[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








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                      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 
[email protected], 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 
[email protected], 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 
[email protected], 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.



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    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).



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    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 ([email protected])

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.
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    \[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.

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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.
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    \[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]
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    \[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.''
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    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]
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    \[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.
                                 ______
                                 
      
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    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.
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    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]
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    \[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.
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    \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.

                                
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