playing by the rules. The
    result of this huge trade imbalance is a dramatic loss of American
    manufacturers' ability to effectively compete with China. The lower the
    yuan, the more attractive Chinese-manufactured goods become in the
    world market. This, in turn, depresses demand for American and other
    countries' manufactured goods. The result is loss of jobs, lower
    margins and, in some cases, closings of American manufacturing
    operations. Put simply, Washington needs to move decisively and quickly
    to force China into fair and equitable economic policies, including a
    policy requiring China to cease manipulating currency.
        The MANP has joined the Coalition for a Sound Dollar. The purpose
    of this union is to file a complaint against China, Japan, South Korea
    and Taiwan under Section 301 of the Trade Act of 1974. This complaint
    will allege that those countries' governments have engaged in currency
    manipulation to secure an unfair trade advantage. Those violations
    break the WTO and the International Monetary Fund rules.
    Intellectual Property Theft
        In addition to the currency manipulation, China is responsible for
    the largest portion of world counterfeiting, which costs the United
    States billions of dollars in lost exports and other related jobs.
    Plus, counterfeit products pose risks to health and safety. The act of
    theft can be found in the international trade activities of a number of
    countries--most notably China. This is a serious accusation and one
    that cannot be made without a careful and thoughtful analysis. Theft is
    also one of the most despicable characteristics attributed to a person,
    institution or country.
        In the case of China, the evidence is overwhelming that
    intellectual property theft runs rampant throughout its commerce and is
    endorsed and sanctioned by the Chinese Government. The result of this
    theft has staggering implications to our nation's prosperity and
    security.
        Those who conclude that the piracy of music, CDs, DVDs and other
    digitized information as minuscule and harmless may want to reconsider
    their position. Even if you set aside the U.S. copyright industry's
    loss of $22 billion or the 118,000 jobs lost and $5.7 billion
    eliminated in wages in the year 2000, this issue goes to the character
    of the nation.
        For example, in the United States, the theft of someone else's
    property is met with severe penalties, and those engaged in such acts
    are prosecuted to the full extent of the law. Without this basic
    protection, our ability to produce and innovate is at risk. Protecting
    intellectual property is more than a fundamental belief--it is at the
    heart of any nation's ability to produce products and services to both
    domestic and foreign markets that ensures fair pricing, safety and a
    reasonable return on investment.
        According to the FBI's Financial Institution Fraud Unit,
    ``Counterfeit products, such as airplane parts, pharmaceuticals, baby
    formulas and children's toys, are often manufactured using inferior
    materials and rarely undergo any type of quality control. For example,
    the U.S. automobile industry, which has estimated sales of counterfeit
    and imitation replacement parts to be in excess of $1 billion a year,
    has reported a number of incidences of brake failures caused by brake
    pads manufactured from wood chips.''
        In a June 27, 2003, Reuters report in Automotive News Europe,
    automakers now fear copycat cars are next. ``General Motors says it's
    investigating media allegations (Chinese) domestic car producer Chery's
    just-launched `QQ' minicar bears a striking resemblance to GM's
    Chevrolet Spark, due to enter the market later this year.'' Chery has
    had its share of controversy as well. Last year, Volkswagen said parts
    produced by the German company had been used illegally in one of
    Chery's cars. Yet another complaint revolves around Geely Group and top
    Japanese automaker Toyota, which is demanding 14 million yuan ($1.7
    million) from Geely for using a logo similar to Toyota's in its
    ``Meiri'' sedan line, a charge Geely denies. ``Foreign automakers have
    said to me they view the counterfeiters as their largest and most
    threatening competitor,'' said Bill Thompson of Pinkerton Consulting
    and Investigations.
        The FBI places intellectual property theft, in general terms, into
    three categories: copyright, trademark infringement violations and
    theft of trade secrets. We have already covered the first two. The
    third, theft of trade secrets violations, ``involve the theft of
    valuable proprietary and sensitive information and includes all types
    of industries, from manufacturing to financial services to high
    technology,'' according to the FBI.
        For those who continue to ignore China's serious violations of
    intellectual property rights despite the billions in lost revenue,
    hundreds of thousands of manufacturing jobs and billions in lost wages
    and tax revenue, this third violation should send shivers down your
    spine.
        We are now talking about the theft of valuable proprietary and
    sensitive information from industries like manufacturing, financial
    services and high technology, which can have both commercial and
    military applications.
        According to an article written by John J. Tracik Jr. and obtained
    through The Heritage Foundation's Web site, ``One of China's biggest
    conglomerates, China North Industries Corporation (NORINCO), which is
    China's premier arms manufacturer, was finally hit with a two-year ban
    on selling exports to the U.S.''
        But this only happened  after NORINCO had sold rocket fuel and
    missile components to the Shahid Hemmat Industrial Group, the Iranian
    government agency in charge of developing and producing ballistic
    missiles. NORINCO is the same Chinese company that smuggled 2,000 fully
    automatic AK-47 assault guns to drug dealers in California. Special
    note: Americans each year buy at least $100 million worth of NORINCO
    products, according to the Commerce Department.
        American manufacturers can compete with any nation on Earth. We are
    second-to-none in production and innovation. But we cannot compete with
    competitors who can cheat, lie and steal free from consequence.
    Trade Imbalance, Unfair Tariffs and Taxes
        Challenges for exporters to China include high import tariffs,
    inappropriate standards, investment barriers, inability to appeal
    rulings and unequial treatment of foreign and domestic firms. In
    addition to tariffs, imports may also be subject to value-added and
    other taxes.
        The U.S. trade deficit with China has exploded since China joined
    the WTO in December 2001. In 2001, America's trade deficit with China
    was $83.1 billion. In 2002, it increased 24 percent to $103.06 billion.
    And in 2003, estimates exceed $133 billion.
        According to the National Association of Manufacturers, the U.S.
    trade deficit with China could exceed $330 billion within just five
    years.
        This begs a compelling question: What exactly is causing this
    massive trade imbalance? That question begets another compelling
    question: If left alone, what are the implications to the United
    States?
        First on the list is the failure of the United States to maintain a
    competitive manufacturing infrastructure. Our domestic policies in
    taxation, regulation, health care, education, and antiquated labor and
    liability laws have contributed dramatically to our decline in
    manufacturing competitiveness. In effect, we are killing our golden
    goose of worldwide manufacturing dominance through our own failure to
    adequately address our internal domestic weaknesses.
        Right behind this is our inability to enforce fair rules of
    economic engagement. Despite adequate international trade laws and
    trade rules contained within negotiated trade agreements--and
    enforceable through the WTO--we continue to cast a blind eye on
    flagrant abuses of foreign trade partners like China, Japan and Taiwan,
    among others. In essence, this is giving our trade partners a distinct
    competitive and unfair advantage over our domestic manufacturers.
        Third, we have lost sight of our obligations as Americans and
    American manufacturers to ensure that our actions are consistent with
    our national interest. As consumers, we pursue the cheapest products
    without first questioning how they became so inexpensive. What this
    means is very simple: Each time we buy a foreign-made product, do we
    question the methods by which it is produced? In the case of China, we
    know that products are produced through means of unfair trade
    practices, which include currency manipulation, intellectual property
    theft and substantially subsidizing noncompetitive Chinese
    manufacturers utilizing direct foreign investments--not to mention
    countless human rights violations and lack of safety standards and
    regulations. In the final analysis, China's trade imbalance is massive
    ($133 billion), because Americans buy $133 billion of Chinese-
    manufactured goods. Put simply, Americans are financing China's ability
    to utilize unfair trade practices against U.S. manufacturers.
        Finally, some multinational corporations have lost sight of their
    obligations as American manufacturers to refrain from partnering with
    nations that violate international trade laws.
        In a recent article, Terry Jeffrey, editor of Human Events and
    former Washington Times editorial writer, quotes Motorola's Web site.
    ``Motorola is moving forward the idea of taking China as its home and
    development base.'' According to Jeffrey, ``The Web site goes on to
    say, `Motorola laid equal emphasis on investment and technology
    transfer. Local sourcing is an important development rule of Motorola
    and China. Motorola hopes to take part in China's economic construction
    by enforcing this rule and strengthening its cooperation with Chinese
    enterprises. Since the very beginning, Motorola has brought forward the
    idea of trying to be a good citizen of China, taking China as its home
    and thriving with the Chinese people. The development strategy of
    Motorola and China is to build an unbreakable strategic partnership
    with China. The development goal is to become a true Chinese company.'
        ``Motorola says that on its Web site,'' Jeffrey wrote. ``It doesn't
    say it's a U.S. company or an American company. It says that it's a
    Chinese company, and it's trying to convince the Chinese Government of
    all these shared interests and all these benefits that Motorola is
    bringing to China including transferring technology and so forth.''
        We visited Motorola's Web site and found the following statement
    about Motorola: ``Motorola Inc. (NYSE:MOT) is a global leader in
    wireless, automotive and broadband communications. Sales in 2002 were
    $27.3 billion. Motorola is a global corporate citizen dedicated to
    ethical business practices and pioneering important innovations that
    make things smarter and life better, honored traditions that began when
    the company was founded 75 years ago this year. For more information,
    please visit www.motorola.com.'' We will let Motorola's statement speak
    for itself.
        As we focus our attention on the unfair trade practices with
    countries like China, we should first recognize our own shortcomings.
    Like the schoolyard bully who never goes unchallenged, our silence and
    complacency simply fuel China's fire. China, along with other nations,
    must be immediately stopped before--like the bully--it goes too far. We
    also have an obligation as a nation to put our nation's interests
    before our profits, because it's precisely those freedoms we enjoy as
    Americans that allow us to earn those profits without resorting to
    lying, cheating or stealing; it's what separates America from most
    other nations.
    Call to Action
        I want to conclude with a final immediate call to action to the
    U.S. Congress and foremost to the Bush administration.
        We urge you and the Bush administration to take direct and
    immediate action to force China to end currency manipulation. China
    must permit its currency to freely float based on market conditions
        We urge you and the Bush administration to impose immediate trade
    sanctions against China until China imposes and enforces international
    trade law pertaining to protecting copyrighted, trademarked and
    intellectual property.
        We urge you and the Bush administration to force China to eliminate
    all trade barriers imposed by China's excessive tariffs, taxes and
    import restrictions. Failure by China to comply with the economic rule
    of law should result in immediate U.S. trade sanctions against China.
        We urge the Bush administration to immediately impose import
    restrictions on all Chinese products imported to the United States at
    below the cost of the materials to produce them.
        Overall, the Bush administration must demand that China play by the
    same international, economic rules of engagement and rule of law
    imposed on all members of the World Trade Organization. By doing so, we
    believe the massive trade imbalance will begin to correct itself based
    on market forces.
    Conclusion
        American manufacturing is the backbone of our domestic economy. Our
    productivity, innovation and exports dramatically contribute to
    virtually every aspect of American life. Manufacturing is a direct link
    to our nation's prosperity and security. We believe that given a fair
    and level economic playing field, American manufacturers can
    effectively compete and continue to lead the world in innovation and
    technology.
        We believe in open and fair trade agreements. If given the
    opportunity to compete fairly, American manufacturers will clearly
    benefit from global market access. We believe the Bush administration
    and Congress need to move decisively to force China to immediately
    comply with the world trade rules under the WTO and to stop
    manipulating its currency by allowing the yuan/dollar-exchange rate to
    be determined by the market.
        Once again, the Manufacturers' Association of Northwest
    Pennsylvania is calling upon President Bush to impose immediate
    sanctions against China for willful violations of the WTO. Failure to
    do so will contribute significantly to the decline of American
    manufacturing. We cannot stress strongly enough the serious
    implications of this decline.
        Thank you, Mr. Chairman.

                Statement of Peter Morici, Alexandria, Virginia
        Since economic reforms began in the late 1970s, China has enjoyed
    dramatic growth and modernization. Important structural changes have
    included a much greater role for town and village enterprises, private
    businesses and foreign-invested enterprises, and a diminished, though
    still significant, role for large state-owned enterprises. Exports, in
    particular exports to the United States, have played a key role in
    driving growth.
        Like many developing economies, China has employed a variety of
    trade barriers and industrial policies to steer investment and ensure
    the rapid modernization of domestic industries, for example in the auto
    and steel sectors.
        As in Japan and other Asian countries, monetary authorities have
    intervened in foreign exchange markets, consistently buying dollars,
    U.S. Treasury securities and other reserve currency assets, to maintain
    an undervalued currency. For example, in the first half of 2003, Asian
    authorities purchased $79 billion in U.S. federal official assets. This
    intervention has distorted the growth of trade, stunted Chinese imports
    and created a large U.S. trade deficit.
        Given rapid productivity growth and foreign investments in China,
    we would expect the dollar value of the Chinese currency to rise with
    its development progress. However, since 1995 the Chinese Government
    has maintained a policy of pegging the yuan at 8.3 per dollar.
        Since 1995, the U.S. trade deficit with China has grown from $38
    billion to $140 billion, and the overall U.S. current account deficit
    has grown from $105 billion to $555 billion. In contrast, when China
    was granted most-favored-nation status by the Congress in 1980, the
    U.S. bilateral trade and global current accounts were in surplus at
    $2.8 billion and $2.3 billion, respectively.
        Consequently, reduced sales and layoffs in U.S. import-competing
    industries caused by Chinese competition have not been matched by
    increased sales and new jobs in U.S. export industries at the scale a
    market driven outcome would require. The free trade benefits of higher
    income and consumption to the U.S. economy have been frustrated by
    currency market intervention.
    Consequences for U.S. Productivity and Growth
        Chronic trade deficits with China, Japan and other countries, which
    emerged in the 1980s, have reduced U.S. productivity growth and the
    trend rate of GDP growth by lowering U.S. value added per employee and
    investments in R&D.
        In a nutshell, increased trade with China and other Asian economies
    should shift U.S. employment from import-competing to export
    industries. Since the latter create more value added per employee and
    undertake more R&D, this process would be expected to immediately raise
    U.S incomes and consumption and boost long-term productivity and GDP
    growth.
        Instead, growing trade deficits with China and other Asian
    economies have shifted U.S. employment from import-competing and export
    industries to nontradeable service producing activities. The import-
    competing and export industries create about 150 percent more value
    added per employee, and spend more than three times as much R&D per
    dollar of value added, than the private business sector as a whole.
        By reducing investments in R&D, an econometric model constructed
    for the Economic Strategy Institute indicates the overvalued dollar and
    resulting trade deficits are reducing U.S. economic growth by at least
    one percentage point a year--or about 20 percent of potential GDP
    growth.[1] China accounts for almost half of this lost
    growth.
    ---------------------------------------------------------------------------
        \[1]\ Peter Morici, The Trade Deficit: Where Does It Come From and
    What Does It Do? (Washington, DC: Economic Strategy Institute, 1998).
    The model indicates that each addition of $140 billion to the trade
    deficit reduces U.S. growth by 0.5 to 0.6 percentage points.
    ---------------------------------------------------------------------------
        Importantly, this one percentage point of growth has not been lost
    for just one year. The trade deficit has been taxing growth for most of
    the last two decades, and the cumulative consequences are enormous. Had
    foreign currency-market intervention and large trade deficits not
    robbed this growth, U.S. GDP would likely be at least 10 percent
    greater, and perhaps 20 percent greater, than it is today. GDP and tax
    revenues would be higher, and the Congress would not be facing large
    federal deficits. We would not be enduring a crisis in manufacturing
    and a jobless recovery, and the Congress would not be facing the
    difficult task of trimming Medicare benefits.
    Floating the Yuan
        Regarding China, several arguments have been made against letting
    the yuan float but the underpinnings of these arguments are
    questionable.
        First, it is true that permitting the yuan float would impose
    difficult adjustments on Chinese state-owned enterprises, disrupt
    Chinese labor markets and further stress the balance sheets of Chinese
    banks. However, adjustments of these kinds will only be larger if the
    yuan is revalued two or five years from now. To avoid such adjustments
    and sustain its current development model, China will have to purchase
    ever-larger amounts of dollars, and transfer ever-larger amounts of
    what it makes to U.S. consumers. How long can that be sustained?
        Second, some have argued a revaluation of the yuan would cause a
    productivity burst in China, wiping out the competitive gains for U.S.
    import-competing and exporting business. Some burst is likely but it
    would not be large enough to wipe out completely the competitive
    effects of yuan revaluation. Moreover, to the extent that a 30 or 40
    percent jump in the dollar value of the yuan did not wipe out China's
    trade surplus and the excess demand for yuan in currency markets
    persisted, the dollar value of the yuan would just rise further.
    Productivity gains in China would cushion inflationary effects all
    around.
        Third, the U.S. is dependent on Chinese and Japanese official
    purchases of Treasury securities (currency market intervention) to
    finance its federal budget deficit. However, absent this intervention,
    the exchange rate for the dollar and trade deficits would be lower, and
    GDP and tax revenue would be higher. To the extent additional tax
    revenue did not close the federal financing gap, the Fed could purchase
    additional Treasury securities to maintain interest rates--something it
    routinely does to expand and regulate the money supply. Instead of the
    Chinese and Japanese monetary authorities purchasing Treasury
    securities, the Fed could make those purchases.

     Statement of William Wolf, Motion Systems Corporation, Eatontown, New
                                     Jersey
        This statement is submitted on behalf of the approximately 70
    employees of Motion Systems Corporation of Eatontown, New Jersey and
    their families. Motion Systems has been in business since 1972. We
    produce electromechanical linear actuators, pedestal actuators, and
    ball drives, among other products. Our customer base includes U.S.
    military contractors that use our products to build weapons and
    equipment for our country's national defense. Therefore, the products
    that we manufacture must be produced to the highest quality standards,
    and our reputation for excellence is well-known throughout the
    industry.
        The Committee has requested written submissions to address, among
    other issues, the relationship between trade with China and the U.S.
    economy, particularly the manufacturing sector. With respect to this
    particular issue, Motion Systems has first-hand experience as to the
    impact of Chinese imports on the U.S. manufacturing sector. We also
    have first-hand experience with seeking assistance from our government
    to remedy the harm caused by Chinese imports. It is this experience
    which is the subject of these comments.
        As noted above, among the products that we manufacture is an item
    known as a pedestal actuator. Pedestal actuators are designed for use
    in applications where up-and-down movement along a single axis is
    required to adjust the height of a surface while maintaining a stable
    base. Applications include dental equipment, hospital incubators, but
    the majority of pedestal actuators are used in mobility scooters to
    automatically lift and lower the seat. Beginning in 1979, Motion
    Systems has produced tens of thousands of pedestal actuators.
        In 2002, Motion Systems lost our largest pedestal actuator customer
    account to a Chinese company that copied our product and then sold it
    to our former customer for less than one-third the price for which
    Motion Systems had sold the same product. As a result, Motion Systems'
    pedestal actuator business was decimated. We decided to go to
    Washington, D.C. in the early summer of 2002 to ask our government for
    help. We met with officials at the U.S. Trade Representative's office,
    who advised us to trademark our product in China (even though we have
    never sold any products in China!).
        We then learned about a trade remedy law called Section 421 of the
    Trade Act of 1974. Also known as a ``China specific safeguard'', this
    statute was expressly written into U.S. law as a condition for giving
    China permanent normal trade relations and WTO membership. The law went
    into effect in December 2001, when China's accession to the WTO was
    completed. Under this law, if the U.S. International Trade Commission
    determines that increased imports from China are causing market
    disruption to a domestic industry, the President must then grant such
    relief as to eliminate or prevent the market disruption. There is a
    narrow exception, which provides that the President may decide not to
    grant relief if, and only if, he determines that taking action against
    Chinese imports would have an adverse impact on the U.S. economy
    clearly greater than the benefits of such action. Statements by USTR,
    Cabinet officials and members of Congress during consideration of the
    legislation that included Section 421 in 2000 made very clear that
    Section 421 was intended to be a strong remedy against import surges
    from China.
        Another important advantage that Section 421 offers is a speedy
    proceeding. Once a petition is filed, the International Trade
    Commission must decide within 60 days whether there is market
    disruption caused by Chinese imports. The President must make his
    decision on relief within 150 days of the petition's filing. This is
    particularly important to small businesses and industries that do not
    have the resources to pay for expensive and lengthy antidumping cases.
    Speed is also necessary to ensure that an industry can get relief
    before it is completely overtaken by surging Chinese imports.
        We filed the first Section 421 petition in August 2002. In October,
    the International Trade Commission determined that imports of pedestal
    actuators from China had indeed caused market disruption and
    recommended that the President impose quotas for three years. Up to
    this point, we believed that the law was in fact working as intended.
    During the next several weeks, however, we saw the Government of China
    impose enormous pressure on the Bush Administration not to grant
    relief. Press reports revealed that high-level Chinese officials
    traveled to Washington, D.C. to lobby our government in private against
    granting relief. We simply did not have the resources to match that
    kind of lobbying effort, having already spent more than half a million
    dollars on legal fees. It's worth noting here that while Administration
    officials were meeting privately with Chinese Government officials
    about this case, our requests to meet with USTR were turned down. Apart
    from the public hearing, our contacts with USTR were limited to a
    handful of telephone calls, most of which dealt with purely procedural
    issues.
        Not surprisingly, the President decided against granting relief,
    although the reasons he gave for his decision were not supported by the
    factual record. In particular, the President's decision stated that
    cost of a quota to the downstream users of the product (i.e., our
    former customer and its customers) would substantially outweigh any
    benefit to Motion Systems. This conclusion was presumably premised on
    the unsupported and unsworn statement from our former customer that
    they had reduced the prices of their mobility scooters in part because
    of the lower priced Chinese actuators. No objective evidence was ever
    provided to support that claim. Indeed, after the President's decision,
    we came across new information that indicated our former customer had
    not reduced its prices after switching to the Chinese import. We
    brought this information to USTR's attention, but no action was taken.
        I am, of course, extremely disappointed in the President's decision
    because of what it means to Motion Systems. If the Chinese can copy one
    model of our actuators, they can surely copy other models and sell them
    to our remaining customers. (Notably, the President apparently never
    even considered imposing quotas that would have at the least protected
    our market from further encroachment from Chinese copies.) However,
    what happened in our case goes far beyond the pedestal actuator
    industry. The Committee has received a great deal of testimony from
    other companies about the adverse impact of Chinese imports on the U.S.
    economy. That small U.S. businesses are confronted with waves of
    imported products built by a labor force that is paid 83 cents an hour
    (according to the U.S. Department of Commerce) in an economy that does
    not operate according to free market economic principles is bad enough.
    This injury is compounded by the insult of a government that is far
    more responsive to lobbying and pressure from a foreign government than
    to the entreaties of its own citizens to apply the trade remedy laws
    that Congress has provided to address injury caused by Chinese imports.
        On September 16, 2003, Commerce Secretary Don Evans gave a speech
    at Carnegie Mellon University, during which he said: ``The President
    knows that competition leads to innovation and improves productivity. .
    . . [T]he Bush Administration will not stand for unfair competition.
    Americans are willing to compete, on even terms, with any country in
    the world as long as it is fair.'' (Emphasis added.) But what the
    Administration fails to explain is how we can compete with an economy
    that pays its workers about 83 cents an hour. Even the most modern
    production facilities cannot compete if the manufacturing includes a
    labor component. We are not competing against laborers who are using
    primitive tools and equipment. To the contrary, Chinese companies are
    equipping themselves with modern machine tools. In 2002, for example,
    China bought almost twice what U.S. companies bought in new machine
    tools.
        The United States has encountered this before when Japan began to
    emerge as a major economic power. It took 30 years for Japanese wage
    rates to normalize, during which large chunks of the U.S. manufacturing
    base were lost. Given the size of China's population and the large
    numbers of unemployed workers, it could very well take a century or
    more for China's labor rates to normalize. In the meantime, the U.S.
    manufacturing sector will not be able to fund research and development,
    and American innovation will end.
        The Government of China controls prices for many key inputs,
    including energy fuels, and props up state-owned enterprises. It
    deliberately keeps its currency undervalued, which means that the cost
    of producing products in China is kept artificially low. Yet, when all
    of these policies and practices lead to surges in imports that threaten
    to destroy a U.S. industry, the Administration fails to act. So long as
    our government is more concerned about giving offense to the Chinese
    Government than about giving relief to injured domestic industries
    under trade rules expressly agreed to by China, then the prospects for
    companies such as Motion Systems from increased trade with China are
    dim indeed.

           Statement of Motor and Equipment Manufacturers Association
        China has emerged as a market of enormous importance to U.S.
    manufacturers of automotive parts and components (``automotive
    products'') and motor vehicle manufacturers. China has tremendous pent-
    up demand and production potential in the automotive sector.
        China's light vehicle production (passenger cars and light trucks)
    is predicted to reach 3.4 million units in 2003, up from 2.6 million
    units in 2002, and is currently predicted to reach 5 million units by
    2005, according to CSM Worldwide. Most of the world's leading
    automakers, including the Big Three, have made significant investments
    in China to take advantage of its market and production potential.
    Growing production in China creates demand for original equipment (i.e.
    ``OE'') automotive products at the time of production and in later
    years demand for automotive products to maintain and repair the
    vehicles as they age (i.e. ``aftermarket parts''). In every market,
    growing vehicle sales over time leads to a larger national car parc and
    greater demand for aftermarket automotive products to maintain and
    repair motor vehicles.
        Investment in motor vehicle production capacity by U.S., Japanese,
    Korean and European automakers have generated investment by U.S.
    manufacturers of O.E. automotive parts and components suppliers has
    grown along with. U.S. automakers are strongly encouraging their parts
    suppliers to source products from China, for use in local production,
    and for export back to the U.S. or third markets. In many cases, U.S.
    automotive parts manufacturers have formed an alliance with local
    Chinese manufacturers, an investment trend which will probably continue
    in the future.
        On the U.S. import side, U.S. manufacturers of automotive
    aftermarket products have faced significant competition from imports
    from China for many years. As Big Three and other automakers seek to
    maintain market share in the U.S. through cost cutting, more U.S. O.E.
    manufacturers are expected to shift production to China, or compete
    with imports from China on the O.E. side of the automotive parts and
    components market. As this trend in sourcing develops, motor vehicles
    assembled in the U.S. will contain more Chinese content.
        United States manufacturers of automotive parts and components have
    been long-time supporters of free trade. The industry was a driving
    force behind creation of the U.S.-Canada FTA, and the NAFTA, and
    supported PNTR for China and China's admission into the World Trade
    Organization. As an industry, manufacturers of automotive products have
    been progressive and forward thinking in its attitudes toward trade and
    globalization. At this time, however, we do have serious concerns about
    the U.S.-China economic relationship and China's implementation of its
    WTO obligations.
    Counterfeiting and Ineffective Enforcement of IPR Protection

        Counterfeiting and intellectual property right violations are
    estimated to cost U.S. manufacturers of automotive products $12 billion
    per year. MEMA has identified China as the primary source of
    counterfeit automotive products in the world. Counterfeiting in China
    is rampant, and often blatant. MEMA and its members have identified a
    wide range of products that have been counterfeited and sold in the
    U.S., in China or in third markets, including automotive glass, brakes,
    fuel filter, oil filters, wire sets, radiators, batteries, shock
    absorbers, pumps, sirens (for use on emergency vehicles), spark plugs,
    structural components, piston rings, gas caps, brake fluid,
    transmission fluid, coolant and other products.
        Counterfeiting and other IPR violations cost U.S. manufacturers in
    our industry billions in sales globally, but the damage is not limited
    to lost sales. Counterfeit products marked as a well know American
    brand are usually of inferior quality, a fact that becomes apparent to
    the distributor or the final customer after the purchase. This leads to
    destruction of a company's brand and reputation in the market. It is
    extremely difficult to calculate the full extent of losses coming from
    destruction of brand and reputation, as it amounts to attempting to
    track sales lost, rather than made. A distributor or a customer will
    simply switch brands, with no explanation. Often when IPR violations
    have been detected, U.S. manufacturers will spend hundreds of thousands
    of dollars redesigning the product or packaging, investigating the
    violations, and taking legal action against the counterfeiter. This
    represents a tremendous drain on corporate budgets in a highly
    competitive global market.
        China needs effective laws and enforcement to criminalize
    counterfeiting. It also needs to enforce commitments to stop the export
    of counterfeit goods.
    Misuse of Federal Safety Standard Markings and Industry Certifications

        MEMA has also identified China as the major source of automotive
    products sold in the United States that do not meet Federal Motor
    Vehicle Safety Standards (FMVSS) or the industry standards set by the
    Society of Automotive Engineers (SAE). Automotive lighting has been
    particularly affected by this problem. Automotive lighting subject to
    FMVSS is stamped with the initials ``DOT'' and ``SAE'', indicating
    compliance with FMVSS and the product standards developed by the
    Society of Automotive Engineers. Distributors, retailers and other
    customers in the U.S. market must be able to rely on these markings as
    a sign of quality and compliance. MEMA and its members regularly find
    lighting products originating from China in the stream of Commerce that
    are marked ``DOT'' or ``SAE'' but do not meet the regulation or the
    industry standard. This compromises highway, and is putting legitimate
    U.S. manufacturers who comply with the standards at a competitive
    disadvantage to the Chinese producers who do not.
        China needs effective laws and enforcement to criminalize willful
    misrepresentation in product marking.
    Currency Manipulation

        As noted above, U.S. manufacturers of automotive aftermarket
    products have faced significant competition from imports from China for
    many years. Currency manipulation by the Chinese to gain a trade
    advantage has exacerbated the problem. China has maintained its
    currency at the same level against the U.S. dollar since 1994--despite
    a huge increase in production capability, productivity, foreign direct
    investment inflows and other factors that would normally be expected to
    cause currency to appreciate in value. The currency is controlled by
    the government and is not allowed to fluctuate freely. China maintains
    enormous reserves of U.S. dollars to control its currency relative to
    the U.S. dollar. Estimates by the Institute for International Economics
    point to an under-valuation of the yuan of between 15 to 40 percent.
        MEMA is encouraged by the Administration's initiatives to persuade
    the Chinese to take steps toward allowing the value of the yuan to be
    determined by market forces. At a minimum, a reevaluation of the 1994
    peg to the dollar by the Chinese is urgently needed, with further
    adjustments to follow in an orderly but deliberate fashion.
    Central Planning in China's Automotive Sector

        The Chinese automotive industry must function under a series of
    government five-year plans and policy statements. These plans and
    policy statements address production, expansion and consolidation,
    technology transfer, joint venture ownership, export incentive
    programs, environmental issues, automotive financing and other issues.
    These plans or policy statements often specifically address the
    government's desire to develop its domestic base of automotive
    suppliers.
        MEMA is concerned that these plans and policies, which have major,
    long-term implications for U.S. industry, have never been developed in
    a clear or transparent manner. Useful information about the actual
    implementation of the plans and policies is often lacking and not
    transparent.
        The lack of transparency in the development and implementation of
    plans and policies is a serious problem for U.S. automotive suppliers
    seeking to invest and develop business in China. The lack of
    transparency will become an even more serious impediment to progress
    for U.S. industry, as China's domestic automotive market grows and
    production in China continues to become more integrated into the global
    automotive industry.
        MEMA believes the Chinese Government must commit to developing
    clear and transparent administrative procedures, similar to those in
    place in other major economies. Also, China must commit to implementing
    its plans and policies affecting the automotive sector within its WTO
    obligations.

                        Statement of Wilbur L. Ross, Jr.
        As chairman of International Steel Group, Inc., the second-largest
    integrated steel producer in the United States, and as the soon to be
    chairman of Burlington Industries, I welcome this opportunity to share
    with the Committee on Ways and Means my views on economic relations
    between the United States and the People's Republic of China, and the
    ever-worsening impact of the rising tide of Chinese imports on U.S.
    manufacturing industries, including steel and textiles and apparel.
        ISG was created in the spring of 2002 at the time that President
    Bush determined to give the U.S. steel industry temporary relief from
    import competition that had helped to put more than 30 domestic steel
    companies into bankruptcy. ISG raised the capital to acquire the
    production assets of three of those companies--LTV Steel, Acme Steel
    and Bethlehem. At the time of their acquisitions, the assets of LTV and
    Acme were completely idle and Bethlehem was facing a possible shutdown.
    Working together with the United Steel Workers of America, we managed
    to bring these facilities back on line to reasonable levels of capacity
    utilization while significantly increasing productivity. Today, ISG is
    a state-of-the-art, globally competitive steel producer with more than
    16 million tons of capacity.
        Burlington Industries is one of the world's leading soft goods
    manufacturers, producing a broad range of textile and apparels
    products. From its origins in 1923, Burlington has been an innovator
    specializing in rapid change to spearhead new fashion trends and
    cutting-edge technologies. While it has recently encountered financial
    difficulties that forced it into bankruptcy, Burlington is poised for a
    return to profitability.
        ISG and Burlington have the resources, production assets and people
    necessary to make them fully competitive on a global scale. Otherwise,
    my company would not have invested several billion dollars to acquire
    their assets. For these and other U.S. manufacturing companies and
    industries to succeed, however, they must be allowed to compete on the
    proverbial level playing field. Unfortunately, the playing field of
    international trade today is heavily tilted against U.S. companies.
    This is particularly true when it comes to competition from China, as
    evidenced by the explosion in our trade deficit with China. In ten
    years, the U.S. trade deficit with China has grown from $4.8 billion to
    $147.2 billion.
        Competition, of course, is the foundation of our economic system,
    and countries do benefit when they invest resources in those products
    where they have a comparative advantage vis-a-vis other countries.
    However, trade and competition in a free market capitalist economy such
    as ours presupposes that all players are operating under the same rules
    and that markets are responding to rational signals. A careful
    examination of China's economy and economic policies indicates that
    China is not operating according to the same rules that operate in our
    and other free market economies. As a result, production costs in China
    are not ``real'', but in many cases are distorted, and usually
    artificially low. As a consequence, investment flows lead to the build
    up of capacity in many industrial sectors, including steel and
    textiles, which results in surplus production and import surges in
    other markets.
        The list of economic policies and practices in China that distort
    the market includes:

            A substantially undervalued Chinese currency: Currency
            misalignment can result from either under-valuation or over-
            valuation of a currency. In either case, the effect is
            significant trade distortion, misallocation of economic
            resources and instability. In the case of a country such as
            China, a currency that is undervalued produces false market
            signals by making industries in that country appear more
            competitive than they actually are, which encourages
            overexpansion of production and export flooding. Since 1994,
            China has maintained a fixed exchange rate for their currency
            relative to the dollar. The rate has been pegged at about 8.28
            yuan/dollar for the entire period. Notwithstanding the
            substantial expansion of China's economy and increase in
            exports, the value of China's currency vis-a-vis the dollar has
            not changed. In order to maintain this fixed rate of exchange,
            China's central bank has had to intervene in the foreign
            exchange market by selling yuan in exchange for dollar
            denominated assets when the demand for the yuan increases and
            buying yuan with dollar denominated assets when the demand for
            the yuan decreases. Since the end of 2001, dollar buying has
            been so great that the foreign reserves held by the Chinese
            Government have risen by $171 billion to $384 billion (as of
            end-September).

            Provision of massive domestic subsidies to spur economic
            development and to cover large operating losses in key
            industries, including steel: Although China committed to
            eliminating various non-agricultural subsidies immediately upon
            its accession to the WTO and phasing out other subsidies, China
            in fact continues to use subsidies widely, often through
            assistance to state-owned enterprises that are operating at a
            loss. Continued subsidization of the Chinese steel industry in
            particular has fostered massive capacity increases in China
            that are not driven by rational market signals. The massive
            capacity expansion in China will exacerbate the problem of
            global excess capacity and lead to increased exports of Chinese
            steel products when demand in China diminishes.

            Government price controls on energy, including crude oil,
            electricity, and natural gas: China's energy sector is largely
            controlled by state-owned enterprises, including China National
            Petroleum Corporation (CNPC), China National Petrochemical
            Corporation (Sinopec), and China National Offshore Oil
            Corporation) (CNOOC). It has been national industrial policy in
            China for many years to provide electricity at preferential
            rates to industries with high levels of energy consumption. One
            of the provisions of the 2003 Regulation and Control Outlines
            of Economic Operation formulated by the former State Economic
            and Trade Commission of China proposes ``providing preferential
            electricity rates to industries with high consumption and high
            cost of electricity, such as caustic soda, electrolytic
            aluminum, special steel, carbon products, etc.'' In order to
            stimulate foreign investment, local governments often require
            that power utilities institute preferential utility prices for
            foreign investors. Efforts to introduce market-based reforms
            are only just beginning and are likely to take a long time to
            complete.

            Export subsidies and tax breaks that are contingent on export
            performance: It is not clear whether China has in fact carried
            out its commitment because China has not submitted its required
            annual subsidy notification to the WTO's Committee on Subsidies
            and Countervailing Measures for the last two years. However,
            the experience of U.S. industries indicates that export
            subsidies continue to be provided. China also provides tax
            relief to foreign investors that is export contingent. Chinese
            officials have acknowledged that China uses its tax laws to
            encourage the formation of wholly foreign-owned enterprises
            that are export-oriented. Specifically, China exempts wholly
            foreign-owned enterprises that are export-oriented from paying
            income tax for a certain period of time, which is followed by
            an additional period during which the enterprise is entitled to
            a 50 percent rebate of income tax. Enterprises located in
            special economic zones, or economic and technology development
            zones, or any other exporting enterprises that already enjoyed
            an income tax rate of 15 per cent, would pay income tax at the
            rate of 10 per cent if they also met certain requirements.

            Labor practices that include denial of internationally-
            recognized worker rights and failure to enforce national and
            local labor laws, which distort the cost of labor: The
            Congressional-Executive Commission on China has reported
            extensively not only on how China denies its workers the right
            to organize independent unions, but also on how China's own
            labor laws governing wages, working hours, working conditions
            and overtime are routinely ignored.

            Controls on capital investment and foreign investment that
            direct investment toward government-favored sectors: Foreign
            investment in China continues to be controlled and channeled
            toward areas that support national development objectives.
            Projects in sectors that are favored by the government receive
            such preferential treatment as duty-free import of capital
            equipment and rebates of value-added tax on inputs. Foreign-
            invested enterprises in China also are largely unable to access
            domestic and international stock markets, to sell corporate
            bonds or accept venture capital investment, to sell equity or
            engage in normal merger, acquisition or divestment activity.
            Further, foreign exchange transactions on the capital account
            must undergo case-by-case review prior to receiving approval,
            which are themselves subject to very tight regulatory controls.
            China has not committed to removing any of these restrictions
            as a condition of WTO accession.

        In addition to the substantial market distortions resulting from
    these and other policies and practices, China also maintains
    significant tariff and non-tariff barriers to imports that deprive U.S.
    exporters the same access to Chinese markets that Chinese producers
    have to U.S. markets. These barriers include:

            High tariffs: Even after reducing its tariffs in accordance
            with the terms of its accession to the WTO, Chinese tariffs
            remain relatively high, particularly when compared to U.S.
            tariffs. In 2002, China's average tariff rate was 12 percent,
            compared to 1.7 percent for the United States. For some
            products, such as passenger cars, the tariffs range from 25 to
            40 percent, compared to the U.S. rate of 2.5 percent. High
            tariffs on downstream products that are important to the steel
            industry depress demand for steel that could otherwise be used
            to build cars for the Chinese market.

            Import substitution policies: China continues to encourage
            import substitution in a number of important product sectors,
            including the auto sector. Notwithstanding pronouncement that
            China's preferential policy for automobile localization rates
            would be cancelled upon WTO accession, U.S. auto manufacturers
            have reported that local government officials in 2002 had
            continued to cite the old auto policy's localization standards
            when they required high local content.

            Lack of transparency in regulations and procedures: China has a
            very poor record of providing transparency in its promulgation
            of laws and regulations. According to the Office of the USTR,
            ``measures'' that do not rise to the level of ministry-issued
            regulations remain unavailable to the public. In 2002, for
            example, China failed to publish all ``measures'' related to
            trade, which puts foreign businesses at a distinct disadvantage
            vis-a-vis their Chinese competitors.

            Taxes that discriminate against imports: China's Value Added
            Tax (VAT) is not always applied equally to imports and
            domestically-produced products. For some products, such as
            semiconductors, China has substantially reduced the VAT and has
            exempted certain other domestically-produced products
            altogether. China's consumption tax also discriminates against
            imports because China uses a substantially different tax base
            to compute consumption taxes for domestic and imported
            articles.

            Efforts to bring China into full compliance with WTO
            commitments are
            lagging: China's progress toward completing implementation of
            its WTO commitments is unsatisfactory in numerous other areas,
            including customs valuation, rules of origin, tariff
            commitments, import quotas, tariff rate quotas, import
            licenses, export licenses and fees, sanitary and phytosanitary
            standards, technical standards and the like. There are
            entrenched domestic interests in China that actively oppose
            further reform and opening of China to competition from abroad.
            I would strongly urge the Ways and Means Committee to call upon
            the Administration to begin using the WTO dispute settlement
            mechanism to address this long list of non-compliance with WTO
            obligations by China.

        There is also virtually unanimous agreement that China's
    enforcement of intellectual property rights remains entirely
    inadequate. For example, China remains one of the few countries in the
    world that fails to actively use its criminal laws to prosecute and
    punish commercial copyright pirates and trademark counterfeiters.
    Intellectual property protection is of great importance to textile and
    apparel manufacturers seeking to establish and maintain brand-identity
    and loyalty. A recent survey by the National Textile Association
    reported that over half of the companies responding stated that IPR was
    either somewhat or very important to their business. China's failure to
    protect textile and apparel-related IPR is well-documented, with
    reports of ``knock-off'' consumer products, including textiles and
    apparel, being widely available almost everywhere in China. Infringing
    products are also causing harm in this country as China is a major
    source of imports that infringe textile and apparel IPR.
        As the United States works toward eliminating trade distorting
    practices and barriers to market access, we must also fully implement
    rights negotiated prior to, and as a condition of, China's WTO
    accession. These are rights that were specifically demanded because
    U.S. industries could foresee many of the problems that we were going
    to encounter with China. Indeed, the support of numerous U.S.
    industries for China's accession to the WTO was conditioned upon the
    inclusion of these important concessions by China. Unfortunately, the
    current Administration has not ``stepped up to the plate'' when it
    comes to administering the laws under which these rights are made
    available to U.S. industry.
        Two of these rights in particular concern special China-specific
    safeguard measures against injurious import surges. The first is a
    special textile safeguard that permits the United States to require
    restraints on imports of Chinese textile and apparel products even
    after the elimination of textile and apparel quotas under the WTO's
    Agreement on Textiles and Clothing. Although this safeguard took effect
    as part of U.S. law upon China's accession to the WTO in December 2001,
    it took nearly seventeen months for the Committee to Implement Textile
    Agreements, part of the Department of Commerce, to promulgate
    procedures to allow the filing of petitions seeking relief from
    injurious imports. According to the American Textile Manufacturers
    Institute, while CITA's procedures languished in the government
    bureaucracy, Chinese textile and apparel imports increased more than
    165%, while 50 textile plants were forced to close, putting some 39,000
    textile workers out of work.
        The procedures themselves also involve numerous delays before any
    decisions are made. Under CITA's provisions, it can take more than
    three and one-half months to decide whether to use the safeguard
    provision in response to the filing of a petition. Worse yet, at the
    end of that period, if CITA determines it cannot make a decision
    whether to grant or deny a request for action, it is simply required to
    give notice as to when it will make a decision. In other words, the
    procedure is entirely open-ended.
        Several petitions invoking the special textile safeguard were filed
    on July 24, 2003. CITA's initial deadline to decide whether to grant or
    deny the requests for relief is set to expire on November 17. But, as
    noted, even then CITA is not required to make a decision. The process
    is completely untenable.
        The second China-specific safeguard is Section 421 of the Trade Act
    of 1974. Under Section 421, the U.S. International Trade Commission
    must determine whether increased imports from China are causing or
    threatening to cause market disruption to a domestic industry. If the
    ITC makes an affirmative determination, it recommends to the President
    what relief should be provided. The President must then grant such
    relief as to eliminate or prevent the market disruption. There is an
    exception to the requirement that relief be granted. The President may
    decide not to grant relief only if he determines that taking action
    against Chinese imports would have an adverse impact on the U.S.
    economy clearly greater than the benefits of such action. However, both
    the legislative history and statements by USTR, Cabinet officials and
    members of Congress during consideration of the legislation that
    included Section 421 in 2000 made very clear that the exception was to
    be construed narrowly and that Section 421 was intended to be a strong
    remedy against import surges from China.
        Unfortunately, as administered to date, Section 421 is not
    providing the relief that Congress intended. In the first two cases to
    reach the President, relief from injurious import surges was denied. In
    the first case, involving pedestal actuators, a component product used
    in mobility scooters, the President cited the increase in the cost of
    the component to the downstream users as one reason not to grant
    relief. However, such reasoning virtually assures that relief will
    never be granted under Section 421 because replacing the Chinese
    product with the domestically-produced product will always result in
    some increase in the price to the downstream customer. If Chinese
    products were not so low-priced in the first place, they would not pose
    a threat to U.S. producers.
        In the second case, which involved wire garment hangers, the
    President denied relief because of a concern that the relief would have
    an ``uneven'' impact on the domestic industry because one domestic
    producer also distributed imported Chinese hangers (although the
    President acknowledged that most domestic producers would see an
    increase in their income if relief were granted). There is no
    requirement in the statute that relief affect all producers evenly. It
    is also particularly troubling that relief to an entire industry would
    be denied because it might adversely affect the interests of a single
    producer.
        There is a procedural problem with the law as it is administered by
    the ITC. The ITC's regulations require petitioners to indicate how they
    will use the period of relief to adjust to Chinese import competition.
    Unlike the global safeguards provisions of Section 201, Section 421
    does not require the domestic industry to adjust to import competition.
    Indeed, Section 421 was established because it was recognized that
    China is in the process of transforming its economy. The burden for
    making adjustments should be on Chinese producers and exporters.
        In addition to these China-specific safeguards, the United States
    must also improve its enforcement of other trade remedy laws as applied
    to China. The Commerce Department's enforcement of the non-market
    economy provisions in the antidumping law is problematic and often
    produces irrational results. For example, if a Chinese producer
    purchases an input from a market economy country, then Commerce
    normally will use the actual price paid for that input as the factor
    value, even if the quantity supplied by the market economy country
    accounts for only a small percentage of the total input used. The rule
    invites gaming by Chinese producers who can shop for and purchase a
    small volume of inputs from market economy producers at ``fire sale''
    prices.
        Commerce also has an overly restrictive policy for disregarding
    prices paid by Chinese producers for inputs from market economy
    countries where there is reason to believe or suspect such prices may
    be ``dumped.'' (In 1988, Congress instructed Commerce not to use such
    prices if it had reason to believe or suspect they may be dumped or
    subsidized, but rather to use alternative sources for prices.) Before
    Commerce will reject prices as possibly ``dumped,'' it requires
    evidence that China has an antidumping order on the imported product
    from the same country from which the Chinese producer purchased it.
    Since China has only recently started to use its antidumping law,
    Commerce's policy virtually ensures against the rejection of such
    prices, regardless of whatever other evidence a petitioner might
    produce.
        Commerce also fails to require Chinese producers to provide the
    same extent of information in antidumping cases that is required from
    producers in market economy countries. For example, if a Japanese
    producer has two factories, only one of which produces product exported
    to the United States, that producer must provide information about both
    factories. A Chinese producer with two factories, however, is only
    required to report information on the factory that produces products
    exported to the United States.
        Finally, Commerce's policy of not applying the countervailing duty
    law to China because it is a non-market economy is hopelessly outdated.
    There is no dispute that China provides extensive subsidies to various
    industries, including steel and textiles. While it may be difficult for
    Commerce to find suitable benchmarks with which to measure Chinese
    subsidies and the benefits they confer on Chinese producers, that is
    not justification for what is tantamount to unilateral disarmament with
    respect to this shield against unfair imports. Moreover, there is
    nothing in the statute that commands such an outcome. Commerce can
    change its policy. However, to the extent that it feels constrained by
    the law as currently written, then it is incumbent upon the Congress to
    amend the countervailing duty law to make clear that it is applicable
    to imports from China.
        In conclusion, and on behalf of the employees of ISG and Burlington
    Industries, I thank the Committee on Ways and Means for this
    opportunity to address the serious problems facing U.S. industries from
    U.S.-China trade. As reviewed, the challenges are both numerous and
    substantial. However, there is no question in my mind that the
    challenges can be met successfully, provided that our government and
    our trade negotiators and policymakers have the willingness to do so.

      Statement of the Securities Industry Association, New York, New York
        The Securities Industry Association [1] is pleased to
    submit this testimony about China's capital markets and the
    opportunities for U.S. firms, our clients, and the U.S. economy to do
    business in China. Our testimony will focus on the goals and objectives
    of the U.S. securities industry in our growing relationship with
    China's economy. Consequently, this testimony highlights some key
    issues related to China's capital markets. SIA is currently in the
    initial stages of developing a more detailed paper on market access
    barriers to China's capital markets faced by U.S securities firms.
    ---------------------------------------------------------------------------
        \[1]\ The Securities Industry Association, established in 1972
    through the merger of the Association of Stock Exchange Firms and the
    Investment Banker's Association, brings together the shared interests
    of more than 600 securities firms to accomplish common goals. SIA
    member-firms (including investment banks, broker-dealers, and mutual
    fund companies) are active in all U.S. and foreign markets and in all
    phases of corporate and public finance. According to the Bureau of
    Labor Statistics, the U.S. securities industry employs nearly 800,000
    individuals. Industry personnel manage the accounts of nearly 93-
    million investors directly and indirectly through corporate, thrift,
    and pension plans. In 2002, the industry generated $222 billion in
    domestic revenue and $356 billion in global revenues.
    ---------------------------------------------------------------------------
        SIA has long supported more open, fair and transparent markets, and
    has strongly advocated liberalization in U.S. multilateral and
    bilateral trade discussions--including China's WTO accession talks. The
    economic benefits of financial services sector liberalization
    reverberate throughout the world from widespread increased
    opportunities created by new entrants, innovative products and
    services, and capital markets with greater depth and efficiency. In the
    global economy, open and fair markets are essential to ensuring that
    markets operate efficiently so that investors can easily and quickly
    buy and sell shares across borders, while businesses can access capital
    at the lowest price. The international financial system has been a
    major and contributing factor in the marked increase in living
    standards of those countries that participate in it.
        China's WTO accession commitments for financial services, and more
    specifically for the securities industry, demonstrated a reluctance to
    open this sector fully to foreign competition. We believe China should
    improve and accelerate its financial sector reform so that it will have
    the financial tools necessary to sustain and improve the quality of its
    economic growth.
    Expanding Business Opportunities for U.S. Financial Services Firms
        Many of SIA's leading member-firms have identified China as the
    largest single emerging market opportunity, with some measures
    indicating that China will be the world's largest economy within the
    next 40 years.[2] Analysts also predict that China will
    invest more than $1 trillion in transportation and communications
    infrastructure improvements and energy-related capital equipment over
    the next decade. In addition, China will accelerate its privatization
    program, and hopes to encourage foreign investors to
    participate.[3]
    ---------------------------------------------------------------------------
        \[2]\ Goldman Sachs' Global Economics Weekly, Issue 03/34, 1st
    October 2003
        \[3]\ China Accelerates Privatization, Continue Shift From
    Doctrine, Philip P. Pan, Washington Post, November 12, 2003.
    ---------------------------------------------------------------------------
        Moreover, China's nascent pension system must deal with a rapidly
    aging population. In 1995, the percent of China's population over 65
    was 6.1 percent; it is projected to reach almost 14 percent by 2025.
    World Bank estimates indicate that by 2030, the Chinese pension system
    will total $1.8 trillion. Already, several U.S. and other foreign firms
    have begun to capitalize on the enormous opportunities in China's
    retirement market by signing technical assistance agreements with local
    fund management companies.
        China's capital markets have grown significantly over the past
    decade and helped finance the country's domestic growth. China did not
    have a functioning stock market until 1991. By 2002, China's equity
    market capitalization totaled $463.1 billion and was the largest
    emerging stock market in the world. Impressively, between 1995 and
    2002, China's stock market capitalization soared by about 40 percent
    per annum, increasing the value of Chinese stocks to 19 percent of all
    emerging markets. China also boasts 1,235 listed companies, exceeded in
    the emerging markets only by Korea (1,526) and India (5,650).
        China's domestic capital markets will benefit from the entry of
    U.S. securities firms and their technology, capital, innovative
    products and services, and best practices. As local firms prepare for
    this increased competition, they will adopt new technologies and
    improve the quality of products and services they offer. More
    competitive and efficient capital markets will also improve the
    allocation of capital to borrowers and users, facilitate the hedging
    and diversifying of risk, and assist the exchange of goods and
    services. As China's capital markets develop, Chinese firms will be
    better able to raise low-cost capital and support job creation. Since
    financial markets are inextricably linked to increased investment and
    economic growth, strengthening China's domestic capital markets will
    help to alleviate the significant financing constraints that Chinese
    firms currently face.[4]
    ---------------------------------------------------------------------------
        \[4]\ Financial Liberalization and Financing Constraints: Evidence
    From Panel Data on Emerging Economies, Luc Leaven, World Bank, October
    2000, http://wbln0018.worldbank.org/html/ FinancialSectorWeb.nsf/
    (attachmentweb)/wp002467/$FILE/wp002467.pdf.
    ---------------------------------------------------------------------------
        China's private and public sectors alone cannot mobilize the
    massive financial resources, advice and expertise that are necessary to
    sustain its economic growth. Much of the infrastructure development
    will, by necessity, be funded through foreign sources, and this
    opportunity has generated substantial interest by the U.S. securities
    industry. Indeed, despite difficulties entering and operating in China,
    numerous U.S. securities firms have established offices in China and
    have participated in China's international securities offerings.
        Chinese issuers, however, will have to improve their disclosure and
    corporate governance standards to meet the demands of the international
    investing community. Indeed, the China Securities Regulatory Commission
    has already promulgated regulations to raise the quality and level of
    disclosure. Stricter disclosure of financial information is now
    required for prospectuses, and companies must ensure they have
    independent directors. These rules will not only help China access
    foreign capital, but they will also set the foundation for building a
    more robust retail and institutional investor base in China.
    China's WTO Commitments For Foreign Securities Firms
        China's WTO commitments gave U.S. firms some greater market access.
    The commitments from China for the securities industry represented a
    first step upon which to pursue additional liberalization of China's
    capital markets. For example, there are provisions for minority
    ownership in local securities underwriting, asset management firms, and
    advisory companies. Particularly noteworthy are China's commitments for
    the securities sector that include the grandfathering of existing
    activities and investments, national treatment, and the elimination of
    China's ``economic needs test.'' [5]
    ---------------------------------------------------------------------------
        \[5]\ Governments often use economic needs tests to discourage new
    foreign direct investment, and take into account inter alia, the number
    of existing firms, level of competitions, and the size of the market as
    criteria in the process of granting a license to establish a commercial
    presence.

    ---------------------------------------------------------------------------
          CHINA'S WTO COMMITMENTS TO FOREIGN SECURITIES FIRMS

          Participate directly in B share transactions *
          Eligible for special membership on Exchanges *
          Establish securities joint ventures (\1/3\ ownership) to
    underwrite A shares, and to underwrite and trade B and H shares and
    government and corporate debt
          Establish funds management joint venture (\1/3\ ownership
    *, 49 percent after three years.)
          Grandfather existing investments
          Eliminate economic means test
          Guarantee national treatment

    * upon accession

        In addition to its WTO commitments, China is taking other steps to
    open its markets. These include allowing foreign firms to list and
    issue local currency (renminbi) shares, and the establishment of
    foreign investment venture capital firms.
        However, there remain significant market access barriers. SIA
    strongly urges China to make the following additional commitments--
    whether in the context of--the ongoing WTO financial services
    discussions, or in other trade forums:

        Market Access

           Permit foreign firms to set up a securities company in China,
    either through a wholly-owned entity or other business ownership
    structure, with power to engage in a full range of securities
    activities, including underwriting, secondary trading of government and
    corporate debt and A shares, etc. Firms should have the right to
    establish offices without geographical limitation. Similarly, permit
    foreign asset management firms to manage money for Chinese investors,
    both retail and institutional, as well as to sell internationally
    diversified mutual funds to individuals through qualified local
    distributors.

          Qualified Foreign Institutional Investors (QFII)

           China has take steps to open it's A-shares market to foreign
    investors adopting rules for Qualified Foreign Institutional Investors.
    Current QFII requirements are onerous, however, and limit the utility
    of the program. For example:

            a.  the requirement that a QFII commit at least $50 million
            equivalent (currently more than 1% of total market
            capitalization) in a special QFII account;
            b.  the limitations on QFII ownership, both individually and in
            the aggregate; and
            c.  the requirements that the principal amount in the QFII
            account remain in the account for at least one year (three
            years for closed-end funds), with subsequent remittances
            required to be approved by the State Administration of Foreign
            Exchange and principal withdrawal only permitted in stages.

           We urge China to continue the process of making its securities
    markets more attractive to investment by abolishing the QFII regime in
    favor of a forward-looking policy encouraging unimpeded investment in
    the domestic market. We believe this would almost certainly result in
    greater foreign investment in China's securities markets, adding to the
    depth and breadth of trading in those markets and resulting in
    increased capital available to Chinese issuers.

        In addition to market access constraints, the lack of a strong
    legal foundation in China further complicates the ability of U.S. firms
    and their clients fully to participate in the Chinese capital markets.
    An unwelcome level of regulatory risk characterizes China's business
    climate and acts as a severe tax on capital. A PriceWaterhouseCoopers'
    report measured the adverse effect of opacity on the availability of
    capital in 35 countries.[6] Not surprisingly, the report
    ranked China at the bottom with an opacity score equivalent to an
    additional 46 percent corporate income tax.[7] China also
    placed last in legal and judicial opacity, as well as regulatory
    uncertainty and arbitrariness.
    ---------------------------------------------------------------------------
        \[6]\ PriceWaterhouseCoopers, The Opacity Index, January 2001.
    Opacity is based on 5 different factors that impact capital markets: 1)
    corruptions; 2) legal systems; 3) government and macroeconomic and
    fiscal policies; 4) accounting standards and practices (including
    corporate governance and information release); regulatory regime.
        \[7]\ The study uses Singapore as the benchmark, so that an
    increase in opacity from the Singaporean level to the Chinese level has
    the same negative effect on investment as raising the tax rate by 46
    percent.
    ---------------------------------------------------------------------------
        If China is to sustain long-term economic growth and continue to
    attract the foreign capital it needs, it must improve its legal
    infrastructure. Greater transparency will be a critical part of
    improving the rule of law in China. Transparent and fair regulatory
    systems play an integral role in the development of deep, liquid
    capital markets that, in turn, attract market participants, increase
    efficiency, and spur economic growth and job creation. A high level of
    transparency also ensures that foreign firms are accorded national
    treatment. Perhaps most importantly, transparency enhances investors'
    trust and assists international capital flows. Lack of transparency in
    the implementation of laws and regulations can seriously impede the
    ability of securities firms to compete.
        The China Securities Regulatory Commission's (CSRC) promulgation of
    draft Joint Venture Rules for securities firms illustrates this point.
    While we appreciate that the CSRC sought public comment on its joint
    venture regulations, we note that the proposed rules were issued on
    December 12, 2001, with a deadline for comment on December 31, 2001. In
    addition, we note that the CSRC's draft provisions for foreign equity
    investment in fund management companies were issued on December 21,
    2001 with a comment deadline of December 31, 2001. Such truncated
    comment periods are clearly insufficient for complex new regulations
    and particularly in cases where the regulations were specifically
    targeted at non-domestic firms.
        SIA has published a paper (Appendix I) that serves as a blueprint
    for a transparent regulatory regime. The paper underscores the key
    guiding principles of fair and transparent regulations as follows: 1)
    rules, regulations and licensing requirements should be considered and
    imposed, and regulatory actions should be taken, only for the purpose
    of achieving legitimate public policy objectives that are expressly
    identified; 2) regulation should be enforced in a fair and non-
    discriminatory manner; 3) regulations should be clear and
    understandable; 4) all regulations should be publicly available at all
    times; and 5) regulators should issue and make available to the public
    final regulatory actions and the basis for those actions, in order to
    enhance public understanding thereof.
        We also note an American Chamber of Commerce in China White Paper
    [8] that commented on the importance of regulatory
    transparency. The Chamber notes that while progress has been made,
    ``[f]oreign investors are adversely affected by the promulgation of
    regulations without prior notice, opportunity to comment, or
    contemporaneous issuance of implementing regulations.'' Moreover,
    according to the Chamber, ``At present, laws and regulations are only
    sporadically released in draft form for public comment, and after
    promulgation are identified only by their name and, in many cases,
    chronological and numerical sequence by issuing department. This
    deprives foreign investors, traders, and other interested parties of
    opportunities to comment, and makes keeping track of existing laws and
    regulations very cumbersome and expensive.'' Also rules and regulations
    on bankruptcy and intellectual property rights, among others, must be
    clear, fairly applied and enforceable. The development of such rules
    and regulations will attract and improve access to financing.
    ---------------------------------------------------------------------------
        \[8]\ 2002 White Paper on American Business in China, March 2002.
    ---------------------------------------------------------------------------
        Continued liberalization of China's capital markets has clear
    benefits for China and the global economy. It is a long-established
    U.S. policy to promote economic growth through open financial services
    markets. Global economic integration facilitates the importation of
    capital and intermediate goods that may not be available in a country's
    home market at comparable cost. Similarly, global markets improve the
    efficient allocation of resources. Countries gain better access to
    financing, and the suppliers of capital--institutional investors or
    individual savers--receive better returns on their investments.
        Finally, open, fair markets help increase living standards. We look
    forward to working with the Congress and the Administration to further
    expand the U.S. securities industry's access to China through the use
    of bilateral and multilateral trade forums.
        Attachment
                                     ______

                   PROMOTING FAIR AND TRANSPARENT REGULATION
                                DISCUSSION PAPER
    I. Setting The Foundation for Open and Fair Securities Markets
        Deep and liquid capital markets are the essential building blocks
    of today's economy, supplying the funds for economic growth and job
    creation. The firms that participate in the markets price risk,
    allocate capital, provide investors with advice and investment
    opportunities, and supply the liquidity needed to make markets work
    efficiently.
        Just as capital markets underpin economic growth and job creation,
    transparent and fair regulatory systems are essential to the
    development of deep and liquid capital markets. A system of regulation
    that is transparent to market participants instills the confidence
    needed to attract both the suppliers and users of capital to make the
    best use of the markets.
        Governments, regulators and the international financial
    institutions have undertaken substantial projects designed to improve
    the quality of the financial systems world-wide. Attention is now
    focused on building fair and transparent regulatory systems--grounded
    in the principles of market integrity and investor protection--to
    oversee those markets. Consistent with those goals and the principles
    of prudential regulation, discriminatory practices and considerations,
    such as the nationality of individuals or the place of origin of firms,
    should not be permitted to influence regulatory policies or actions.
        This paper is based on the assumption that a country's relevant
    laws should promote fair and transparent regulation. The principles
    outlined in this paper are not intended to prevent a regulator from
    taking measures for prudential or legitimate public policy reasons
    recognized under the World Trade Organization, including protecting
    investors, ensuring that markets are fair, efficient and transparent,
    and reducing systemic risk.
        A consensus view, supporting the development of active, sound and
    efficient markets based upon established principles for capital market
    regulation, is rapidly emerging. In September 1998, the International
    Organization of Securities Commissions (IOSCO) issued a paper entitled
    ``The Objectives and Principles of Securities Regulation'' that urged
    the adoption by all regulators of processes and regulations that are:

          consistently applied;
          comprehensible;
          transparent to the public; and
          fair and equitable.

        The International Monetary Fund (``IMF'') is developing a broad-
    based ``Code on Good Practices and Transparency in Monetary and
    Financial Policies'' that complements IOSCO's work.
        The securities industry, which today operates on a global basis,
    supports the IMF and IOSCO efforts to establish principles of fair and
    transparent regulation. The securities industry strongly believes that
    by making regulation and the operation of regulators accessible and
    transparent and by treating foreign and domestic licensed market
    participants fairly and equitably, governments, regulators and
    international financial institutions will promote the best markets for
    investors throughout the world.
        Building on the emerging regulatory consensus, this paper provides
    the views of the securities industry on fundamental regulatory
    principles and practices that will provide a fair and level playing
    field for market participants. It also sets the foundation for building
    strong and vibrant markets worldwide. Moreover, we strongly believe
    that the principles promoting fair and transparent markets are broadly
    applicable to all financial services firms participating in the global
    capital markets. In this regard, we are actively seeking the support of
    financial services firms worldwide in promoting these principles.
    II. Guiding Principles of Fair and Transparent Regulation
        A.  Rules, regulations and licensing requirements should be
    considered and imposed, and regulatory actions should be taken, only
    for the purpose of achieving legitimate public policy objectives that
    are expressly identified, including, for example, investor protection,
    maintaining fair, efficient, and transparent markets, and reducing
    systemic risk.
        B.  Regulation should be enforced in a fair and non-discriminatory
    manner.

             1.  Regulations and regulators \1\ should not discriminate
            among licensed market participants on the basis of the
            nationality or jurisdiction of establishment of the
            shareholders of a market participant or the jurisdiction of
            establishment of any entity that owns or controls the equity or
            indebtedness of a market participant.
    ---------------------------------------------------------------------------
        \1\ The term ``regulator'' is intended to cover all bodies that are
    authorized pursuant to law to play a role in the licensing and
    supervision of the activities of financial services firms, as well as
    the bodies that formulate rules, regulations and policies relating to
    such firms. Where the legislature or authorized regulator delegates its
    authority to a non-governmental entity such as a self-regulatory
    organization or trade association, the term is intended to encompass
    such an entity.
    ---------------------------------------------------------------------------
             2.  The relationship between a regulator and a licensed market
            participant should be governed by the standards set forth in
            relevant rules and regulations, and should not be subject to
            political or other extraneous or improper considerations.
             3.  The introduction of new securities products and services
            by firms should be governed by the standards set forth in
            relevant rules and regulations

        C.  Regulations should be clear and understandable. Clear and
    understandable regulations and rulings provide market participants with
    the predictability and necessary knowledge to comply with regulations.
    Opaque or ambiguous regulations and rulings create uncertainty among
    investors and licensed market participants.
        D.  All regulations should be publicly available at all times. All
    regulations should be made, and at all times remain, publicly
    available, including requirements to obtain, renew or retain
    authorization to supply a service. Disciplinary actions should not be
    taken based on violations of regulatory standards that were not in
    effect at the time the relevant activity took place.
        E.  Regulators should issue and make available to the public final
    regulatory actions and the basis for those actions, in order to enhance
    public understanding thereof.
    III. Rulemaking and Implementation
        A.  The rulemaking process

             1.  Regulators should utilize open and public processes for
            consultation with the public on proposals for new regulations
            and changes to existing regulations. A reasonable period for
            public comment should be provided. Any hearings at which formal
            promulgation or adoption of new regulations or changes to
            existing regulations are considered, if open to a member of the
            public, should be open to all members of the public. Regulators
            should not take arbitrary regulatory action against those who
            participate in the consultation process.
             2.  In considering whether rules, regulations, licensing
            requirements or actions are necessary or appropriate,
            regulators should also consider, in addition to the protection
            of investors, whether the action will promote efficiency,
            competition and capital formation.

        B.  Communicating and implementing new rules

             1.  New rules and regulations that provide advice for market
            participants should be made available to them and the public in
            a timely and efficient manner. Such changes should be made
            available, in writing, by electronic media or other means of
            distribution so that all market participants have reasonable
            access to such material.
             2.  Market participants should be given a reasonable period of
            time to implement new regulations. The effective date of a new
            regulation should provide a reasonable period for market
            participants to take the steps needed to implement the new
            regulation under the circumstances.

        C.  Interpretations of rules

             1.  Regulators should establish a mechanism to respond to
            inquiries on rules and regulations from market participants.
            The titles and official addresses of the relevant regulatory
            offices should be provided.
             2.  Interpretations and the grants or denials of regulatory
            relief or exemptions should be made available to the public.
            Such interpretations, relief or exemptions should generally
            apply or should be applied upon proper request, to
            substantially similar licensed market participants and new
            products. Under limited circumstances it may be appropriate to
            delay the publication of individual grants of relief for
            reasonable periods of time to address legitimate competitive
            concerns.
    IV. Licensing and new Product Procedures
        A.  Procedures for licenses and introduction of new securities
    products and services.

             1.  Criteria governing licensing of firms and the introduction
            of new securities products and services by firms should be in
            writing and accessible, and should be the basis on which
            decisions are made. All regulations and related explanatory
            materials governing the consideration and issuance of licenses
            to firms and the introduction of new securities products and
            services by firms should be reduced to writing and made
            publicly available to potential applicants upon request. No
            licensee should be denied a license, and no new securities
            product or service should be prohibited, on the basis of any
            factor not identified in such written regulations or
            explanations.
             2.  The introduction of new securities products and services
            by firms should be governed by the standards set forth in
            relevant rules and regulations. Where particular requirements
            are established in connection with the introduction of a
            product or service, such requirements should govern the
            introduction of complying products and services. In order to
            promote flexibility and efficiency in the capital markets, such
            standards and requirements should enable firms, to the maximum
            possible degree consistent with principles of prudence and
            investor protection, to introduce complying new products and
            services on the basis of sound internal procedures for
            compliance without additional regulatory review.
             3.  Information supplied by applicants as part of an
            application process should be treated confidentially. Such
            information should be disclosed only in accordance with
            existing rules permitting public disclosures, such as those
            that may be triggered by the granting of a license or product
            approval.
             4.  Regulators should promptly review all applications by
            firms for licenses and required product or service approvals
            and should inform the applicant of any deficiencies. No
            application for a license or approval that provides all
            information required pursuant to regulation and is made in good
            faith by an applicant that meets required criteria should be
            refused review and action by the relevant regulator. Action on
            all applications received should be taken within a reasonable
            period. Licenses should enter into force immediately upon being
            granted, in accordance with the terms and conditions specified
            therein.
             5.  Where an examination is required for the licensing of an
            individual, regulators should schedule such examinations at
            reasonably frequent intervals. Examinations should be open to
            all eligible applicants, including foreign and foreign-
            qualified applicants.
             6.  Fees charged in connection with licenses and the
            introduction of new securities products and services should be
            fair and reasonable and not act to prohibit or otherwise
            unreasonably limit licensing requests or the introduction of
            new product and services.

        B.  Licensing of entities and their employees

             1.  An applicant's competence and ability to supply the
            service should be the criteria used for licensing entities and
            employees. The terms and conditions for granting licenses
            should be made explicit, including education, experience,
            examinations and ethics. Procedures and criteria should not
            unfairly distinguish between domestic and foreign applicants.
            In addition, there should be no quantitative limits on the
            number of licenses to be granted to a particular class of
            market participants who are otherwise qualified.
             2.  When imposing licensing requirements, regulators should
            endeavor to give consideration to comparable testing or other
            procedures confirming the qualifications of an applicant that
            already have been completed in another jurisdiction. The
            ability of qualified and experienced market professionals to
            provide services in a foreign jurisdiction may be promoted
            where testing or other procedures used in the professional's
            home jurisdiction may satisfy all or part of the foreign
            jurisdication's licensing requirements.

        C.  Denials of licenses and product and service approvals

             1.  When denying an application for a license or a required
            securities product or service approval, regulators should, upon
            request, provide an explanation for that action. Any total or
            partial denial of any application for a license or a required
            new product or service approval should, upon request, be
            accompanied by a written statement of explanation from the
            relevant regulator detailing the reasons for the denial,
            including the particular requirements of the regulations
            governing the issuance of such license or required approval
            that were not satisfied. Applicants should be given the
            opportunity to resubmit applications or to file additional or
            supplementary materials in support of their applications.
             2.  Applicants should be afforded meaningful access to
            administrative or judicial appeal of a denial of a license or a
            required product or service approval (or failure to act on an
            application).
             3.  An appeal of a denial of a license or a required product
            or service approval should be decided within a reasonable time
            period after the appeal is filed. An applicant's decision to
            pursue an appeal (whether formal or informal) should not
            prejudice its existing licensed operations.
    V. Implementation of Regulatory Standards
        A.  Inspections, audits, investigations and regulatory enforcement
    proceedings \2\
    ---------------------------------------------------------------------------
        \2\ The term ``regulatory enforcement proceedings'' means
    administrative or judicial action authorized by the relevant regulatory
    authority and is intended to cover civil, administrative or criminal
    proceedings that involve a financial services firm and/or its employees
    based on their financial services activities.

             1.  All inspections, audits, investigations and
            regulatoryenforcement proceedings should be conducted pursuant
            to established regulatory and judicial standards and should not
            arbitrarily discriminate based on improper or other extraneous
            criteria like nationality.
             2.  All inspections, audits, and investigations should be
            conducted in a manner that does not impinge on the rights of
            licensed market participants and their directors, officers and
            employees.
             3.  A regulatory authority \3\ should not publicly disclose
            the fact that it is conducting an enforcement related
            inspection, audit or investigation of a particular entity until
            a determination has been made by the regulatory authority to
            take remedial or other enforcement-related action, unless
            otherwise subject to a legally enforceable demand unless made
            in connection with a generally applicable disclosure
            requirement imposed on the entity. The inspection, audit or
            investigation should be conducted at all times with due
            attention to the privacy and confidentiality concerns of all
            affected parties, including licensed market participants, their
            directors, officers, employees, and clients.
    ---------------------------------------------------------------------------
        \3\ The term ``regulatory authority'' is intended to cover all
    regulatory bodies involved in the inspection, auditing, investigation
    or prosecution of the activities of financial services firms. Depending
    on the system, the term may encompass criminal and judicial authorities
    as well as non-governmental entities such as self-regulatory
    organizations.

    ---------------------------------------------------------------------------
        B.  Regulatory proceedings to impose a sanction

             1.  Notice and opportunity to be heard

                a.  Notice of applicable law and regulation. A regulatory
            proceeding to impose a sanction should only be instituted based
            on the violation of laws or regulations that were in effect at
            the time that the relevant activity occurred and where the
            subject of the proceeding had timely notice of them.
                b.  Notice of determination to take action. Licensed market
            participants should be notified in a timely manner both when:
            1) a determination has been made to hold a regulatory
            proceeding concerning the conduct of that participant; and 2) a
            decision in, or on the status of, that proceeding has been
            made.
                c.  Opportunity to be heard. Except in situations where
            emergency temporary relief is necessary, in all regulatory
            proceedings, licensed market participants should be given a
            reasonable opportunity to be heard and to submit, on the
            record, position papers and other documentary evidence.

             2.  Representation by counsel and access to evidence

                a.  Right to legal counsel. The subjects of a regulatory
            proceeding should have the right to have legal counsel of their
            choice represent them in all meetings with, and interviews by,
            regulatory authorities. A regulatory authority should not
            suggest or imply that the attendance of counsel will in any
            manner alter the character of the proceedings being conducted,
            the level of supervisory review to be undertaken, or the manner
            in which the regulatory authority carries out its functions.
                b.  Access to evidence. The subjects of a regulatory
            proceeding should, upon request, be permitted reasonable access
            to all documents and records that are relevant to the subject
            matter involved in the pending regulatory action. Documents and
            records to which access is denied based on privileges generally
            recognized in such proceedings should not be admissible in
            evidence in such regulatory proceeding.
                c.  Burden of proof. The burden of proof to demonstrate
            that a licensed market participant has not conducted its
            business in accordance with the relevant law and regulation
            should rest with the regulatory authorities.

             3.  Sanctions and Appeals

                a.  Sanctions. Sanctions by a regulatory authority should
            be imposed in a fair and nondiscriminatory manner based on the
            relevant facts and with an effort to treat similarly situated
            persons and entities in a similar manner. The basis for any
            decision to impose sanctions by a regulatory authority should
            be explained in a writing that is made available to the
            subjects of the proceeding.
                b.  Appeals. The subjects of a regulatory proceeding should
            have available to them a forum for appealing the decisions
            rendered and sanctions imposed. The body considering a
            particular level of appeal should be separate from that which
            made the decision or imposed the sanction that forms the basis
            of the appeal. Appeals to a regulatory authority should be
            decided in a timely manner and appeal determinations should be
            explained in a writing that is made available to the subjects
            of the proceeding.

              Statement of the Semiconductor Industry Association
        The Semiconductor Industry Association (SIA) is pleased to submit
    written comments regarding U.S.-China economic relations and China's
    role in the global economy. The SIA represents the $70 billion U.S.
    semiconductor industry. U.S. semiconductor firms are leading global
    competitors, commanding a 50 percent world market share.
        China represents a large and growing market for semiconductors and
    other information technology products. In fact, semiconductors are the
    second largest U.S. export to China. Over the past decade, SIA was a
    strong supporter of legislation to provide Permanent Normal Trade
    Relations with China as part of China's entry into the WTO, and SIA is
    pleased that the Chinese Government has taken a number of positive
    steps in implementing its WTO obligations. However, several areas will
    require continued efforts by the Chinese Government in order to fulfill
    the commitments made under WTO accession. SIA's submission will only
    elaborate on those issues of special relevance to American
    semiconductor producers, including China's value added tax (VAT)
    rebates for domestically produced chips, semiconductor intellectual
    property, transparency, and local content. The VAT rebate issue is of
    particular concern to SIA members. Earlier this week, SIA released a
    study of China's emerging semiconductor industry which, among its
    conclusions, finds the VAT rebate scheme distorts trade and investment,
    and imposes a cost penalty for semiconductor importers trying to
    compete for sales in China.
    CHINA MARKET
        In 2001 the Asia Pacific region, driven primarily by growth in
    China, surpassed the U.S. as the largest semiconductor market in the
    world. In terms of demand, in 1997, the U.S. represented 33 percent of
    the world market, while the Asia Pacific region represented 22 percent.
    Five years later, in 2002, the Asia Pacific share had grown to 36
    percent, compared to the U.S. share of 22 percent--a reversal of
    positions. By 2005, the U.S. is projected to be the smallest of the
    four regional markets,[1] representing only 18 percent of
    the world, less than half of the 40 percent share that the Asia Pacific
    market is projected to represent. The growth of the Asia Pacific market
    has been driven by the growth in China. China's $18 billion integrated
    circuit market represented 15 percent of total world demand in 2002, up
    from 7 percent of the world in 2000.
    ---------------------------------------------------------------------------
        \[1]\ The four regions are North America (primarily the U.S.),
    Europe, Japan and Asia Pacific.
    ---------------------------------------------------------------------------
        China's semiconductor market growth is occurring within the context
    of significant growth in China's computer and telecommunications
    markets. China is now the world's largest mobile phone market, and
    second largest personal computer market.
        Currently domestic Chinese production, including foreign owned
    facilities in China, meets only about 15 to 20 percent of its market
    demand, with the remaining 80 to 85 percent met by imports. The Chinese
    Government's Tenth Five Year Plan, covering 2001-2005, has an ambitious
    target to ensure that by 2005 ``60 percent of IT products should be
    home grown,'' and that China shall ``gradually design and develop its
    own IC products, (including [central processing units]).''
    SIA'S EFFORTS IN CHINA
        SIA has been encouraging an open trade environment in China for
    over a decade. SIA has sent delegations to China since the early 1990's
    to meet directly with Chinese Government and industry officials to
    discuss the benefits of market liberalization to China's economic
    growth and to U.S.-China relations. SIA provided advice to the U.S.
    government on the WTO accession issues of importance to the
    semiconductor industry and, as noted earlier, was an active supporter
    of legislation to allow Permanent Normal Trade Relations with China.
        Based on SIA's interactions with senior Chinese Government
    officials, we believe that there is a genuine commitment expressed by
    all Chinese officials to full and faithful execution of China's WTO
    obligations.
        SIA was pleased that China became a signatory of the WTO's
    Information Technology Agreement (ITA) in April 2003, committing to
    eliminate tariffs on a range of information technology products. SIA
    has long supported the elimination of semiconductor tariffs, beginning
    with the suspension of U.S. tariffs in 1985, because tariffs increase
    costs to consumers and thus impede the ability of consumers to take
    advantage of semiconductor technology. SIA was an early supporter of
    the ITA, and China's joining this agreement was a high priority because
    of the consumer benefits that would flow from the elimination of
    tariffs on semiconductors, computers, telecommunications equipment, and
    semiconductor manufacturing equipment. The elimination of China's 6 to
    12 percent semiconductor tariffs in January 2002, contributed to a
    reduction in smuggling and resulting shift to legitimate import
    channels, better positioning U.S. companies to take advantage of
    trading rights when they are fully phased in at the end of 2004 (three
    years after accession). SIA was pleased that China was able to resolve
    the ``end use'' certification issue that had initially prevented its
    formal participation in the ITA. China had imposed ``end use''
    certification requirements on 15 ITA products, that were inconsistent
    with the ITA, and would have created a dangerous precedent, especially
    as we sought to expand the ITA to additional countries. SIA is pleased
    that China is now a full participant in the ITA, and we appreciate the
    efforts of USTR that led to this result.
    VALUE-ADDED TAX
        China imposes a value-added tax (VAT) of 17% on sales of all
    imported and domestically-produced semiconductors and integrated
    circuits. However, current Chinese Government policy provides for a
    rebate of the amount of the VAT burden in excess of 6% for integrated
    circuits manufactured within China (and the amount of the VAT burden in
    excess of 3% for integrated circuit designs developed in
    China).[2] This discrimination against imported
    semiconductors through the VAT rebate is inconsistent with China's WTO
    obligations.
    ---------------------------------------------------------------------------
        \[2]\ State Council Document Number 18, June 2000
    ---------------------------------------------------------------------------
        Reduction of the semiconductor VAT should apply to all
    semiconductors and integrated circuits sold in China (whether
    domestically-produced or imported). Application of the VAT reduction to
    all companies would allow China to come into compliance with its WTO
    obligations to refrain from discrimination against imports while
    maintaining its commitments to investors in domestic facilities of a
    reduced VAT rate.
        GATT Article III (on ``National Treatment'') establishes a general
    prohibition against a WTO member engaging in activity that
    discriminates in favor of domestic products at the expense of imported
    products. Specifically, paragraph 2 of this article states that a WTO
    member cannot impose taxes on imported products that are greater than
    those imposed on domestic products. By rebating the amount of the VAT
    burden over 3% or 6% for local products, while continuing to impose the
    full 17% VAT on imported semiconductors, the current policy violates
    this basic GATT/WTO obligation.
        Prior GATT decisions clearly establish that it is a violation of
    the national treatment principle to grant a tax credit or rebate to
    certain domestic manufacturers of a product while charging the full tax
    rate to similar foreign-manufactured products. This is true even if the
    tax credit or rebate is intended to provide a subsidy to local
    producers. While China does provide the benefits to both domestic and
    foreign-owned facilities in China, the different treatment of domestic
    and imported products is a violation of its national treatment
    commitment. Any tax imposed on imported goods must be collected in a
    non-discriminatory manner.
        The best solution for U.S. export interests and the development of
    China's information technology market is for the PRC to reduce or
    eliminate the VAT rate for all semiconductors and integrated circuits,
    regardless of origin.
        As noted above, China joined the Information Technology Agreement
    (ITA) and has eliminated all tariffs on semiconductors in 2002 and will
    eliminate tariffs on other information technology products in the near
    future. The same public policy reasons that caused China to decide to
    eliminate its tariffs on semiconductors apply with equal force to a
    decision to lower the VAT rate. A substantial portion of the growth of
    the American economy has been attributed to information technology and
    the productivity enhancements made possible by advances in
    semiconductor technology and production. Just as it was in China's
    interest to eliminate all import tariffs on semiconductors, significant
    reduction in the VAT rate imposed on all semiconductors would
    contribute to the growth of the Chinese IT market and would benefit the
    Chinese economy in general. In addition, reports indicate that China's
    elimination of semiconductor tariffs (formerly 6-12%) has succeeded in
    reducing smuggling of semiconductors into China. As the high VAT rate
    on semiconductors provides an incentive for smuggling, this runs
    counter to the high priority the Chinese Government has placed on
    eliminating illegal entry of goods.
        Although it is not designed to do so, the high VAT rate imposed on
    semiconductors imposes significant costs on Chinese electronics
    producers on exports from China. While China ostensibly rebates the VAT
    on semiconductors and other electronics components when the finished
    product containing the inputs is exported, many exporters from China
    have been unable to receive the full amount of the rebate officially
    due to them because provincial and local authorities may refuse to
    rebate VAT charges collected by another jurisdiction within China.
        There have been several noteworthy developments on the VAT rebate
    issue this year. First, there is the growing recognition in Washington
    as well as in other world capitals that China's VAT rebate program is a
    violation of the WTO. In March, 32 Members of the U.S. House of
    Representatives sent a letter to Ambassador Zoellick stating ``We
    believe China should eliminate the VAT for all semiconductors
    regardless of origin and we encourage you to continue to press for a
    speedy resolution of this violation.'' In June, 21 U.S. Senators sent
    Amb. Zoellick a letter stating ``We urge you to continue to vigorously
    insist that China lower its VAT on semiconductor imports to abide by
    its World Trade Organization (WTO) commitments . . .'' Many of you on
    the Committee signed these letters, and we appreciate the continued
    support of Congress on this issue.
        In May, the World Semiconductor Council (WSC) issued a joint
    statement critical of China's VAT rebate program. The WSC is composed
    of CEOs from companies representing the European Semiconductor Industry
    Association (EECA-ESIA), Japan Electronics and Information Technology
    Industries Association (JEITA), Korea Semiconductor Industry
    Association (KSIA), Semiconductor Industry Association (SIA), and
    Taiwan Semiconductor Industry Association (TSIA). The WSC stated:

           ``. . . under China's current application of its Value Added Tax
    (VAT), a VAT of 17% is applied to all semiconductors, but companies
    designing and manufacturing semiconductors in China are eligible to
    receive a substantial rebate of the VAT paid on those semiconductors.
    This reduces the effective VAT burden on domestically designed and
    produced semiconductors to only 3%. Discrimination has the effect of
    limiting market access, distorting patterns of trade and investment,
    and negates the benefits China promised to provide when it joined the
    WTO. The WSC calls for China to lower its VAT rate to 3% for all
    semiconductors, regardless of origin.''

        A second key development is USTR's formal inquiries to the Chinese
    on this subject.Coupled with the interest on Capitol Hill and the WSC,
    USTR's request that China address the VAT rebate problem has attracted
    the attention of Chinese Government officials. As a result of this
    attention, China has formed a research group to re-examine the VAT
    issue. In SIA's recent meetings in China, we sensed a willingness in
    some quarters to explore alternatives with the U.S., but in other
    quarters, continued skepticism that changes were necessary. The U.S.
    government must continue to insist that China quickly come into
    compliance with GATT article III.
        In the most recent development, SIA released a report this week
    entitled, ``China's Emerging Semiconductor Industry--The Impact of
    China's Preferential Value-Added Tax on Current Investment Trends.''
    The study finds that China's VAT rebate puts pressure on foreign
    semiconductor makers to design and manufacture their products within
    China, or face a cost penalty. As a result, the VAT policy is driving
    investment to China that may otherwise not occur. Copies of the new SIA
    study have been distributed to Ways and Means staff, and it may be
    downloaded from www.sia-online.org.
        Lowering the VAT for both domestically produced and imported
    semiconductors would be a non-discriminatory policy that is in China's
    interest for all the reasons set forth above. Non-discriminatory
    application of the VAT rebate for all semiconductors would allow
    Chinese electronics producers to obtain the most advanced technology
    available worldwide at the most competitive prices, benefiting Chinese
    consumers and the entire Chinese economy, as well as encouraging growth
    in China's IT sector.
    INTELLECTUAL PROPERTY PROTECTION
        SIA would like to underscore the importance of China's full
    compliance with its commitments to improve intellectual property (IP)
    protection. This is critical not only to U.S. firms doing business in
    China, but also in China's self interest, as it will encourage the high
    technology foreign investment China seeks in order to promote the
    development of its economy while simultaneously encouraging local
    entrepreneurs to engage in innovation.
        Before discussing the issue of enforcement, let me begin by
    congratulating China for its success in resolving one issue related to
    its semiconductor layout design protection law. In March 2001, China's
    State Council passed Regulation on Integrated Circuit Layout Design
    Protection, which took effect October 1, 2001. Last year, a senior
    official of the Ministry of Information Industry made comments
    indicating that China's new law did not cover discrete semiconductors.
    SIA objected to this interpretation because the WTO TRIPs agreement is
    clear that discretes, which are products with only one active element,
    are to be protected. We are pleased to report that, in a response to a
    question posed by the United States, China affirmed before the Council
    for Trade-Related Aspects of Intellectual Property Rights that ``With
    respect to discrete mentioned in the question in particular, if it
    complies with provisions of Article 2 and Article 4 of the Regulations
    on the Protection of Layout Designs of Integrated Circuits, it can be
    protected through applying for registration of layout-design.''
    [3] We believe that this resolves the discretes issue, and
    again express our appreciation the USTR and Chinese Government for
    their efforts to bring this question to a satisfactory conclusion.
    ---------------------------------------------------------------------------
        \[3]\ Council for Trade-Related Aspects of Intellectual Property
    Rights; Responses from China to the Questions posed by Australia, the
    European Communities and their member States, Japan and the United
    States; IP/C/W/374 10 September 2002; Page 43.
    ---------------------------------------------------------------------------
        SIA would like to highlight the need for strengthened IP
    enforcement. IP protection is important not only in China, but in all
    markets around the globe. The World Semiconductor Joint 2003 Statement,
    referenced above, emphasized the need for strong intellectual property
    protection around the world, stating:

           ``Semiconductor makers must invest a very high percentage of
    sales in R&D, and the intellectual property that results is the
    lifeblood of the company. Failure to adequately protect intellectual
    property is very damaging to the semiconductor industry. There are an
    increasing number of instances of counterfeiting of IC's and other
    semiconductors. One form of counterfeiting is the unauthorized direct
    optical copying of the chip, and reproduction of a mask work (layout
    design/topography) based on the optical copying, and then fabrication
    of a semiconductor based on this mask work and sale under a different
    company's name. Another form of counterfeiting involves reverse
    engineering a company's chip, and then producing a physically identical
    chip and selling it without authorization under the original company's
    name and trademark. Both types of counterfeiting must be quickly
    addressed and stopped.''

        The World Semiconductor Council is now working on a proposal to
    establish fast track consultative mechanisms to encourage enforcement
    actions to counter IP violations, and to encourage manufacturers to
    develop policies to prevent their inadvertently making semiconductors
    that violate a third party's IP. We are hopeful that this proposal will
    be adopted in all semiconductor producing regions around the world.
        SIA is aware of numerous reports of IP violations in China. In one
    typical case, an SIA member company found that Chinese firms were
    making identical copies of its chips and data sheets, and selling it
    under the Chinese company's name. Under TRIPs, reverse engineering a
    chip to design an original and better product is allowed under the
    layout design laws. However in this case the chips were essentially
    photocopies of the U.S. design, which we know because the pirate
    included the U.S. company's part number etched in a submask level and
    unused circuits that the U.S. firm had placed on the chip to reserve
    space for future product development. The Chinese firms that engage in
    piracy are typically thinly-capitalized companies that contract the
    manufacture of the copied chips to foundries that can afford to make
    the necessary capital expenditures.
        China's court system is still developing, and U.S. firms are
    concerned about the fairness of its procedures. For example, we
    understand that only ``legitimate'' purchases are actionable. These
    rules put an unreasonable burden on U.S. firms who cannot hire a
    private investigator to purchase the counterfeits, but must instead
    find purchasers of the counterfeit product and convince those purchases
    to sign a statement that they bought the counterfeit goods. China also
    has administrative enforcement mechanisms, but these are largely
    untested.
        In the aforementioned letter signed by 32 House members, the
    Representatives stressed that ``the improved laws China put in place to
    protect IP are useless unless they are supported by transparent,
    standardized and predictable court procedures that make the judicial
    system accessible . . . We must continue to demand that China
    immediately upgrade its IP enforcement mechanisms so that foreign
    semiconductor companies have certainty their products are protected in
    this emerging market.'' The letter signed by 21 Senators to Ambassador
    Zoellick stated ``We encourage you to continue to press for
    strengthened enforcement to bolster the credibility of [the IP] laws,
    and to explore with your Chinese counterparts alternative solutions
    such as fast track investigations of alleged piracy.'' Given its
    importance to both U.S. producers and China's economic development, SIA
    urges USTR and the Chinese Government to continue to make IP
    enforcement a high priority issue.
    TRANSPARENCY
        Several commitments in the final protocol of accession are expected
    to improve transparency in China's administrative rule-making. For
    example, China has agreed that only those trade-related measures that
    are published and readily available will be enforced. China has also
    agreed to make information on trade-related measures available to WTO
    members upon request before those measures are implemented or enforced.
        Additionally, China has committed to establish or designate an
    official journal for the publication of all trade-related measures and
    to provide a reasonable period of time for comment to the appropriate
    authorities before measures are implemented. China is considering
    providing this information in English in order to provide transparency
    to the international business community, and to post the information on
    the web. These are important steps in improving transparency. SIA urges
    China to fully implement these measures.
    LOCALIZATION
        There had been localization requirements for parts and materials
    for products made in China which, while not technically legal
    requirements, imposed serious restrictions on firms' ability to utilize
    imported parts. Firms had been required to file localization plans with
    their foreign investment application. The Chinese Government also
    audited foreign firms to determine local content. What constitutes
    local content can be subject to many definitions. For example,
    importation via a Chinese distributor can qualify a part as ``local.''
    Chinese sectoral industrial policies also contain local content
    requirements. Prior to its accession to the WTO, China had imposed
    local content requirements on products containing semiconductors.
        In our discussions with Chinese officials, there was a recognition
    that these policies are inconsistent with China's WTO obligations and
    would be repealed in time. SIA again calls for the immediate repeal of
    all local content policies as required by the terms of the WTO
    accession agreement.
        During the China WTO accession negotiations, the Chinese Government
    confirmed that China would ensure that all state-owned and state-
    invested enterprises would make purchases and sales solely on
    commercial considerations, e.g. price, quality, marketability,
    availability, and that the enterprises of other WTO members would have
    an adequate opportunity to compete for sales to these enterprises on a
    non-discriminatory basis. In addition, the Chinese Government committed
    that it would not influence commercial decisions on the part of state-
    owned or state-invested enterprises. Adherence to these commitments
    will be critical for China's development because it will ensure that
    Chinese electronics firms are able to purchase the most competitive
    chips free from political interference. Given the market access
    problems that the U.S. historically faced in other semiconductor
    markets, it is also critical to U.S. export interests that China's
    state-invested enterprises purchase solely on a commercial basis.
    CONCLUSION
        China is a large and fast growing market. The economics of our
    industry dictate that U.S. firms, to remain competitive, must be able
    to compete on a fair and open basis for sales in China. For this
    reason, we are very encouraged by China's efforts to implement its WTO
    commitments, but we are concerned over the remaining existence of
    barriers and impediments to trade in China. While the challenge of
    promoting economic development in a country the size of China is
    immense, we are encouraged by China's progress and are hopeful that
    China will lower its VAT for all semiconductors, vigorously enforce its
    IP laws, eliminate its local content requirements, and improve
    transparency.
        SIA thanks the Ways and Means Committee for the opportunity to
    submit written comments for today's hearing on ``United States-China
    Economic Relations and China's Role in the Global Economy.'' We look
    forward to continuing to work with the U.S. government on these
    important issues.

                    Statement of the Honorable Jim Slattery
        Thank you, Mr. Chairman, for the opportunity to bring to this
    Committee's attention a matter that I believe is central to the future
    of the trade relationship between the United States and China. This
    hearing is focused on ensuring that China is integrating itself into
    the rules-based trading system that governs all WTO members. However,
    there is another rules-based system of law to which China must adhere
    if it is to obtain the foreign capital, technology, and expertise it
    needs.
        Simply put, China cannot reach its economic potential until it
    consistently applies the rule of law and due process of law to foreign
    companies and investors doing business in China. Government entities
    cannot seize private property without promptly and adequately
    compensating the rightful owner. That rule of law is generally
    recognized among all our trading partners. As I will explain, it is not
    the case today in China, especially where high government officials are
    involved in seizing private property for their own ends. This situation
    should concern the Committee as it poses a threat to U.S. and other
    foreign investors considering investments in China.
        In an effort to gain control over the first company in China in
    half a century to be listed on the New York Stock Exchange, Governor Bo
    of Liaoning Province directed the seizure of the true owner's interests
    in the company. The owner, an entrepreneur named Yang Rong, had taken
    the company, Brilliance China, from being a profit loser to become the
    largest minibus producer in all of China. He is a resident green card
    holder in the U.S., and his wife is an American citizen. The corporate
    directors who cooperated with this illegal seizure were paid handsomely
    with call options later exercised for a value of $15 million for each
    director.
        Mr. Yang Rong, sought due process of law in the Beijing Courts.
    However, this effort was thwarted because the provincial government
    notified the court in Beijing that Yang Rong was accused of unspecified
    ``economic crimes.'' The alleged crimes were never specified. It did
    not matter; the mere suggestion of possible criminal conduct was
    sufficient to cut off Mr. Yang Rong's due process rights in Beijing.
    Under Chinese law, civil cases must defer to consideration of criminal
    cases, so the case was transferred from Beijing to the province. At
    that point, Mr. Yang Rong, out of concern for the safety of himself and
    his family, moved to the United States.
        He also sought due process of law in Bermuda, where China
    Brilliance was incorporated. The case is still proceeding there. Now,
    with the assistance of my law firm, Wiley, Rein & Fielding, he has
    brought a case in the U.S. District Court for the District of Columbia
    under the Foreign Sovereign Immunities Act. The central government has
    so far declined to serve the complaint on the Liaoning Provincial
    Government. That, however, will not prevent this case from proceeding.
        Mr. Yang Rong's experience sends a very powerful negative signal to
    U.S. businessmen and investors. The message to foreigners is that while
    the central Chinese Government strives to attract foreign investments,
    a provincial governor, like Governor Bo in Liaoning Province, can
    expropriate them without due process of law.
        This issue has attracted considerable attention in the
    international press. The reason is because millions of Chinese and
    foreign investors realize two things. First, due process of law is
    vital to China's progress in attracting foreign investment. Second,
    there is no clearer test of the vitality of the rule of law in a
    government than where someone with influential friends and relatives is
    accused of illegally taking private property without compensating the
    lawful owner.
        I am happy to supply any Member with additional information about
    this fascinating case. Hopefully, China will learn that to attract
    investment, the rule of law and due process of law must be applied
    impartially to everyone--citizens and foreigners, from the lowest to
    the highest persons.

            Statement of the Society of the Plastics Industry, Inc.
        The Society of the Plastics Industry, Inc. (SPI) is pleased to
    submit comments to the House Ways and Means Committee for the October
    30-31, 2003, hearings on U.S.-China Economic Relations and China's Role
    in the Global Economy. SPI applauds the Chairman and the committee for
    addressing this critical issue.
        Founded in 1937, SPI is the primary plastics industry trade
    association representing the entire plastics industry supply chain
    which includes plastics products processors, manufacturers of machines
    and molds, and raw material (resin) suppliers. The plastics products
    industry is the nation's fourth largest manufacturing segment and can
    be found in every state. The U.S. plastics industry provides products
    that impact and enhance every aspect of our lives.
        Plastics is a dynamic industry that has grown more rapidly than
    overall manufacturing for the past 25 years. It has continued to adapt
    to meet the ever-growing needs of consumers and to meet ever-changing
    economic challenges. Employment in the plastics industry grew 2.2% per
    year between 1980 and 2001. Real value added in the industry grew 3.7%
    per year from 1980 to 2001. The value of shipments grew 3.3% per year
    from 1980 to 2001.
        Plastics industry growth rates slowed significantly in terms of
    shipments, employment and number of establishments towards the end of
    the 1990s and into 2001. This slowdown mirrored what happened to the
    rest of manufacturing for various reasons including rising energy
    costs, the high value of the dollar, and the bursting of the 1990s
    ``tech bubble.'' The industry gets a double hit from high energy
    prices: plastics resins are made from natural gas, and the
    manufacturing process is energy intensive. The industry slowdown
    accelerated in 2001.
        Today the industry is facing especially difficult times, having
    been hard hit over the past several years during the nation's economic
    slowdown and by policies that have put U.S. manufacturing at a
    disadvantage in the global marketplace.
        These policies make it more expensive to manufacture products in
    the U.S. at a time when the resultant cost increases cannot be passed
    on in the form of price increases in products that are competing in the
    global marketplace. Such market conditions force U.S. companies to make
    tough decisions, such as whether to relocate outside of the U.S. in
    order to compete or lay off employees.
        The U.S. plastics industry in 2002 employed some 1.4 million
    workers and shipped $309 billion in raw material, products and
    equipment. This is down 4.7 percent from 2001 in terms of jobs, and
    down 1.1 percent in terms of shipments. Compared to 2000, the number of
    jobs lost is 8 percent and shipments are down 6.5 percent.
        The U.S. plastics industry is going through a transformation. It
    retains its strong export surplus in resins, but its trade in molds and
    machinery remains in deficit, and its plastics products trade has swung
    from surplus to deficit in the last two years. The U.S. plastics trade
    balance with China has deteriorated especially fast.
        On a global basis, the industry had a large and growing trade
    surplus over the past decade. That trend, however, appears to have been
    reversed starting in 2001 with net exports falling 23.3% in 2002. Total
    plastics industry imports rose 6.9% and reached $24 billion in 2002.
    The biggest problem was plastics products, as defined by Chapter 39 of
    the Harmonized Tariff Schedule, which went from an $894 million trade
    surplus in 2000 to a $1.4 billion trade deficit in 2002. Plastics
    products imports grew 8.9% to $14.7 billion in 2002.
        More importantly, the net trade deficit of plastics contained in
    all traded goods has grown significantly. The net trade deficit of
    plastics contained trade in 1997 was $4.2 billion. In 2002, it was $14
    billion. That is an increase of 26.9 percent annually.
        The causes of the deterioration of the U.S. plastics trade surplus
    to a rapidly increasing plastics trade deficit needs to be understood,
    especially with regard to the double-digit growth in imported Chinese
    products. Much of the deterioration in the plastics industry trade
    balance has been with China. Where it is due to deleterious domestic
    and international policies that have coalesced to drive plastics
    processors out of business or offshore and forced workers into
    unemployment, U.S. policymakers must undertake efforts to change these
    policies. If unfair trade practices are responsible, then the U.S. must
    use its resources to address and rectify such policies. Trading
    partners, including China, must operate consistent with U.S. trade laws
    and international trade rules, and enforce their World Trade
    Organization (WTO) commitments. We want to compete with the Chinese on
    a fair and level playing field both internationally and in our domestic
    marketplace.
        During the past couple of years, many SPI members have become
    increasingly alarmed that unfair Chinese competition may be destroying
    U.S. plastics manufacturing.

          SPI member companies have anecdotal evidence that China
    is producing plastics finished goods for less than the cost of the raw
    materials in the U.S. There is also evidence that some material prices
    in China are approximately half the price of the same materials sold in
    the U.S. The result is that these imports are being offered for sale at
    prices so low that U.S. companies cannot compete.
          Some plastics processors are being forced to move
    operations offshore not only to take advantage of lower cost
    production, but also to avoid the higher costs of manufacturing in the
    U.S. due to ever-increasing costs such as energy, health care, and
    frivolous law suits.
          There are reported widespread Intellectual Property
    Rights violations in China that are continuing unabated despite its
    accession to the WTO and to the intellectual property rights agreements
    signed by WTO signatories.
    Examples of Plastics Business Lost to China

        In 2003 a plastics cutlery and house wares manufacturer lost 14% of
    his sales valued at $4 million to imports from China. The imported
    products are being sold for less that the U.S. manufacturer's raw
    material cost alone. The manufacturer says he cannot understand how
    this is possible when the products have to be made then shipped half
    way around the world. Lower-wage Chinese labor is not the issue because
    the manufacturing process is quite automated. This manufacturer would
    like to see the U.S. government do a study to understand how his prices
    can be so undercut by the Chinese. To retain customers, the
    manufacturer has had to lower selling prices while absorbing higher raw
    material prices that have resulted from high natural gas prices in the
    U.S. This company has done a lot to hold its own successfully against
    U.S. and European competitors but is worried about the impact on his
    business from the increasing imports from China. The manufacturer is
    concerned that his lost profits means less money to invest in the
    company to help ensure its future and the jobs of his employees.
        A medical device manufacturer makes Class II patented medical
    devices which are registered with the FDA and sells them
    internationally. He discovered that unauthorized copies of his patented
    products made in China were being offered for sale in Canada. For this
    manufacturer, the lack of enforcement of Intellectual Property Rights
    is his biggest concern for the long-term viability of his business
    because he is convinced that China is developing the capability to make
    and copy increasingly sophisticated products.
        A household goods manufacturer found his product for sale in Europe
    packaged to look like it was his, including the Made-in the USA label.
    But the U.S. manufacturer didn't make it here or anywhere. It came from
    China, including the Made in the USA label!
        A packaging company lost a $600,000 per month customer to China for
    whom he had already cut his price to the bone. The packaging company
    believes it is THE low cost producer in the U.S.
        A molder and tool maker lost a contract on tooling that was 60%
    less and on a widget that used commodity resin that was priced at a
    level that made it unprofitable for him.
        A medical molder that makes proprietary stints for the medical
    imaging market had his product knocked off overseas for sale in less
    regulated markets overseas.
        A film manufacturer that makes substrates for tape was approached
    by Chinese representatives about locating a plant in China that would
    have insured him fixed costs on lease holds and other benefits that he
    cannot duplicate even in the rural South.
        SPI has not undertaken any studies specific to China plastics
    production costs and trade practices that support suspicions of unfair
    trade practices. However, SPI contracted for a trade study by Probe
    Economics [1] that looks at U.S. plastics import and export
    data, the results of which are cited below. The SPI trade study
    concludes that:
    ---------------------------------------------------------------------------
        \[1]\ ``U.S. Plastics Industry Trade Through 2002; Trends,
    Partners, Hot Products, and Impacts on Employment'' prepared by Probe
    Economics, Inc. for The Society of the Plastics Industry, Inc. August
    2003
    ---------------------------------------------------------------------------
    Plastics Industry Imports From China--Probe Economics

          Total plastics industry imports from China increased
    17.4% in 2002 and reflect an annual growth rate of 14.3%.
          In 2002, the U.S. had a $3.8 billion trade deficit in
    plastics products with China. China accounted for 27% of the plastics
    products imports in 2002, and Chinese imports have been growing at
    double-digit rates. U.S. imports from China have grown at a compound
    rate of 13.5% since 1997.
          The imports from China had been mostly consumer goods,
    like trays, cups, plates, curtains and kitchenware--the kinds of things
    that are sold by Wal-Mart. Increasingly, we are seeing items like
    doors, windows, blinds, shutters and builders' wares--the kinds of
    products that are sold by Home Depot and Lowe's. This doesn't include
    the many plastics products coming from China that are contained in
    other products, such as automobiles and TV sets.
          When plastics products contained in other goods are
    considered, the U.S. trade deficit in plastics products from China has
    swelled to $$7.6 billion in 2002, an annual increase of 16.4 annually
    since 1997 representing 54.6% of the total U.S. plastics trade deficit
    in 2002.

        The trade study notes that the U.S. previously had a trade surplus
    in plastics because the country had: (A) a large home market, which
    provided scale economies, (B) relatively low feedstock costs, (C) good
    logistics, especially in the Gulf Coast, and (D) some of the best
    technologies. The report states:

          As to why the balance is deteriorating, first of all, the
    U.S. has lost its energy and feedstock advantage. For years, U.S.
    manufacturing enjoyed natural gas costs which were below crude oil
    prices on a Btu basis. Most of the world had to base its energy on
    crude oil. The U.S. gas surplus has run out. Natural gas prices have
    been rising relative to crude oil prices for some time in the U.S. and
    now are at or above parity levels. Other principal reasons are the high
    dollar value and the movement of manufacturing to Asia--especially
    China.
          The plastics industry serves manufacturing, providing raw
    materials and finished components. The biggest problem for the plastics
    industry today is that U.S. manufacturing is losing out to imports.
          Imports and exports represent a growing share of the U.S.
    plastics industry. Imports grew from 7% of annual shipments in 1992 to
    12.3% in 2002.
          The U.S. has a significant and growing plastics products
    trade deficit with China. The biggest problem that China poses,
    however, is not in exports of plastics products per se, but in the
    usurpation of the markets for these products. In other words, China is
    taking over manufacturing--especially assembly operation. Because of
    the need for `just in time' delivery to manufacturing sites, the
    associated manufacture of plastics products is also moving to China.
    International Trade and Domestic Policies Need to Be Addressed

        International trade and domestic policies need to be addressed by
    policymakers to improve the competitive environment for U.S. industry
    including plastics. Many policies significantly increase the
    manufacturing costs in the U.S., some policies and practices put U.S.
    products at a disadvantage in the global marketplace, and other
    policies are inadequately implemented thus contributing to a weakened
    manufacturing base.
        Because SPI believes that U.S. manufacturing including the plastics
    industry remains critical to America's economic success and security,
    it is essential to modify policies that collectively are making it
    increasingly more difficult for U.S. manufacturers to compete in the
    global marketplace. We urge policymakers to change policies that hinder
    U.S. manufacturing and adopt approaches that best advance manufacturing
    competitiveness.
        Economic stimulus efforts have been supported by the White House
    and enacted by Congress, and recent indicators suggest a recovery is
    underway. However, that good news has yet to translate to the
    manufacturing segment of this economy. Therefore, many in the plastics
    industry remain very concerned that their businesses and the industry
    are threatened by a global marketplace in which they find it
    increasingly difficult to compete.
        China has become a manufacturing powerhouse. Its central and local
    government policies have supported development of key industrial
    sectors. Since the 1990's, China has become a global supply chain for
    many traded products and has seen its share of global trade in
    manufactured goods triple.
        In the meantime, there is increasing unease in the U.S. over the
    declining share of manufacturing output and employment in our overall
    economy. And this is happening while China's currency--the yuan--
    remains pegged to the U.S. dollar at a rate set by government fiat nine
    years ago. Many believe that this maintains an artificially undervalued
    currency.
        Congress needs to understand the impact of China's growth as a
    manufacturing powerhouse on the U.S. economy and security, particularly
    on the U.S. manufacturing sector. Congress needs to understand the
    relocation of manufacturing, high-technology, and R&D facilities to
    China and the implications of these transfers on the United States'
    national security, employment and the standard of living of the
    American people.
        Are China's governmental policies--currency valuation, stimulation
    of exports, industrial capacity building policies, and non-compliance
    with WTO mandates--contributing to an unfair trading advantage
    detrimental to U.S. economic and security interests? SPI thinks that
    the answer is yes.
    China's Currency Policy

        SPI believes that China continues to follow a policy of one-way
    market interventions to maintain its currency at a level that
    economists estimate is between 15-40 percent undervalued. We believe
    that the artificially undervalued Chinese yuan is having a serious
    adverse impact on the competitiveness of U.S. manufactured goods and is
    contributing to a migration of world manufacturing capacity to China,
    and to an erosion of the U.S. manufacturing base. We believe that China
    is in violation of both its IMF and WTO obligations by manipulating its
    currency for trade advantage. Therefore, we think that the Treasury
    Department must immediately enter into negotiations with the Chinese
    Government to successfully resolve this matter. Otherwise, China's
    continued maintenance of an undervalued exchange rate with the U.S.
    dollar will continue to promote major distortions in trade and
    investment, to the detriment of American companies and workers,
    including plastics.
        SPI also is concerned that the banking system in China is
    structurally weak. SPI urges the Administration to address this issue
    with the Chinese Government. For U.S. economic strength, it is
    imperative to maintain stability in the financial markets in the Asian
    region.
    China's Industrial Policies and WTO Non-Compliance

        China has attracted a total of over $400 billion of foreign direct
    investment (FDI), most of it in the last six years. This compares with
    $1.3 trillion for the U.S., $497 billion for the U.K., $482 billion for
    Belgium-Luxemburg, and $480 billion for Germany. As FDI flows to China
    are now expanding by over $50 billion per year, China will soon have
    accumulated the second largest amount of FDI in the world.
        Experts have concluded that China's undervalued currency is just
    one of several factors behind its success in attracting massive inflows
    of FDI, particularly into its manufacturing sector. China has pursued
    industrial policies that have catalyzed its growth as a manufacturing
    powerhouse. The Chinese Government has designated a number of ``pillar
    industries,'' for which it provides preferential benefits for domestic
    development and foreign investment. Manufacturers in China are
    supported through a wide range of national industrial policies, which
    include: tariffs; limitations on foreign firms' access to domestic
    marketing channels; requirements for technology transfer by foreign
    investors; government selection of partners for major international
    joint ventures; preferential loans from state banks; privileged access
    to listings on national and international stock markets; tax relief;
    privileged access to land; and direct support for R&D from the
    government.
        Some of these industrial practices violate China's WTO obligations.
    The Administration needs to engage more forcefully with the Chinese
    Government where it violates China's commitments under the World Trade
    Organization (WTO).
    Importance of Manufacturing to the U.S. Economy

        In his September 15, 2003 remarks to the Detroit Economic Club,
    Commerce Secretary Don Evans stated that ``the President believes that
    our economic and national security require a stable, robust
    manufacturing sector that produces sophisticated and strategically
    significant goods here, in the United States.'' While manufacturing
    employs 14 percent of the American workforce, it has accounted for
    nearly 90 percent of all the job losses since total U.S. employment
    peaked in March 2001. Over 2.7 million American manufacturing jobs have
    been lost over the past three years, roughly one in every six
    manufacturing jobs.
        SPI was heartened when the Administration announced the President's
    Manufacturing Initiative earlier this year and we look forward to
    reviewing its proposals for dealing with the China-related concerns as
    well as with domestic policies. We think that China's undervalued
    currency and government industrial policies are having an adverse
    impact on the competitiveness of U.S. manufacturing and contributing to
    a migration of world manufacturing capacity to China, with a concurrent
    erosion of the U.S. manufacturing base.
    Domestic Policies

        SPI also believes strongly that in addition to international
    policies, U.S. domestic policies have played a major role in the
    decline of manufacturing in this country. Congress and the
    Administration must understand the urgency in changing domestic
    policies that are, in effect, forcing U.S. manufacturers to relocate
    overseas. Some of these domestic policies are noted below.
        Energy--The plastics industry is doubly dependent on energy--not
    only for power for this energy-intensive industry but for its
    feedstocks as well. Of those feedstocks, 70 percent come from natural
    gas. The plastics industry has lost its energy and feedstock advantage.
    For years, natural gas costs in the United States were below crude oil
    prices on a Btu basis. Most of the world had to base its energy on
    crude oil. U.S. natural gas prices in the last couple of years have
    been at or above parity, thereby becoming a significant factor hurting
    competitiveness. Congress should adopt a balanced, comprehensive policy
    that will assure adequate supply of multiple sources of affordable
    energy plus a secure and reliable supply of reasonably-priced natural
    gas for U.S. manufacturing.
        Health Care Insurance--Rapidly rising health care costs are the
    largest cost increase for many manufacturers. We need policies that
    contribute to lowered costs and greater access to health care including
    passage of federal Association Health Plan (AHP) legislation.
        Tax--Tax rules affecting trade and international business need to
    be reformed and simplified. The U.S. must resolve the WTO Foreign Sales
    Corporation/Extraterritorial Income case in such a way as to avoid EU
    trade retaliation while keeping U.S. manufacturers competitive.
    Congress must address the WTO ruling on taxation of extraterritorial
    income with either tax credits for manufacturers or lowered corporate
    tax rates for U.S. manufacturing that will make U.S. manufacturers more
    competitive.
        Legal/Tort Reform--Litigation including that related to product
    liability has been one of the significant and growing contributors to
    the increasing cost of manufacturing in the U.S. Congress should adopt
    reforms to eliminate abuses of the current tort system that are
    destroying jobs and undermining the U.S. economy and the civil justice
    system.
        Skilled Workforce--Surveys have found that many manufacturers face
    a shortage of skilled workers, and that many workers and applicants
    need training in the basic skills of reading, writing and math. Also,
    many employers have lacked the resources to provide technical training
    and the development of basic skills, especially during the economic
    downturn of the last couple of years. Congress should expand policies
    such as the Workforce Investment Act to help ensure that American
    industry will have the essential skilled workforce.
    Conclusion

        The plastics industry is stepping up to the challenge by continuing
    to innovate and further increase productivity to compete in the global
    marketplace. We cannot, however, win the battle alone. We implore our
    nation's leaders to recognize the importance of U.S. manufacturing to
    the overall economic health of the U.S. and its sustainability, and to
    take appropriate actions.
        We would like to close with a quote from an SPI member who is
    working creatively to compete in this increasingly global marketplace.
    Among nearly 12,000 industry workers who recently signed a Plastics
    Manufacturing Matters petition supporting U.S. policies to encourage
    plastics manufacturing growth in this country, he expressed the
    following: ``Our company has been in business for 32 years. We don't
    fear our [global] competition; we fear playing in a game with different
    rules and standards for the players. Please help my father keep a
    legacy for our family, our employees, our community and our country.''
        SPI thanks the Chairman for providing SPI the opportunity to put
    its concerns regarding China on the record. We look forward to the
    committee's continued efforts on this critical matter and would like to
    work with you wherever possible.

      Statement of Roger W. Robinson, Jr., U.S.-China Economic & Security
                               Review Commission
        The U.S.-China Economic and Security Review Commission commends the
    Committee for holding this important hearing and appreciates the
    opportunity to apprise the Committee of its work in this area. The
    creation of the Commission itself demonstrates Congress' growing focus
    on U.S.-China economic relations and the implications of this
    relationship for U.S. economic and national security interests.
        In America, people in varying capacities--business, labor,
    academia, the media and government--need to better understand the
    almost tectonic forces now shaping the U.S.-China economic
    relationship. With increasing sophistication, China has become a
    manufacturing powerhouse. Its central and local government policies
    have supported development of key industrial sectors. In the 1990's,
    China became embedded in what has become a global supply chain for many
    traded products and saw its share of global trade in manufactured goods
    triple.
        In the meantime, there is increasing unease in the U.S. over the
    declining share of manufacturing output and employment in our overall
    economy. And this is happening while China's currency--the yuan--
    remains pegged to the U.S. dollar at a rate set by government fiat nine
    years ago. What are the causes and effects here? What are the key
    linkages? Are there steps the U.S. should be pursuing to remedy these
    challenging and, in some cases, debilitating circumstances?
        Our Commission is mandated by Congress to examine, among other
    areas, China's economic policies and the United States' trade and
    investment relationship with China, including assessing the qualitative
    and quantitative nature of the shift of United States production
    activities to China. This latter charge includes examining the
    relocation of high-technology, manufacturing and R&D facilities to
    China and the effect of these transfers on United States national
    security, employment and the standard of living of the American people.
        To begin to address these vitally important questions, the
    Commission held a full-day hearing on September 25, 2003, entitled:
    ``China's Industrial, Investment and Exchange Rate Policies: Impact on
    the United States.'' Our hearing was designed to investigate the impact
    of China's growth as a manufacturing powerhouse on the U.S. economy,
    particularly on the U.S. manufacturing sector. We invited academic
    experts and representatives of business, industry and labor to provide
    us their perspectives on these issues. We examined whether China's
    governmental policies were contributing to an unfair trading advantage
    detrimental to U.S. economic interests. In this regard, we focused on
    China's policies regarding its currency valuation, stimulation of
    exports, industrial policies, and incentives to inward investment and
    research and development.
        We benefited from the views of seven Members of the House and
    Senate who appeared at the start of our hearing. These Members--
    representing both sides of the aisle--described their concerns, and the
    concerns of many of their constituents, regarding the negative impact
    on U.S. manufacturing of China's currency and industrial policies.
    Several of these Members have introduced legislation aimed at providing
    appropriate incentives to the Chinese Government to cease its policy of
    maintaining, through a firm peg to the U.S. dollar, an artificially
    undervalued currency. Some argued for U.S. action against other unfair
    Chinese trade practices such as export subsidies, dumping, intellectual
    property theft, and other WTO-inconsistent practices.
        At the conclusion of the hearing, the Commission weighed the
    testimony it had heard and came to some conclusions about the dynamics
    at work as well as some initial recommendations for U.S. Government
    action. These findings are recommendations were transmitted to Congress
    along with the full record of our hearing. I am pleased to provide you
    here with a summary of these findings and recommendations, which the
    Commission hopes will be helpful to your deliberations in this area.
    China Exchange Rate Policies

        Based on our examination of this issue, it appears clear that China
    continues to follow a policy of one-way market interventions by the
    government to maintain its currency at a level that economists estimate
    is between 15-40 percent undervalued. In this regard, China is
    purchasing U.S. dollars at an estimated rate of $120 billion per year
    to prevent appreciation of its currency against the dollar. In
    assessing causes of the worsening U.S. trade deficit and loss of U.S.
    manufacturing jobs, a broad range of factors are clearly at work; the
    lack of net new savings in the U.S. economy, the global mobility of
    factors of production and low labor costs in China are among the
    principal factors. However, we believe that the artificially
    undervalued Chinese yuan is negatively impacting the competitiveness of
    U.S. manufactured goods and is contributing to a migration of world
    manufacturing capacity to China and to an erosion of the U.S.
    manufacturing base.
        Section 3004 of the Omnibus Trade and Competitiveness Act of 1988
    (22 U.S.C. Sec. 5304) requires annual reports from the Department of
    Treasury on foreign countries' exchange rate policies and requires the
    Secretary to enter into negotiations on an expedited basis with
    countries found to be manipulating their currencies to gain an unfair
    competitive trade advantage. Past reports from the Treasury on China
    have sidestepped this conclusion, which appears now to be inescapable.
    The Commission believes it is clear that China, in violation of both
    its IMF and WTO obligations, is in fact manipulating its currency for
    trade advantage and therefore finds it imperative that the Treasury
    immediately and forcefully enter into negotiations with the Chinese
    Government to resolve this matter. China's continued maintenance of an
    undervalued exchange rate with the U.S. dollar will continue to promote
    major distortions in the flow of trade and investment, to the detriment
    of American companies and workers, and therefore requires decisive
    action by Washington.
        Given these findings, the Commission made the following
    recommendation to Congress:

           Recommendation: The Treasury Department should make a
    determination in its foreign country exchange rate report to Congress
    that China is engaged in manipulating the rate of exchange between its
    currency and the U.S. dollar to gain an unfair competitive trade
    advantage and immediately enter into formal negotiations with the
    Chinese Government over this matter. Should these efforts prove
    ineffective, the Commission urges the Congressional leadership to use
    its legislative powers to force action by the U.S. and Chinese
    Governments to address this unfair and mercantilist trade practice. For
    the near future, continued vigorous development of such legislative
    initiatives as were outlined by Members of Congress during our hearing,
    linking China's performance on its exchange rate policies to its
    continued full access to the U.S. market, appears essential to ensure
    the appropriate level of effort by both Governments to this matter.
    China's Investment and Industrial Policies

        China has attracted a total of over $400 billion of foreign direct
    investment (FDI), most of it in the last six years. This compares with
    $1.3 trillion for the U.S., $497 billion for the U.K., $482 billion for
    Belgium-Luxemburg, and $480 billion for Germany. As FDI flows to China
    are now expanding by over $50 billion per year, China will soon have
    accumulated the second largest stock of FDI in the world.
        Our hearing indicated that China's undervalued currency is just one
    of several factors behind that country's success in attracting massive
    inflows of FDI, particularly into its manufacturing sector. Our hearing
    examined the extent to which China's industrial policies have played a
    role. In this regard, we learned that:

          China has pursued industrial policies that have catalyzed
    its growth as a manufacturing powerhouse, particularly in increasingly
    higher-technology production. The Chinese Government has designated a
    number of ``pillar industries,'' particularly in the high-tech area,
    for which it provides preferential benefits for domestic development
    and foreign investment.
          Manufacturers in China are supported through a wide range
    of national industrial policies, which include: tariffs; limitations on
    foreign firms' access to domestic marketing channels; requirements for
    technology transfer by foreign investors; government selection of
    partners for major international joint ventures; preferential loans
    from state banks; privileged access to listings on national and
    international stock markets; tax relief; privileged access to land; and
    direct support for R&D from the government budget.

        Some of these industrial practices fall outside the parameters of
    China's World Trade Organization commitments, however others appear to
    violate China's stated WTO obligations. The U.S. Government needs to
    engage more forcefully with the Chinese Government where they appear to
    violate China's commitments under the World Trade Organization (WTO).
    The Congress needs to be regularly briefed on progress and removing
    these barriers so as to keep the pressure on our trade regulators and
    enforcers to hold China to its commitments.

           Recommendation: The United States Trade Representative and the
    Department of Commerce should identify whether any of China's
    industrial policies are inconsistent with its WTO obligations and
    engage with the Chinese Government to mitigate those that are
    significantly impacting U.S. market access. Appropriate Congressional
    Committees should be fully briefed on the actions the agencies are
    taking to resolve these issues.

        With trade and investment flows rapidly growing between the U.S.
    and China, it has become increasingly difficult for interested parties
    to have a clear understanding of all the dynamics at work. In order to
    fashion effective government policy, a better picture of the trade and
    investment relationship is needed.

           Recommendation: The Commission also believes it is essential
    that U.S. policymakers have a clearer, more comprehensive, and timely
    picture of global investment and R&D flows to China, particularly in
    the manufacturing sector. The Commission's 2002 Report to Congress
    urged Congress to consider establishing an enhanced, mandated corporate
    reporting system to capture better this information by requiring firms
    to report ``their initial investments in China; any technology
    transfer, offset, or R&D cooperation agreed to as part of the
    investment; the shift of production capacity and job relocations
    resulting from the investment, both from within the United States to
    overseas and from one overseas location to another; and contracting
    relationships with Chinese firms.'' We believe the need for such a
    system has only increased in urgency since our 2002 Report and again
    urge Congress to consider taking such action.
    Impact on U.S. Economy

        In his September 15, 2003 remarks to the Detroit Economic Club,
    Commerce Secretary Don Evans stated that ``the President believes that
    our economic and national security require a stable, robust
    manufacturing sector that produces sophisticated and strategically
    significant goods here, in the United States.'' Manufacturing employs
    14 percent of the American workforce, but has accounted for nearly 90
    percent of all the job losses since total U.S. employment peaked in
    March 2001. Over 2.7 million American factory jobs have been lost over
    the past three years, roughly one in every six manufacturing jobs.
        We are awaiting the release of the President's Manufacturing
    Initiative and look forward in particular to reviewing its proposals
    for dealing with the China-specific challenges. It is our opinion that
    that China's undervalued currency and government investment strategies
    are having a deleterious effect on the competitiveness of U.S.
    manufactured goods and contributing to a migration of world
    manufacturing capacity to China, with a concurrent erosion of the U.S.
    manufacturing base.

           Recommendation: The Commission recommends that the President's
    pending Manufacturing Initiative should include provisions that
    strengthen the competitiveness of U.S.-based manufacturers in light of
    the growing shift of production to China, especially high-tech and R&D.
    The Initiative should address de facto Chinese Government subsidies,
    including those not covered under the WTO, such as tax incentives,
    preferential access to credit, capital, and materials, and investment
    conditions requiring technology transfers.

        Engaging forcefully with China over its currency valuation, over
    its WTO non-compliant practices, and over practices that, even if
    outside the strictures of the WTO agreement, are operating to
    inappropriately disadvantage U.S. exporters is not a ``get tough''
    policy attempting to hold China to a higher standard than other trading
    partners. It is a necessary and appropriate U.S. response to bring a
    major trading partner around to the spirit and letter of the
    commitments it agreed to in the interest of forging a mutually
    beneficial economic relationship.
        When China joined the WTO, part of the bargain was that it agreed
    to be subject to three China-specific safeguard provisions that lowered
    the threshold for bringing WTO trade disputes against China: a non-
    market economy methodology in anti-dumping cases, a product-specific
    safeguard that allows WTO members to restrain Chinese imports that
    disrupt their domestic markets, and a textile safeguard. These
    provisions were pursued in recognition of China's still developing
    market economy and are an important means to maintain a level playing
    field for China's trading partners. As we recommended in our 2002
    Report to Congress, we urge USTR and the Commerce Department to make
    aggressive use of these safeguards to minimize the potentially severe
    dislocations to our economy during China's transition into the WTO.
        In the coming months, the Commission will hold hearings on a number
    of issues pertinent to the Committee's work. In December we will
    examine how China's emergence as an economic and military power is
    impacting other nations in Asia and how this affects U.S. interests in
    the region. We also plan to hold a hearing in the near future on
    China's WTO compliance record where we will review the official reports
    of China's compliance--those issued by USTR and the WTO--and compare
    them with assessments offered by industry, labor and other key
    stakeholders. We also intend to carefully examine the Administration's
    Manufacturing Initiative once it is released and how it addresses the
    concerns we have outlined above.
        Early next year, the Commission will hold hearings on China's
    military modernization, U.S. science and technology transfers to China
    and a security-minded review of Chinese fundraising activities in the
    U.S. capital markets. The fruit of all this work will be embodied in
    our second Annual Report for the Congress due out next Spring.
        It is the hope of the Commission that our work will help inform
    your deliberations and contribute to the fashioning of legislation by
    the Congress which will illuminate the dynamics of the U.S.-China
    economic and security relationships, better identify unfair Chinese
    trade practices, identify emerging threats to U.S. national security
    interests, and steer Chinese economic practice into more sustainable
    and fairer channels. Thank you again for this opportunity to provide
    our views on the issues before you.