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




                    CHINA'S EXCHANGE RATE REGIME AND
                    ITS EFFECTS ON THE U.S. ECONOMY

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                       DOMESTIC AND INTERNATIONAL
                 MONETARY POLICY, TRADE AND TECHNOLOGY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                            OCTOBER 1, 2003

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-56




92-336              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001

                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North          CHARLES A. GONZALEZ, Texas
    Carolina                         MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California                 HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin                KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania      JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona             STEVE ISRAEL, New York
VITO FOSSELLA, New York              MIKE ROSS, Arkansas
GARY G. MILLER, California           CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania        JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia  JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio              STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota           ARTUR DAVIS, Alabama
TOM FEENEY, Florida                  RAHM EMANUEL, Illinois
JEB HENSARLING, Texas                BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey            DAVID SCOTT, Georgia
TIM MURPHY, Pennsylvania              
GINNY BROWN-WAITE, Florida           BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director

 Subcommittee on Domestic and International Monetary Policy, Trade and 
                               Technology

                   PETER T. KING, New York, Chairman

                                     CAROLYN B. MALONEY, New York
JUDY BIGGERT, Illinois, Vice         BERNARD SANDERS, Vermont
    Chairman                         MELVIN L. WATT, North Carolina
JAMES A. LEACH, Iowa                 MAXINE WATERS, California
MICHAEL N. CASTLE, Delaware          BARBARA LEE, California
RON PAUL, Texas                      PAUL E. KANJORSKI, Pennsylvania
DONALD A. MANZULLO, Illinois         BRAD SHERMAN, California
DOUG OSE, California                 DARLENE HOOLEY, Oregon
JOHN B. SHADEGG, Arizona             LUIS V. GUTIERREZ, Illinois
MARK R. KENNEDY, Minnesota           NYDIA M. VELAZQUEZ, New York
TOM FEENEY, Florida                  JOE BACA, California
JEB HENSARLING, Texas                RAHM EMANUEL, Illinois
TIM MURPHY, Pennsylvania
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    October 1, 2003..............................................     1
Appendix:
    October 1, 2003..............................................    49

                               WITNESSES
                       Wednesday, October 1, 2003

English, Hon. Phil, U.S. Representative from the State of 
  Pennsylvania...................................................    13
Green, Hon. Mark, U.S. Representative from the State of Wisconsin    11
Aldonas, Hon. Grant, Under Secretary for International Trade, 
  Department of Commerce.........................................    17
Goldstein, Morris, Dennis Weatherstone Senior Fellow, Institute 
  for International Economics....................................    34
Taylor, Hon. John B., Under Secretary for International Affairs, 
  Department of the Treasury.....................................    16
Vargo, Franklin J., Vice President, International Economic 
  Affairs, National Association of Manufacturers.................    32

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    50
    English, Hon. Phil...........................................    53
    Green, Hon. Mark.............................................    56
    Manzullo, Hon. Donald........................................    58
    Aldonas, Hon. Grant..........................................    60
    Goldstein, Morris............................................    71
    Taylor, Hon. John B..........................................    85
    Vargo, Franklin J............................................    91

              Additional Material Submitted for the Record

Maloney, Hon. Carolyn B.:
    Exerpt from a statement by Kathleen P. Utgoff, Commissioner, 
      Bureau of Labor Statistics, September 5, 2003..............   103

 
                    CHINA'S EXCHANGE RATE REGIME AND
                    ITS EFFECTS ON THE U.S. ECONOMY

                              ----------                              


                       Wednesday, October 1, 2003

             U.S. House of Representatives,
         Subcommittee on Domestic and International
             Monetary Policy, Trade and Technology,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 2:02 p.m., in 
Room 2128, Rayburn House Office Building, Hon. Peter King 
[chairman of the subcommittee] presiding.
    Present: Representatives King, Biggert, Paul, Manzullo, 
Ose, Kennedy, Feeney, Hensarling, Murphy, Barrett, Maloney, 
Sanders, Sherman, Hooley, Baca and Emanuel.
    Chairman King. [Presiding.] Good afternoon. This hearing 
will come to order.
    The subcommittee today meets to examine the issue of 
foreign currency exchange rates and their relationship to the 
United States economy, in particular, the much-publicized 
relationship between the Chinese yuan and the U.S. dollar.
    I want to thank my Ranking Member, Ms. Maloney, for her 
usual bipartisan cooperation in preparing for this hearing, as 
well as the cooperation the subcommittee has received from the 
administration.
    We are particularly fortunate that both Under Secretary 
Taylor from Treasury and Under Secretary Aldonas from Commerce 
have made themselves available to share their expertise on 
currency exchange and trade-related matters. I am aware of the 
time constraints these gentlemen face today, and we will do our 
best to accommodate their schedules.
    My understanding is that the next series of votes is at 
about 3:30 p.m., so we will try to move this along as much as 
we can.
    As the subcommittee specifically charged with international 
monetary policy, we have been looking at this issue for the 
better part of the year. In fact, it was my colleague on the 
committee, Congressman Green, and also Congressman English, who 
initially approached me in the spring, underscoring their 
concerns as they relate to their manufacturing bases back home.
    While currency pegs have been a reality for some time, it 
has really only been in the last month or so that considerable 
national attention has been paid to valuations of foreign 
currencies and the effects they may be having on U.S. export 
opportunities and the economic recovery overall.
    I am very aware that many see this as a U.S.-jobs issue. 
Others view it as a function of global economic integration. 
Some also contend that currency intervention by China and 
others in Asia is tantamount to currency manipulation and thus 
actionable under appropriate trade remedies.
    It is my hope that this hearing today will provide a 
thoughtful and appropriate forum for the various viewpoints we 
discuss as Congress works with the administration to ensure 
competitive free markets for U.S. manufacturing and its labor 
force.
    When we look at the challenges to our manufacturing sector, 
the key, of course, is getting the fundamentals right at home, 
in other words, putting in place a strong domestic growth 
agenda. The China challenge is complex, and there are a number 
of dimensions to the problem. These include ensuring that China 
continues to open its markets, plays by the rules of free 
trade, removes restrictions on capital flows and moves toward a 
market-determined exchange rate.
    While we need to address all these challenges, it is 
important that China is one of the few engines of growth in the 
world economy today, and that imports and foreign investment 
into China are expanding rapidly.
    However, there is much more that China can and should do to 
implement its WTO commitments, and we look forward to hearing 
what the administration is doing to hold China to these 
commitments. To that end, I want to underscore my strong 
support for the efforts of Treasury Secretary Snow in his most 
recent visit to China, as well as the APEC meetings in Thailand 
and G-7 finance ministers meetings in Dubai. This 
administration continues to press for market-based exchange 
regimes and the need for flexibility.
    Under Secretary Taylor will understandably be limited in 
his ability to speak to many of these issues pending the 
upcoming currency report. I am confident that he, along with 
Under Secretary Aldonas, will be able to discuss efforts 
currently taking place on multiple fronts to promote job 
growth, economic expansion, and level the global economic 
playing field.
    One truth seems to be universal with regard to the topic of 
discussion today. There is unanimity that the yuan is 
undervalued. Where to go from there and the potential effects 
stemming from any corrective action raise a myriad of 
questions, such as a possible U.S. interest rate predicament, 
given massive Chinese holdings in U.S. treasuries.
    Regardless of the resulting exchange regime in China, steps 
to bring about that change must be taken, mindful of the 
delicate economic interplay our own economy has with it and 
countries in that region. I would caution against a rush to 
judgment, particularly in light of the current political 
environment.
    I look forward to the testimony, in which I thank all the 
witnesses in advance for their time today.
    With that, I recognize the Ranking Member, the gentlelady 
from New York, my colleague, Ms. Maloney.
    Mrs. Maloney. I thank the Chairman for yielding and for 
calling this important hearing. And I congratulate my two 
colleagues for their hard work, and I appreciate their time and 
testimony today.
    This afternoon, the subcommittee considers the issue of the 
Chinese exchange rate and its impact on the U.S. economy. Any 
discussion of the current state of our nation's economy must 
begin with employment. For many of our constituents, these are 
extremely difficult economic times.
    More than 9 million Americans are without jobs. Since 
January 2001, the number of unemployed Americans has grown by 
3.2 million, the most in our history since President Hoover was 
in office.
    Worse yet, the number of Americans experiencing long-term 
unemployment has nearly doubled. In New York City, the national 
unemployment rate is a high rate. But in New York, it is even 
higher, so it is of tremendous concern, I believe, to everyone 
in New York and I would say to all of our colleagues in 
Congress.
    In this environment, it is understandable that concern 
would focus on a country that utilizes an artificial peg to 
maintain a set exchange rate with the U.S. dollar. While many 
economists believe the Chinese currency peg maintains an 
undervalued remimbi that benefits Chinese exports, the full 
impact of this policy and the increasingly intertwined 
relationship between our two economies is even more 
complicated.
    While making it difficult for domestic producers of 
textiles, furniture and other manufactured goods to compete, 
some economists point to lower-priced consumer goods in the 
U.S. and lower interest rates as a result of an undervalued 
Chinese currency.
    Additionally, the growth of the U.S. bilateral trade 
deficit with China is not nearly the result of an exchange rate 
mismatch. In part, it reflects the fact that China is 
increasingly an assembly point and final destination for goods 
manufactured in other Southeast Asian countries before export 
to the United States.
    In this way, China absorbs trade deficit numbers that would 
otherwise be dispersed throughout the region. Overall, China's 
markets are opening to foreign trade and the country must be 
pushed to fully comply with commitments it made for entry into 
the World Trade Organization.
    In 2002, China was the U.S.'s seventh-largest export 
market, while the U.S. was China's second-largest export 
market. If this relationship is to continue to grow, China must 
make strides in enforcing U.S. intellectual property and market 
access, especially in the service sector.
    China also has a major impact on the financing of the 
growing U.S. national debt. The fiscal year 2004 budget deficit 
will exceed $500 billion, forcing the U.S. to seek increased 
foreign investment. Currently, China is the third-largest 
foreign holder of U.S. treasuries, as of June 2003, with a 
total of $123 billion. I look forward to hearing our panels 
discuss the impact of the currency peg on this investment.
    In the long run, China and the U.S. will benefit from a 
free-floating Chinese currency that is determined by market 
forces. As we push the Chinese to move in this direction, it 
must be part of an overall effort to comply with WTO rules and 
move toward freer, fairer trade between our two countries that 
can benefit both countries.
    I yield back the balance of my time.
    Chairman King. Thank you, Ranking Member Maloney.
    And now, does anyone in the subcommittee have an opening 
statement? Ms. Biggert?
    Mrs. Biggert. No.
    Chairman King. Mr. Manzullo?
    Mr. Manzullo. Thank you, Mr. Chairman, for holding this 
important hearing this afternoon.
    For the last several years, American manufacturers have 
lost about 50,000 manufacturing jobs per month for the last 38 
months in a row. The unemployment rate in Rockford, Illinois, 
the biggest city in the district that I am honored to 
represent, is 11.3 percent. The erosion of manufacturing jobs 
continues to happen over and over again. Americans can compete 
with anybody in the world. We need fair competition.
    You have four countries in Asia that are purposefully 
fixing the currency. In the Financial Times today, ``Dollar 
lifted as Japan steps in to sell the yen.'' They are not even 
casual about it. That means that the rules of free trade no 
longer apply. What that amounts to is when Asian countries fix 
the currency, that is the equivalent of a 15 to 40 percent 
price advantage over U.S. manufacturers. This amounts to an 
additional 40 percent tax on our exports to China and a price 
break of 40 percent for Asian imports into the United States.
    NAM believes that if this continues, two-thirds of the 
trade deficit with those Asian countries will be sustained. 
These four Asian nations have cost manufacturers $140 billion 
in lost exports. It cost at least a half-million workers their 
jobs.
    And the bleeding continues. To make it even more bleak, the 
Chinese argue that were it not for their generosity in keeping 
their dollar pegged to ours, there wouldn't be anybody in the 
whole wide world that is available to buy our Treasury bills 
and notes.
    So to manipulate the currency, they help destroy American 
jobs, and then they tell us that ``we are buying your T-bills 
to support your debt. And by the way, if you change the rules 
on currency, we won't buy your bills and the rate of inflation 
will go up, and we will also control not only your inflation 
but your lending rate.''
    The United States should not be in a position for China to 
determine the monetary policy of this country. It has to come 
to an end. The massive unemployment in this country continues 
unabated until we get some fair rules with regard to the 
currency. There is only on thing to do. The Chinese understand 
one thing. They have to be pushed against the wall to make that 
yaun float, and the yen too.
    [The prepared statement of Hon. Donald Manzullo can be 
found on page 58 in the appendix.]
    Chairman King. Thank you.
    The gentleman from Vermont?
    Mr. Sanders. Thank you very much, Mr. Chairman. And thank 
you for calling attention today to an issue that many of us 
have been talking about for a number of years, essentially, as 
Mr. Manzullo just indicated, the collapse of manufacturing in 
the United States. In the last 3 years, we have lost some two 
million manufacturing jobs, jobs in Vermont, the Midwest, 
California. It is high time that the United States Congress 
started to pay attention to that issue.
    While I share your concerns, Mr. Chairman, about the 
manipulation of currency, the truth of the matter is that it is 
not the most fundamental issue that must be addressed. The 
issue that must ultimately be addressed is our trade 
relationship with China, permanent, normalized trade relations.
    Now when that agreement was first brought forth, we were 
told by all of corporate America what a great agreement it 
would be and how many new jobs would be created here in the 
United States. I think all of us understand that many of us, 
not me, but others, were sold a bill of goods. Trade policy 
with China has been an absolute failure. We have a trade 
deficit of over $100 billion with China as part of a $435 
billion trade deficit.
    Ultimately, what we must do is while all of us want a 
positive relationship with China, we want to work well with 
China, we have to recognize that our current trade policy has 
failed, and we have to eliminate and do away with permanent, 
normalized trade relations.
    I am happy to mention to you, Mr. Chairman, that I have 
introduced tripartisan legislation with Congressmen 
Sensenbrenner, Pence, Burton, Gene Taylor, Goode, Pascrell, 
Wamp and Michaud to repeal permanent, normalized trade 
relations with China.
    Now in case anybody doesn't know what is going on, let me 
just tell you. Over the last short period of time, we have lost 
180,000 jobs in the textile industry. We have lost 46,000 
steelworker jobs. Our apparel industry is virtually nonexistent 
anymore. One in five jobs among companies producing aircraft is 
gone; 360,000 jobs in industrial machinery; 290,000 jobs in 
electronic and electrical equipment, and on and on.
    Some people have told us in the past, Mr. Chairman, ``Don't 
worry. It is just those blue-collar factory jobs, and Americans 
don't want those anymore. They really want the high-tech jobs, 
the computer jobs. That is where the money is.'' Well, if 
anybody doesn't understand that we are losing those jobs in 
leaps and bounds, then you don't know what is going on.
    What we are seeing now is a huge exodus of information 
technology jobs, computer jobs, high-tech jobs that are going 
out the window. Large companies from Microsoft to many, many 
others are now moving their high-tech efforts to Third World 
countries where well-educated people can do those jobs for a 
fraction of the wages earned in the United States of America.
    So again, Mr. Chairman, while I think it is important to 
look at the currency issue, and I support your efforts there, 
we have got to ultimately get the bull by the horns and say, 
``Our current trade policy has failed.''
    Do we want to trade with China? Yes, we do, but it should 
be in a bilateral way which works well not just for China but 
for American workers as well.
    I am not critical of the Chinese. They have done very well 
in this trade agreement. But it might be a good idea if the 
United States Congress started representing American workers 
for a change, and we can work on that in the months to come.
    Mr. Chairman, thank you very much.
    Chairman King. Thank you.
    Mr. Paul?
    Dr. Paul. Thank you, Mr. Chairman.
    I, like the rest of you, am very concerned about the loss 
of jobs. I think everybody is. The whole country is concerned 
about the loss of jobs to other nations.
    I think most people recognize that it is related to our 
currency problems. Of course, what we are dealing with today is 
whether or not we should put pressure on China to change the 
valuation of the yuan.
    But I think at times we are going at this in an incorrect 
fashion, because we are arguing the case for fluctuating rates. 
We want the Chinese to do something that is inherently not 
normal. Because when we want to measure something, if you are 
building a building or measuring something in the economy, you 
want a sound and dependable unit of measurement.
    China, as a matter of fact, has done well because they have 
had a fixed measurement of value. They have good growth rates, 
and now we say, ``Well, we are not doing so well so we are 
going to put all the blame on China, and we want them to have a 
fluctuating rate.'' That is sort of like arguing that if there 
was one State in this country that wasn't doing as well as 
another one for other reasons that, ``Well, maybe if we had 50 
different currencies, and we could adjust currencies, we might 
be able to achieve something.''
    So instead of going in the direction of having a single 
currency with which we could measure production and goods and 
services, we are going in the opposite direction of blaming a 
currency, whether it is too weak or too strong.
    I think the thing that we fail to see is when we say that 
we don't like what the Chinese are doing, we fail to see the 
other half of the coin, of the benefit of what the Chinese do 
when they buy our debt. I mean, what are the Chinese supposed 
to do with the money? We say, ``Well, buy some goods and 
services.'' But what if we can't compete? There is still the 
balance of payments; so the dollars always come back here, and 
they do a great service because they finance our extravagance, 
our deficit financing.
    Not too long ago, a financier, a financial journalist, 
actually, went over to China, and visited with businessmen. He 
asked, ``Why are you over here? Why are you starting a business 
in China?'' Their answer was very clear, and it should send a 
message to us: ``It is so much easier to start a business in 
China than in the United States, especially in places like 
Massachusetts and California.'' That was the answer. Why? 
Because of the taxes and the regulation and labor costs, all 
kinds of things.
    So maybe sometimes we have to look to ourselves on why we 
make ourselves less competitive through our tax system.
    Mr. Sanders. Will my friend yield for a second?
    Dr. Paul. Yes, I will be glad to yield.
    Mr. Sanders. Does my friend think that it might also be 
easier to do business in China because people are paid 30 cents 
an hour because there are no environmental regulations?
    Dr. Paul. I will take my time back. Yes, I think that is 
obviously the case, but that is not the only reason. There are 
a lot of different reasons why our companies have to leave, and 
that obviously is one of the major reasons. But the point that 
I want to make is that stability in currencies is not a 
negative. Stability is not a negative. It is a positive, 
especially if it could be ever internationalized in a voluntary 
commodity fashion, rather than having fluctuating fiat 
currencies dictated by central governments around the world 
where there is no standard of value. Someday we will have to 
determine that currencies should have a standard of value and 
be something real, or you are going to continue to have trade 
imbalances.
    Chairman King. The time of the gentleman has expired.
    Mr. Emanuel?
    Mr. Emanuel. Thank you, Mr. Chairman.
    The fact is in the 1980s, we had a severe trade problem 
with Japan. In the 1990s, we had a major problem related to 
Mexico, starting with NAFTA. And today, we are facing 
manufacturing job losses that may relate to China's trade 
practices and currency policies.
    The currency issue is certainly important. It is relevant. 
Additionally, there are a host of other issues that are 
relevant. But in my view, what distinguishes the current 
situation from Japan and Mexico is that we are now without an 
economic strategy in the United States focused on retaining 
jobs and investing in our own future to maintain our 
competitive edge.
    The currency issue is relevant, but solving it is not the 
solution to three million lost jobs and to a destruction of the 
industrial base. It does not answer the whole problem as it 
relates to China. I believe in free trade, having worked on 
NAFTA and GATT. The truth is, the premise behind trade and free 
trade and globalization has been that high-tech, high-skilled 
jobs would move north; low-skill, low-tech jobs would move 
south; and that would be kind of where things would settle out.
    But what has happened is the high-tech, high-skilled jobs 
have moved to India, and the low-tech, low-skill jobs have 
moved to China. All of us who would believe in globalization as 
a good thing have got to acknowledge not only has it not worked 
out, but the principal underpinning of globalization has not 
worked out.
    And we need to address it. Rather than having a win-win 
situation, right now we have a win-lose situation here at home. 
And American people will not support a policy if it is seen as 
one where 75 percent of the folks on one side of the ledger are 
losers.
    Although we will deal appropriately here with the issue of 
currency and how that affects trade with China, it is a piece 
of the puzzle but not the whole puzzle.
    Mr. Sanders. Would my friend yield?
    Mr. Emanuel. Sure.
    Mr. Sanders. Is my friend suggesting that the trade 
policies developed by Ronald Reagan, George Bush the first, 
Bill Clinton and this President may have some fundamental flaws 
that need to be addressed?
    Mr. Emanuel. Yes and no.
    [Laughter.]
    Well, you asked me part of the Clinton question so I 
thought I would give you both answers. The fact is, I still 
believe free trade is the right thing to do. What has to go 
with that is an investment in education, job training, and 
health care. The fact is, health care costs that our companies 
are bearing here, running at 20 percent inflation in this 
country, make them competitively disadvantaged to countries 
that don't pay health care and don't have a health care policy, 
or do have a health care policy that doesn't actually fall to 
their bottom line. So I think the right strategy is to make 
investments in our competitive future. Is that my time?
    Chairman King. The time of the gentleman has expired. You 
can finish your thought.
    Mr. Emanuel. But it would be an interesting discussion. I 
don't think the trade policies were wrong. I think the trade 
policies were right. The question is whether we are going to 
have an investment strategy that emphasizes both trade and 
training.
    Chairman King. I thank the gentleman.
    Mr. Ose?
    Mr. Ose. Thank you, Mr. Chairman.
    I am sitting here intrigued by this entire question. It 
seems to me that the subject of the hearing being the exchange 
rate between the Chinese currency and American currency and 
whether or not it has been unduly influenced from the Chinese 
side, there is the exact reciprocal argument that could 
potentially be made relative to the United States, or the value 
of the United States currency, as it relates to every other 
currency in the world except the Chinese currency.
    I would just be very cautious about the arguments one might 
make in favor of the Chinese not being able to manipulate their 
currency in terms of our partners in the WTO and elsewhere 
coming to us and suggesting that by virtue of interest rate 
changes here domestically and the like, we might be 
manipulating our currency.
    Now, while I don't subscribe to Mr. Paul's comments about 
the inadequacies of a fiat currency, I do find his observations 
illuminating in the context of value in exchange for something.
    I do want to point out that Mr. Emanuel is correct from 
where I sit relative to the trade policies that we need. The 
stuff we have done here in the last few months, in the last 
couple of years, is now manifesting itself in terms of economic 
growth. We have had in the last couple of months significant 
growth in retail sales. We are having significant growth in 
after-tax discretionary income.
    I know that the unemployment rates in California, in 
particular, seem to have stabilized. There may be some minor 
fluctuations, but they seem to be stabilized. And if there is 
one State in the union that benefits from trade around the 
Pacific Rim, and consequently with China, it would be 
California, just by its geographic location.
    The other aspect of this is that there is only one class I 
got an A in college, and that was currency valuations. I am 
most intrigued to hear what Secretary Taylor will offer in 
terms of the long-term implications of trying to argue only one 
side of this question relative to Chinese valuation as opposed 
to having to account for both sides of the equation if the 
United States is viewed as also manipulating its currency.
    Mr. Chairman, I yield back.
    Chairman King. Perhaps at the next hearing we can bring in 
your currency professor.
    Mr. Ose. And ask him about the grade.
    Chairman King. Maybe we will turn it over to Judiciary.
    Mr. Kennedy?
    Mr. Kennedy. I would like to join my voice to those who are 
expressing concern with how big of a hit our manufacturers are 
taking and what that is meaning for our jobs. But I would like 
to reject the idea that some are suggesting that the solution 
to that is to close down relations with China or to close down, 
really, freedom or relations with anyone else.
    I am a strong believer that the problems of freedom, which 
we are wrestling with right now, are best solved through more 
freedom. And if you look at it, it has been mentioned by Mr. 
Paul and others, that we have some limitations on freedom in 
this country as well, whether that be the steel tariffs where 
we are imposing a cost on our manufacturers that is not borne 
by anyone else, whether that be the high cost of health care 
where we are paying double in our country for health care as 
other industrialized countries, whether it be the very big 
burden from litigation that we have imposed on our businesses. 
We have a number of costs, and lack of freedom for our 
businesses that we bear here that is hurting us.
    But also no other country of a similar scale in the trade 
environment has a fixed currency like China does. That lack of 
freedom is something we need to address. We need to have that 
be a free-floating currency like everyone else's. And that will 
help us be more competitive, help bring the trade deficit in 
line.
    Other Asian countries, like Japan, are happy to prop up 
their currencies to keep them on a par from a regional 
perspective with China, which is also similarly hurting us.
    Increasingly, it is unhealthy for America to be the sole 
engine of growth for this world economy where we are having a 
huge trade deficit and growing every year. That has to stop. 
The way it has to stop, as economists will tell you, is, and I 
also probably got that A, too, but we have to get these 
currencies to allow for that adjustment.
    One of the concerns I have that may or may not be addressed 
here is, the banking system is said to be, by Glenn Hubbard and 
others in China, not stable enough to really absorb a floating 
currency. Are we going to be addressing that? And with the $360 
billion in reserves that China has built up, can they 
recapitalize that banking system, and move us towards a 
stronger banking system to allow that?
    They also need to open up their markets. We have to have a 
strong, stable world economy that has more engines than just 
the United States, and part of that is certainly opening up 
their markets, having a free-floating currency.
    I thank you, Mr. Chairman.
    Mr. Sanders. Will my friend yield for a second?
    Mr. Kennedy. Certainly.
    Mr. Sanders. Thank you very much.
    Just a question. You used the word ``freedom'' a whole lot 
in your introductory remarks. Is it your understanding that 
freedom is about a company throwing American workers out on the 
street, moving to China, paying people pennies an hour, having 
those people arrested when they try to form a union, and then 
bring that product back into this country tariff-free. Is that 
what you are talking about as freedom?
    Mr. Ose. Would the gentleman from Minnesota yield, please?
    Mr. Kennedy. Certainly.
    Mr. Ose. If I might just observe, if I were living in the 
early 1900s and was asked that question of an imperial America 
in terms of our ability to go into another country and impose 
an economic doctrine, I would answer in the affirmative to Mr. 
Sanders's question.
    Mr. Sanders. But we no longer live in imperial America. 
Presumably we have moved beyond that phase of our development. 
And I would hope that we don't go backwards to where we seek to 
impose such an economic regime.
    Chairman King. Fascinating discussion, but the gentleman's 
time has expired.
    Mr. Murphy?
    Mr. Murphy. Thank you, Mr. Chairman.
    I am looking forward to hearing the testimony especially 
from my colleague from Pennsylvania, Congressman English. But 
as part of this, in historical perspective, although the Cold 
War has long been over, we are still very much in a battle 
between communism, socialism and capitalism, that neither 
communism nor its cousin, socialism, has been able to survive 
in a capitalist world and create jobs and pay people decently 
without certain manipulation.
    And those manipulations from government control and central 
control, which oftentimes run roughshod over environmental 
issues, run roughshod over paying people decent wages and safe 
workplaces are part of what allows the Chinese to have 
workplaces where they can have goods manufactured at much lower 
cost than in America.
    Now as long as there are Americans, of course, who are 
looking for less expensive goods, they have a marketplace here. 
And I suspect they will continue to do that, and that is part 
of the thing that we want to protect in a capitalist 
marketplace, to allow people access to goods.
    That being the case, we also have to recognize that it does 
no good over the long run for us to destroy our own 
manufacturing sector in the meantime. If one looks historically 
at anyone who has done this, where they will be in a 
competitive position, a tradition you have seen time and time 
again is, you move into a marketplace, you sell goods lower, 
you destroy your competitors, and then you can go ahead and 
raise the prices, or you control the marketplace. So in the 
long run, I don't think that is helpful for America.
    We see some of these manipulations, for example, in steel. 
We have to remember that steel is a manufactured product. And 
we look at the kind of things taking place now with tariffs, 
and we have to remember that in America we are so good at 
producing steel at perhaps one or two persons per ton, but I 
believe in some Asian countries it is maybe 14 or 15 people per 
ton it takes, and you have to do that by manipulating jobs and 
manipulating currency.
    I think this is a serious issue that we have to look at. 
What is the long-term impact not only upon our jobs and our 
manufacturing base, but long-term impact upon our own safety 
and security with jobs and so on?
    I am looking forward to hearing the comments made by 
Congressman English and the solutions he is proposing.
    Thank you, Mr. Chairman.
    Chairman King. I thank the gentleman.
    I thank the members for their opening statements.
    On the schedule, we are going to have votes at about 3:30 
p.m. I also understand that the two Secretaries from Commerce 
and Treasury have to leave here by 3:30 p.m. So what I would 
like to do is ask Congressman Green and Congressman English to 
make their statements, and then ask if the members of the 
committee would defer questioning the two members so we can get 
right on to the administration officials.
    With that, I would like to acknowledge Congressman Mark 
Green and Congressman Phil English, both of whom really are 
responsible for this hearing being brought in the first place. 
I want to thank them for their input, for their long-time 
interest in this issue.
    I will ask a member of the full committee, Congressman 
Green.

STATEMENT OF HON. MARK GREEN, A REPRESENTATIVE IN CONGRESS FROM 
                     THE STATE OF WISCONSIN

    Mr. Green. Thank you, Mr. Chairman, Ranking Member Maloney, 
distinguished members of the subcommittee, for not only holding 
this very important hearing, but also I was very interested to 
hear the discussion we had leading up to this.
    Obviously, the questions of manufacturing job losses go 
well beyond currency issues. I think manipulation of currency, 
because it is the jurisdiction of this subcommittee, but also 
because it represents a concrete issue, a tangible issue, that 
we can act upon and take action on and have an immediate impact 
it makes it so very important.
    We have all heard a lot about the loss of the American jobs 
in the last few years. Obviously, this news has been terrible. 
We have been losing jobs for 38 consecutive months. While few 
sectors seem to escape the downturn, manufacturing has been hit 
especially hard.
    In Wisconsin, we have lost over 60,000 manufacturing jobs 
in these last 3 years. We have seen some of our oldest and most 
established companies, such as Mirro and even Evenflo buckle 
and finally break under the pressure. As a result, whole 
communities in my state have been thrown into turmoil. Many 
families in my district are facing, at best, an unsettled 
future.
    As I have said, there are a lot of factors that contribute 
to the flight of our manufacturing jobs. I think all of these 
factors do have to be addressed. But I believe that an 
important concern is the unfair advantage by some East Asian 
countries, particularly as we have all said already, the 
People's Republic of China. The unfair advantage that they have 
been creating for their manufacturers through a policy of 
currency manipulation is one that we must take up. This policy 
is unfair. It is anti-competitive. It is anti-freedom. And it 
is costing us jobs.
    It is not the only factor. Again, it may not even be the 
largest factor. But it is one that we should address, and if we 
can address it, I believe it would provide an immediate benefit 
to manufacturing and manufacturing jobs in this country.
    As some have already mentioned, since 1994 China has pegged 
its currency at 8.3 yuan to the dollar. The goal behind this 
effort is simple and intentional: to drive exports and fuel 
economic development. The Chinese success in this policy has 
been remarkable and costly. Our trade deficit with China has 
grown from $20 billion in the early 1990s to an estimated $125 
billion this year. Our ratio of imports to exports in China 
stands at about 6 to 1, while in the same period, U.S. 
manufacturers have struggled to compete with China's economic 
surge.
    Fueled by an exchange rate policy that some economists and 
manufacturers estimate makes Chinese products 15 to 40 percent 
cheaper compared to U.S. goods, many manufacturers have found 
it nearly impossible to compete, no matter how efficient they 
become, no matter how much they are able to accomplish through 
cost cutting.
    In the last several years, the world has stood by as China 
has promised that change is forthcoming. We even helped bring 
China into the world economic community and WTO with the 
commitment that they would live up to international rules of 
fair trade, including reforms of their currency policies. 
Unfortunately, this has not been the case, and I believe that 
we can no longer afford to wait to see if these promises will 
ever be kept.
    Now, if Congress could pass a law requiring China to at 
least partially float its currency, I would introduce one 
tomorrow. Unfortunately, Congress does not have that luxury, 
and even more unfortunately, the Chinese know it. Earlier 
today, Congressman Manzullo and I had the opportunity to meet 
with senior Chinese officials to talk about the problems that 
we are seeing in our bilateral trade relationship, including 
the problems of currency manipulation.
    Their response was to say that they heard what we had to 
say and they appreciated our point of view. That is all they 
said, they said no more. Why? Because they know that we cannot 
pass a law today that would force them to float their currency.
    There are steps that we can take, however. One thing we can 
do is pass a law to try to offset the advantage that the 
Chinese are providing for themselves through currency 
manipulation. In fact, Congressman English, Congressman 
Ballenger, and I have already introduced such a bill. This 
legislation is H.R. 3058, the China Act.
    Under this legislation, the Secretary of the Treasury is 
required to analyze whether China is, in fact, manipulating its 
currency to achieve an unfair advantage in trade. If in fact 
manipulation is found, the Secretary is directed to levy 
tariffs in a percent equal to the degree of manipulation. For 
example, if the Secretary finds what some have suggested, a 40 
percent advantage, there would be a 40 percent tariff on 
Chinese goods coming into this country.
    Such a high tariff would almost certainly help offset the 
unfair gains that Chinese producers have been receiving. Most 
importantly, this legislation sends a clear message to other 
countries that we are prepared to take bold action. I know this 
committee does not have jurisdiction over this legislation, but 
I am hopeful that members will work with me, Congressman 
English and others to pass this legislation through the House.
    Make no mistake, we understand that this is tough medicine, 
that it is harsh medicine. But we think that tough medicine is 
important right now because we do need to send a signal of 
strength and impatience.
    For those who oppose this legislation and our approach, I 
would ask them, quite frankly, for their alternatives. If we 
all agree that there is a problem of currency manipulation, and 
if people don't support the approach that Congressman English 
and I have taken, then what is the approach that we should 
take? What steps should this Congress take to try to level the 
playing field?
    Getting China to reform its currency policies is going to 
require a full-court press, more than just Congress. I am 
pleased that the Bush administration has taken some actions and 
that they also support more flexible currency, a more floating 
currency for China. I think that is an important step. I look 
forward to continuing to work with the administration in 
ensuring that this body is doing everything it can to enhance 
their efforts.
    Our legislation is a powerful and appropriate tool. I 
think, at the very least, it will help convince China that the 
time has come now for action, no more stalling, no more 
delaying, and no more waiting.
    Mr. Chairman, thank you once again for allowing me to 
testify. I appreciate it.
    [The prepared statement of Hon. Mark Green can be found on 
page 56 in the appendix.]
    Chairman King. I thank the gentleman for his testimony and 
for the interest he has shown in this throughout.
    And now the gentleman from Pennsylvania, Mr. English.

 STATEMENT OF HON. PHIL ENGLISH, A REPRESENTATIVE IN CONGRESS 
                 FROM THE STATE OF PENNSYLVANIA

    Mr. English. Thank you, Mr. Chairman, Madam Ranking Member, 
distinguished members of the subcommittee. It is a real 
privilege to be able to appear here today to explore what I 
believe to be substantial negative effects to the U.S. economy 
as a result of Chinese monetary policy. I want to thank you all 
for the opportunity to testify before you today, and especially 
thank you, Mr. Chairman, for having the foresight to schedule 
this hearing on something so topical for our economic future.
    When President Clinton approved China's entry into the WTO 
in 1999, many believed that a new era of vast opportunity for 
U.S. businesses and workers had been opened. Those in Congress, 
like myself, who were skeptical that this opportunity would not 
come without substantial risks, voted to grant permanent normal 
trade relations to China only after insisting that special 
safeguards relating to Chinese imports be included.
    Looking back from China's accession to the WTO until this 
point, I would like to convey a clear message. Few of the 
benefits intended for America have been realized as a result of 
this Chinese accession to the WTO because China has not abided 
by the terms of their international commitments. And while the 
current administration has begun to develop a comprehensive 
strategy to ensure China plays by the rules, these steps need 
to be accelerated, strengthened and reinforced.
    China has pegged its currency, the yuan, at a rate of 
approximately 8.3 to the dollar since 1994. As a result of this 
peg, other major currencies in East Asia have also been under 
tremendous pressure to intervene by infusing massive amounts of 
foreign currency into their reserve accounts or manipulate 
their currency to maintain stability.
    If China were to freely float its currency, it would deny 
other Asian countries a convenient excuse for manipulating 
their currencies. This would bring about a revaluation of Asian 
currencies against the dollar, and for that matter, against the 
euro, which is needed to restore a balance among global 
currencies and reduce the threat of a hard landing for the 
dollar.
    Misalignments in currency, particularly in the case of 
China, adversely affect the benefits gained from trade 
concessions. In fact, misalignments in currency caused by 
government policies intended to maintain an unfair trade 
advantage can impair and even nullify trade concessions.
    Many economists estimate that the Chinese yuan is 
undervalued against the dollar by as much as 40 percent. 
Essentially this amounts to a 40 percent subsidy on all Chinese 
exports to the U.S. and a 40 percent barrier on all U.S. 
exports to China. U.S. exports to China currently face an 
average bound tariff of 15 percent.
    If recent estimates of China's currency undervaluation are 
correct, the effect of a free and open currency market would be 
more than twice as large as the effect of eliminating every 
tariff that China imposes on U.S. imports. Therefore it is 
imperative that countries allow their currencies to reflect 
their true value, or else all of the benefits of bilateral 
trade will be compromised.
    Because China's currency is pegged to the dollar and other 
currencies have readjusted against the dollar, the economic 
effect of China's currency policy to the United States is more 
pronounced. To illustrate the point, since February the dollar 
has fallen by approximately 25 percent against the euro, but by 
10 percent or less against the yen and most other Asian 
currencies. The dollar has, of course, remained unchanged 
against the yuan. At the same time, China's net exports to the 
U.S. have grown rapidly, but China's trade surplus with the 
world as a whole has actually been falling. It is down sharply 
this year.
    This strongly suggests that China's currency regime is 
contributing strongly to the rapidly ballooning trade imbalance 
between the U.S. and China. The U.S.-China trade deficit is 
projected to reach more than $120 billion in 2003, $17 billion 
over the previous year, and the largest bilateral trade deficit 
in the world. This is precisely why the practice of maintaining 
currency to obtain an unfair advantage in trade is illegal 
within the frameworks of two international bodies, the World 
Trade Organization and the International Monetary Fund, as well 
as U.S. law.
    While each provision contained within international or 
domestic law defines this highly destructive practice slightly 
differently, the end goal of each provision of law is the same: 
to provide a mechanism to countries which play by the rules, to 
address the egregious practice of currency manipulation and 
thereby restore the benefits of free trade.
    As I have studied this issue further, Mr. Chairman, I found 
that the international mechanisms to make this adjustment are 
flatly inadequate. For this reason, I have recently introduced 
along with my colleague, Mr. Green, and Representative Cass 
Ballenger, H.R. 3058, the Currency Harmonization Initiative 
Through Neutralizing Action Act of 2003.
    While there have been multiple bills and resolutions 
introduced in Congress on this topic, the CHINA Act enjoys the 
most robust co-sponsorship, currently supported by over 60 
members of the House of Representatives. The premise of the 
CHINA Act is straightforward. It requires the Secretary of the 
Treasury to determine if China is manipulating its currency to 
gain an advantage in trade.
    If the Secretary finds manipulation is occurring, then he 
is directed to impose a tariff equal to the degree of 
manipulation on all imports from China. This is in addition to 
any existing tariff, or any other existing findings, like 
antidumping provisions, on Chinese products. This is a measure 
that actually levels the playing field. It strips China of its 
ability to give itself an arbitrary advantage. It is a flexible 
tariff, and it can be adjusted to meet the actual extent of the 
distortions from the artificial undervaluation of the yuan.
    While I understand that participation in an open and fair 
global economic system is essential to U.S. economic prospects, 
when China breaks the rules the U.S. suffers the consequences.
    Through observing the direct effect China's state-sponsored 
mercantilism has had on my district in northwestern 
Pennsylvania, it is very clear to me that China's currency 
regime is neutralizing gains made through trade liberalization, 
heavily contributing to our bilateral trade deficit with China, 
subsidizing Chinese exports to the U.S. and taxing U.S. exports 
to China.
    Of potential greater consequence, however, is that this 
type of blatant disregard for international trade law will 
erode support within the U.S. for the WTO and the multilateral 
trading system.
    Very simply, Mr. Chairman, Congress must ensure that the 
U.S. maintains the ability to police our own markets and force 
others to play by the rules.
    Thank you for the opportunity to present this testimony.
    [The prepared statement of Hon. Phil English can be found 
on page 53 in the appendix.]
    Chairman King. Thank you, Mr. English.
    As I stated before, Mrs. Maloney and I have agreed, because 
of the time constraints, to forego questioning of Congressman 
English and Congressman Green so we can get to the 
administration officials.
    But I do want to thank both of you for the tremendous input 
you have had on this. I want to thank you after the fact for 
all the buttonholing you did of me on the floor earlier this 
year as you were convincing me of the necessity of having this 
hearing, and thank you for the job you are doing for your 
constituents on this very vital issue.
    Mr. English. Mr. Chairman, thank you for you farsighted 
leadership.
    Chairman King. Now, if the second panel will step forward 
please?
    I want to thank Under Secretary Taylor and Under Secretary 
Aldonas for being here today. I realize the time constraints 
you are under. Rather than go through introductions or anything 
else, I just want to welcome you to the committee and thank you 
for being here.
    I will give it to Secretary Taylor.

     STATEMENT OF HON. JOHN B. TAYLOR, UNDER SECRETARY FOR 
       INTERNATIONAL AFFAIRS, DEPARTMENT OF THE TREASURY

    Mr. Taylor. Thank you very much, Mr. Chairman, for inviting 
me to this important hearing.
    This is the fifth time I have appeared before this 
subcommittee to address various international economic issues. 
Previous testimonies were on emerging markets, developing 
countries, removing barriers to the free flow of capital. In 
each of these cases, I have stressed that the goal of our 
policies is to raise economic growth and increase economic 
stability around the world and, in doing so, benefit the 
American people with more jobs, more security and a better 
life. My testimony today will be no different in this respect.
    The administration's major economic endeavor now is to 
strengthen the economic recovery in the United States. The jobs 
and growth package enacted into the law this summer was 
essential, but there are barriers to economic growth in other 
countries. This is where our international economic strategy 
comes in.
    Our policy towards China is part of this strategy. The 
strategy is to urge the removal of rigidities and barriers 
wherever they exist and to encourage pro-growth, pro-stability 
policies that benefit the United States and the whole world. It 
is a two-track approach of domestic and international. The 
international part is applied both bilaterally and 
multilaterally.
    I am pleased to report that this endeavor is working. 
Economic growth in the United States is picking up 
significantly now after the severe shocks of the terrorist 
attacks, the corporate accounting scandals, and the stock 
market drop of 2000. Global economic growth is also improving.
    There are also notable improvements in economic stability 
around the world. The number and the severity of financial 
market crises are down. Capital flows are up, and interest rate 
spreads are down compared to the late 1990s. This improvement 
is very important for the United States. Greater economic 
stability is essential to creating a long-lasting recovery, 
which is needed for sustainable job growth in the United 
States.
    Despite this progress, we need to do more. During the 
summer months, Secretary of Treasury Snow embarked on an 
international pro-growth tour to Europe, to Asia, including 
China, as I will discuss in a minute, culminating in the annual 
meetings of the IMF and World Bank in Dubai, where he forged a 
new agreement on a new G-7 agenda for growth.
    But now let me address China's economy and its exchange 
rate policy and how it fits into this overall strategy. Free 
market reforms in China have made China one of the largest 
economies in the world. But for nearly 10 years now, the 
Chinese have maintained a fixed exchange rate for their 
currency, the yuan relative to the dollar. In doing so, they 
have accumulated a large amount of foreign exchange. At the 
same time, China has significantly restricted capital flows 
into and out of China.
    With this rapid growth and accumulation of foreign exchange 
reserve, China is now in a position, in our view, to show 
leadership on the important issue of exchange rate flexibility. 
A flexible exchange rate regime would be good policy for China. 
It would allow China to open the nation to capital flows and at 
the same time reduce macroeconomic imbalances.
    We have been urging China to reduce barriers in other 
areas, such as trade and capital flows. As you know, tariffs on 
manufactured goods are scheduled to come down from the average 
of 17 percent now to an average about 9 percent as a result of 
the WTO commitments. I think this should be accelerated. Even 
at 9 percent, China will be well above the United States's 
average and the average of other large economies, which now 
stands around 4 percent. It is important for China to go 
further in reducing these trade barriers as well.
    Secretary Snow has encouraged these changes during his very 
successful trip to Beijing last month. He met with Premier Wen, 
Vice Premier Huang, Central Bank Governor Zhou and Finance 
Minister Jin. During Secretary Snow's visit to China, a number 
of important announcements were made by the China Central Bank, 
including steps to remove restrictions on money and capital. 
They have indicated the intention to move forward towards more 
exchange rate flexibility.
    In addition, following Secretary Snow's trip, a number of 
new economic engagements between China and the United States 
have been discussed, in particular a whole new engagement 
between China and the entire G-7. The first meeting between 
senior officials from the G-7 and the finance ministry in 
Central Bank of China took place in Dubai last week and 
represented a significant degree of exchange on economic 
issues.
    So I am pleased to report, Mr. Chairman and other members 
of the committee, that our efforts to engage in financial 
diplomacy are bearing fruit. Active engagement with China and 
other countries is paving the way towards freer markets. The 
administration's effort to raise growth in the United States 
and abroad, and thereby create jobs at home, is already showing 
signs of success.
    Thank you very much, Mr. Chairman. I will be happy to 
answer your questions.
    [The prepared statement of Hon. John B. Taylor can be found 
on page 85 in the appendix.]
    Chairman King. Thank you, Secretary Taylor.
    I understand Mr. Manzullo wanted to make a motion to have 
his full statement made a part of the record. Without 
objection, so ordered.
    Secretary Aldonas?

     STATEMENT OF HON. GRANT ALDONAS, UNDER SECRETARY FOR 
          INTERNATIONAL TRADE, DEPARTMENT OF COMMERCE

    Mr. Aldonas. Thank you, Mr. Chairman.
    If I might, I would like to submit my full statement for 
the record and summarize my comments.
    Chairman King. Without objection, so ordered.
    Mr. Aldonas. Mr. Chairman, Ranking Member Maloney and 
members of the committee, thank you for the opportunity to 
appear. This is obviously an important topic, and I very much 
appreciate the opportunity to appear to discuss it. I want to 
focus on two aspects of the topic of the hearing, on our trade 
relationship with China and the impact on our manufacturing 
sector.
    I do want to provide a little bit of context at the outset, 
because I think they are facts that are often lost in the 
discussion about our trade with China.
    The first thing is that the United States starts from a 
position of real strength in manufacturing, which is often lost 
in the discussion. The United States remains the largest 
producer and exporter of manufactured goods in the world. 
Standing alone, our manufacturing sector would be the fourth-or 
fifth-largest economy in the world. Our manufacturing sector 
alone is larger than the entire economy of China.
    Productivity and manufacturing, which is the best indicator 
of our future strength, is way up, higher than it was in the 
late 1990s. In fact, in the last 2 years we have seen stronger 
productivity growth than we have at any time since 1960.
    What is more, manufacturing after many months of slow 
growth, as Congressman Manzullo pointed out, is beginning to 
participate in the broader economic recovery. Orders for 
durable goods and the purchasing and managers index, which is 
an indicator of future demand for manufacturers, are up 
significantly.
    Now having said that, there are three statistics which 
generate real cause for concern. The first is the employment 
numbers, which have been discussed; second is the trade 
deficit; and the third is the sharp drop in the share of world 
trade made up by our exports, which is another good indicator 
of our relative competitiveness, our manufacturing sector.
    What drives all three, as you pointed out in your opening 
statement, Mr. Chairman, is the lack of stronger economic 
growth abroad. Now that is not to say that government-imposed 
constraints, like the Chinese currency peg, as John was 
referring to, help the matter. They certainly create a sense of 
unfairness in terms of the trade, which we heard loud and clear 
from manufacturers as we went across the country over the last 
6 months, visiting 23 cities, meeting with manufacturers large 
and small in every industry, basically. And there was no topic 
other than China that was a higher concern from their point of 
view.
    Now having said that, they, too, recognize that growth at 
home and stronger growth abroad were the keys to a broader 
manufacturing recovery. In terms of growth abroad, I do want to 
pick up on the comments of Congressman Kennedy. The problem 
there is, frankly, slow growth in Europe and Japan and certain 
other Asian trading partners that have not yet fully recovered 
from the 1997 financial crisis.
    It doesn't happen to be China. China, together with the 
United States, has accounted for most of the world's economic 
growth this year. China's imports and our exports to China have 
risen significantly despite the currency peg. China's trade 
with the world is roughly in balance as has been noted. Our own 
exports are up 15 percent per year and are growing faster than 
exports to any other destination.
    Now could we do better? Absolutely. And this is where I 
think the peg comes into play.
    I hope no one operates under the illusion that China 
represents a market economy. Many of the drivers of the economy 
and the production of manufactured goods remain in state hands. 
What that means in practical terms is that Chinese companies 
will not face the same capital market pressures that ours do to 
turn a profit, which may be the ultimate subsidy in the system.
    In other words, the common concern identified by U.S. 
manufacturers about the lack of a level playing field went 
right to the heart of both the issue of the exchange rate peg, 
but more fundamentally about the underlying operation of the 
financial markets, which I think is the key that John really is 
turning to. I know that the Treasury has been working on that 
with the Chinese.
    The effect on trade is that a heavy investment in China 
funded by state-owned banks has led to a great deal of capacity 
on the market that continues to pump out manufactured goods 
that are looking for an outlet.
    The question is, how do we respond. John addressed the 
currency side of the equation. I want to say that there are two 
things underway on the trade side. First, we are using every 
opportunity to press the Chinese for full compliance with their 
WTO commitments. The first year following China's accession to 
the WTO, I personally think that both the administration and 
Congress showed an extraordinary amount of patience as China 
worked to pass the literally thousands of new laws that were 
needed to bring the country into compliance with WTO rules.
    But now, as we move deeper into the second year of China's 
participation in the WTO, we need to see the actual enforcement 
of those laws and compliance with WTO rules in other areas. 
Toward that end, the President, Secretary Evans, Ambassador 
Zoellick, Secretary Snow, certainly John, have all made that 
point vigorously to their counterparts in China, as have I.
    Secretary Snow's recent visit represented the start of a 3-
month process in which the administration will be regularly 
engaged in discussions with our Chinese counterparts on these 
issues, including meetings between the President and President 
Hu, at the time of the APEC meetings, Ambassador Zoellick's 
trip to China.
    The Secretary and I will be going to China at the end of 
the month. We will then be followed up with a visit of the 
Chinese premier here in December, as well as a meeting of the 
Joint Committee on Commerce and Trade, at which point WTO 
compliance will be front and center in our discussions.
    Second, we also have been extraordinarily vigilant with 
respect to the injurious effects of other forms of government 
support for Chinese industry. Over 50 percent of the 
antidumping actions initiated by this administration focused on 
imports from China. Nonetheless, I do think we can do a better 
job.
    That is why one of the principal recommendations that we 
will be moving forward with is the creation of an unfair trade 
investigation scheme, which is to adopt a proactive approach 
with respect to trade with China, as well as our other trading 
partners, since this isn't a problem with China alone.
    The point is that we do not have to wait for a petition to 
know that there are unfair trade practices going on, that those 
ought to be investigated when we know of allegations, that we 
ought to certainly be going after the issues that we face with 
our trading partners. And there certainly are industries, like 
tool and die, that we have talked about, Mr. Manzullo, where 
you can see the net effect of a lot of government involvement 
in the Chinese economy, not just the currency peg in terms of 
creating an unlevel playing field.
    Let me stop there, and I will be happy to answer any 
questions you have.
    Thank you.
    [The prepared statement of Hon. Grant Aldonas can be found 
on page 60 in the appendix.]
    Chairman King. Thank you very much.
    In view of the time constraints, I am going to limit myself 
just to one question, actually the same question to each of 
you.
    If China did float its currency, how do you respond to the 
argument that traders would dump dollars on the world market 
and lower the value of American investments, corporate bonds? 
And also, what impact would it have on manufacturing service 
sectors in this country? Would it necessarily increase the 
demand for U.S. exports? So I guess I am asking you to give the 
downside of the free-floating currency.
    Mr. Taylor. Mr. Chairman, the United States treasury 
markets are resilient. They are deep. They are liquid. The 
amount of treasury securities that are held in China is under 4 
percent, by our best estimates, of our total amount of 
securities. And the total amount of reserves that the Bank of 
China holds are much more than our treasury securities. So we 
emphasize the great attractiveness of our treasury securities 
and will continue to do so. We don't see that as an issue.
    With respect to the impacts on the United States economy, a 
change in price affects buyers and sellers in different ways. 
It is difficult to estimate exactly how much a change in the 
yuan would have on the United States. In fact, there is large 
debate about how much overvaluation there is of the currency 
amongst economists. Both Congressman Green and Congressman 
English indicated a significant range of uncertainty there, and 
I would think it is even wider----
    Chairman King. Actually, the number they mentioned was 40 
percent, I believe.
    Mr. Taylor. They talk about a range. I believe it was 15 to 
40--a large range. I think it is even wider than that.
    Chairman King. Secretary Aldonas?
    Mr. Aldonas. Thank you.
    First of all, just to pick up on John's comment, obviously 
what drives investment in the United States, including 
investment in manufacturing, actually has a lot more to do with 
the relative rates of growth between our economy and other 
economies. To the extent the United States is growing at a 
pretty fast clip right now means it is a more attractive 
investment at the end of the day. I think that is part of the 
attraction of investors, whether it is in T-bills or whether it 
is in foreign direct investment.
    The second thing is, would a change in the currency 
increase exports? I think it is very much about what you would 
see as the knock-on effect in the Chinese economy if in fact by 
de-linking the peg or revaluing they slow their economic 
growth. Odds are it would have a negative impact on our 
exports, frankly. And that is, I think, the risk that many 
point to.
    We have an interest in a stable and growing Chinese economy 
as long as the terms of trade are fair. That is why I have a 
tendency to look more to the tools that we have and grapple 
with the problems that are facing individual industries than 
look to a change in the currency peg necessarily to improve our 
exports.
    Chairman King. Ms. Maloney?
    Mrs. Maloney. Thank you, Mr. Chairman.
    Secretary Taylor, I am trying to understand what you 
intended and what was accomplished by the U.S.-led statement on 
exchange rate flexibility at Dubai. In some ways it seems to 
have created more confusion than anything with little agreement 
even within the G-7 countries about what the statement means.
    If it was indeed an effort to achieve more exchange rate 
flexibility globally, then why do you say in your testimony 
today, ``There are benefits from a hard exchange rate,'' and 
``The choice of an exchange rate regime is one where country 
ownership is particularly important''?
    After the meeting, the dollar declined after the release of 
the Dubai statement. Was this a desirable outcome, for the 
dollar to decline?
    Mr. Taylor. Well, let me answer your question in four 
different ways.
    First, I think it is important to understand exactly what 
the statement was. If I could do so, Congressman Maloney, I 
would like to read the statement.
    The ministers and Central Bank governors of the G-7 stated, 
``We reaffirm that exchange rates should reflect economic 
fundamentals. We continue to monitor exchange markets closely 
and cooperate as appropriate. In this context, we emphasize 
that more flexibility in exchange rates is desirable for major 
countries, for economic areas to promote smooth and widespread 
adjustments in the international financial system based on 
market mechanisms.''
    The second point I would make is, there was strong 
agreement among the ministers and Central Bank governors who 
made this statement in Dubai. I was at the meeting and I can 
attest to their support for this statement.
    The third point I would mention is that Secretary Snow 
indicated at the time this statement was released that he 
reiterated the strong-dollar policy for the United States.
    And the fourth thing I would like to emphasize very 
strongly here is this statement was part of a larger document, 
still pretty short, just a little over one page, but a larger 
one nonetheless, that emphasized a whole new agreement on 
raising economic growth in the G-7.
    For the first time, the ministers and the Central Bank 
governors agreed on what they called the G-7 agenda for growth. 
Under this agenda for growth, each of the countries are 
endeavoring to take policies that raise growth in their own 
countries It is very important to the United States that growth 
rise in Japan and in Europe and in Canada, the other members of 
the G-7, and I think this part of the statement is very 
significant, this so-called G-7 agenda for growth.
    I would be happy to talk to you more about that.
    Mrs. Maloney. But what happened after the Dubai statement 
was that the dollar declined, so when all the G-7 countries 
voted together, were they voting together to bring down the 
dollar, because that was the outcome?
    Mr. Taylor. As I say, the second part of what my answer to 
your previous question was that Secretary Snow reiterated a 
strong-dollar policy in Dubai.
    Mrs. Maloney. Well, also, both of you testified about the 
recent trip of Secretary Snow that he made to China where he 
met with many important Chinese leaders, and he prodded the 
Chinese to float their currency.
    Besides being courteous and having many important meetings, 
did the Chinese give the administration or our country, any 
timetable for when we can expect real progress in this 
direction?
    Mr. Taylor. There is not a timetable.
    Mrs. Maloney. Did we win any concessions during the trip, 
where you can point to an action the Chinese will take at a 
given point in the future?
    Mr. Taylor. I think there are a number of significant 
actions that the Central Bank announced, mainly related to what 
I would call preparatory actions related to the exchange rate, 
such as beginning to remove some of their restrictions on 
capital flows, the restrictions that Chinese citizens have to 
hold foreign currencies, which affects currency values. A long 
list of things was put out in terms of announcements along 
these lines.
    In discussing the issue with China, Secretary Snow has 
noted, I have noted, that there is clearly an intention to move 
towards a flexible exchange rate at some time. There is not a 
deadline. There is not a time line, so I can't give you that. I 
do feel that this intention has been there for a while. My 
sense is that perhaps it could have even come earlier were it 
not for the 9-11 attack, the other uncertainty that occurred in 
the world economy.
    So, you can't put time lines on things like this because 
events occur which affect time lines. But again, I think it is 
promising about the intentions.
    Mrs. Maloney. So the intentions are there, but there is no 
concession, no time line and really no decision when they will 
take action.
    Mr. Taylor. As I just said, there are a number of 
announcements and changes in policy that are related to 
flexibility in the Chinese economy, related to the financial 
mark of flexibility. And those had to do with the gradual 
removal of capital controls. I think that is very significant.
    Chairman King. The gentleman from Illinois, Mr. Manzullo.
    Mr. Manzullo. Thank you.
    First of all, I want to thank both of you gentlemen for the 
tremendous work that you have been doing. John Snow is just a 
remarkable individual.
    And Grant, you had one of those hearings in my 
congressional district and you got an earful there. But we told 
you that was going to happen and you knew that prior to coming, 
and we appreciate your sensitivity.
    I just have one remark and a question. There are a lot of 
things that we can do to bring about and narrow the trade 
imbalance. We have a horrible system of issuing visas to 
Chinese who want to come to this country to buy stuff. This is 
scandalous. And, Grant, how many times do we call you with a 
list of people? We are not talking about export-controlled 
items, things that are not subject to a validated export 
license.
    Every Chinese purchaser is presumed to be a bad person by 
our government. I am the chairman of the American-Chinese 
Inter-Parliamentary Exchange. We are hosting them. They are in 
town this week, and they said, ``There is a lot of stuff we 
want to buy from you,'' and it is not even high-tech stuff, 
``but we can't even come to your country to shop.'' Now, whose 
fault is that? The Chinese? That is the fault of our own U.S. 
government.
    The task force that we have put together, and I know, 
Grant, you have helped us out on it and Treasury is engaged and 
everything. We have got to loosen up dramatically. We need a 
yearly multi-visit businessperson's visa to allow people to go 
back and forth freely for the purpose of looking at stuff to 
buy.
    How stupid our own government is that we close the doors to 
people who want to buy stuff from us, and then we end up 
complaining that we are not selling enough stuff to the 
Chinese. It is just absurd, and I know both of you agree with 
us.
    In an article in today's Financial Times Japan intervened 
again, they are not even subtle. The New York Federal Reserve 
had to come in and conduct the sale for the Bank of Japan 
because by law it was obliged to do so. The question is, what 
plan does the administration have to stop this type of overt 
currency manipulation by Japan?
    Mr. Taylor. We have a very good set of engagements with 
Japan on their policies, with the finance ministry, with the 
Central Bank.
    What we have stressed in the last year-and-a-half or so is 
the importance of Japan to grow more rapidly. The way we have 
emphasized that is to do two things related to the financial 
markets. One is to for the Bank of Japan to raise the growth 
rate of the money supply, to put the monetary policy, if you 
like, which is more conducive to growth in Japan, and the 
benefits that higher growth in Japan will have for the United 
States's job creation, as well as the rest of the world, and 
Asia in particular.
    The second part of it is to deal with the problems in the 
banks, the nonperforming loan problems. These are very much 
related to your question, and in fact a significant part of 
this is that they are actually making some changes here which 
are very, very good.
    The new Central Bank governor, Governor Fukui, has had 
increase in money growth which is substantial. The person in 
charge of the financial market regulations, Minister Tanaka, 
has put on a very good reform plan under Prime Minister 
Koizumi's guidance and leadership. That is beginning to show 
up, and for the first time in a long time we see some signs of 
the harmful deflation in Japan starting to be eliminated, 
starting to come back, starting to diminish.
    On top of all this, we see some strong growth in Japan, as 
I indicated in my written testimony. So that has been our 
focus.
    The issues with respect to the currency are the kind of 
things that are being done there, the kind of things that are 
reflected in the G-7 statement that I read for Congressman 
Maloney, which was established in Dubai.
    So that is the strategy. We think it will work, and there 
are already signs of it working. As always in changes in 
economic policy, it doesn't occur overnight, but we think there 
is really good progress being made here.
    Mr. Aldonas. Congressman, if I could add just a couple of 
comments to that. One is really to compliment John and 
Secretary Snow, and I have worked in this area for over 25 
years at this point. This Treasury, more than any other I have 
seen, worked with, whether I was in the private sector or in 
public service. If there was a point at which we could divorce 
finance from trade back in the 1940s and live in what we 
thought was a fixed exchange rate regime, that ended a long 
time ago, and obviously the dialogue that has gone on and the 
efforts that John has undertaken to bring these issues back to 
the forefront and really allow us to grapple with the 
underlying problems.
    In fact, I think John's point about working with both the 
Japanese and the Chinese on their financial markets is in the 
end the answer in terms of trying to open up the market 
further, and that has real value for our economic growth and 
the growth of exports.
    The other point I wanted to raise was in direct response to 
what you said, Congressman Manzullo, about the other things 
that our exporters worry about and that our manufacturers worry 
about. What would probably surprise everybody is the degree to 
which we heard more comments during the roundtables about 
keeping our own side of the street clean, in effect, than we 
actually heard about the level playing field. The arguments 
about the level playing field were intense in a way that some 
of the others were not.
    But by and large, most of the comments recognized we have 
things like a visa policy which gets in the way of our 
exporting, that we have things in terms of costs that our 
manufacturers bear that we need to be observant about otherwise 
we are not going to be creating the most favorable place to 
invest in manufacturing. And those are things that are the real 
levers we have in our own hands and know how to use.
    Chairman King. The gentleman from Vermont?
    Mr. Sanders. Thank you very much, Mr. Chairman.
    And thank you very much, guests, for being with us today.
    Mr. Aldonas mentioned phrases like the fact that the United 
States today still has the most powerful manufacturing sector 
in the world. But I think he also understands that in the last 
3 years we have lost 2.7 million manufacturing jobs in that 
powerful sector. According to The Washington Post, we have lost 
16 percent of the jobs in our manufacturing sector.
    I hope that instead of just talking about how wonderful we 
are doing, he would look at some of the real crises that exist 
in that sector.
    According to the U.S. Business and Industry Council, this 
is a business organization, Beijing has a trade surplus with 
the U.S. of about $120 billion this year. The rule of thumb is 
that every $1 billion in the trade balance represents the gain 
or loss of 10,000 jobs. Using that standard, the trade deficit 
with China could explain the loss of more than one million 
American jobs. Now here is another point. According to 
Forrester Research, we will lose 3.3 million high-tech jobs in 
the next 12 years in the areas of life sciences, legal work, 
art design, management and so forth and so on.
    I see us as being in a very serious crisis. I see the 
situation, according to these forecasters, is actually getting 
worse.
    Now my questions for the gentlemen are as follows. What 
does the Bush administration say to General Electric, IBM, 
Motorola, Kodak, Intel and dozens of other corporations who are 
throwing American workers out on the street and moving to 
China, where they are hiring people at 30 or 40 cents an hour? 
What do we say to those guys? Is that good public policy? Thank 
you very much, General Electric.
    Furthermore, it is not just the loss of jobs. It is the 
loss of wages in the private sector in the last 30 years. 
Today, a worker in the private sector is earning 6 percent less 
in real wages than was the case 30 years ago. What is your 
attitude toward large corporations who are throwing American 
workers out on the street and moving to China?
    You talk about a level playing field. Maybe I am living in 
a different world, but in China, workers make 30 or 40 cents an 
hour. How is that a level playing field with workers in the 
United States who in the middle class are trying to make $15 or 
$20 an hour? What does a level playing field mean when a worker 
in China goes to jail when he or she tries to join a union? 
What does it mean when there are virtually no environmental 
regulations in China, causing havoc environmentally in that 
country and perhaps for the rest of the world? So those are my 
questions.
    What do you guys say to those corporations who throw 
American workers out on the street and go to China? Tell the 
workers of Pennsylvania or Vermont about the level playing 
field that exists when workers make 30 cents an hour.
    That is my question.
    Mr. Aldonas. If I could, Congressman, the first thing is, 
to be very clear with China, is that where there are issues 
like the sorts of things they adopt with respect to labor 
rights, that the policy of the administration is they have to 
reform. We have a conversation with these guys regularly about 
the human rights aspects of these policies.
    Mr. Sanders. And that conversation has been going on for 20 
years, and Chinese workers are going to jail when they form a 
union. But I don't want to let you off the hook that easy, 
Grant, if I might. I want you to get back to the basic issue.
    Mr. Aldonas. Sure.
    Mr. Sanders. Tell me about the level playing field when 
workers go to jail for forming unions and when they make 30 
cents an hour. If you were a corporate executive, would you 
move to China?
    Mr. Aldonas. Congressman Sanders, two points. One, I do 
know that we are living in a global economy.
    Mr. Sanders. Yes.
    Mr. Aldonas. And to do that, to succeed locally, you are 
going to have to succeed globally.
    Mr. Sanders. Not necessarily.
    Mr. Aldonas. Yes, and that means what we are going to have 
to do is get the fundamentals right and we are going to have to 
allow our companies to get their costs down. And indeed what 
has happened in that global economy is real economic geography 
has reasserted itself, which means a lot more is going to be 
done closer to where consumers are.
    So to give you an example on some figures that go with it, 
when U.S. companies invest in China, there are $60 billion 
worth of sales by the U.S. companies that invest in China in 
China, to Chinese consumers. There are $20 billion of sales by 
U.S. companies that invest in China that export back to the 
United States. Net, in terms of their activities in China, 
there is real value, which means jobs back in the United 
States.
    Mr. Sanders. But how do you talk about jobs in the United 
States, when according to the trade deficit we have probably 
lost a million? Of course, some jobs are being created, but you 
are losing a lot more than you are creating.
    Mr. Aldonas. Well, then we ought to talk about what goes on 
in the context of the labor statistics. I mean, what you have 
is, you have two surveys.
    Mr. Sanders. You have two what?
    Mr. Aldonas. Two surveys that the Bureau of Labor 
Statistics does. One is the establishment survey, which is the 
figure that is commonly cited about the 2.7 million job losses. 
The other is a household survey. And there is always a lag 
between the two surveys.
    What you have right now, and I don't know if you saw the 
column by Allan Meltzer, a professor at Carnegie Mellon, in the 
Wall Street Journal, but he identified the difference right 
now. If you look at the establishment survey, which surveys 
existing businesses, it does not capture start-ups that have 
happened in the last couple of years, they will show $2.7 
million job losses. If you look at the household survey, when 
they survey households and ask are you employed, what it will 
show is there are 220,000 job losses. Not good, but not bad in 
the context of this recovery.
    I see your staff aid seems to be expressing some shock 
behind you. But what I would ask him to do, then, is actually 
go to the Bureau of Labor Statistics and talk to them seriously 
about the two surveys and what the differences are.
    Mr. Sanders. We have $100 billion trade deficit with China. 
Do you agree with that?
    Mr. Aldonas. Absolutely.
    Mr. Sanders. And you see that as the loss of how many jobs?
    Chairman King. I am sorry, the gentleman's time expired, so 
I would allow Mr. Aldonas to answer the question and then move 
on.
    Mr. Sanders. Thank you, Mr. Chairman.
    Mr. Aldonas. What I see is a trade deficit that is 
expanding generally, of which China represents about one-sixth.
    And just to make it a little more poignant, I had to order 
a cell phone recently. I said, ``Look, I am the Under Secretary 
of Commerce for International Trade, get me a Motorola,'' 
because I want one that operates all over the world, right, 
rather than a Samsung or something else. I picked it up and 
turned it over. Guess where it was made?
    Mr. Sanders. Let me guess.
    Mr. Aldonas. Ireland.
    [Laughter.]
    My point is that this is a global phenomenon. And my point 
in saying that is that we have a trade deficit----
    Mr. Sanders. I am glad that you found something in Ireland. 
When I go to a department store, most of the products that I 
find are made in China. I am glad you found Ireland.
    Mr. Aldonas. I am sorry, Mr. Sanders, but my point in 
saying that is that we have a trade deficit which is growing 
because of the relative growth rates in our economy compared to 
others. That is not a China phenomenon alone. My point in 
saying that is not to diminish what we need to do with respect 
to China. It is to make sure that we don't let others off the 
hook as a part of that process. A lot of what John was talking 
about with respect to some other countries in terms of growth 
is the real key to driving a recovery in manufacturing at the 
end of the day.
    Mr. Sanders. Thank you very much.
    Chairman King. Mr. Ose?
    Mr. Ose. Thank you, Mr. Chairman.
    This is perhaps the most interesting hearing I have sat 
through in my 4 1/2 years.
    Chairman King. See, what you are going to be missing, Doug?
    Mr. Ose. Let's go on to my questions.
    [Laughter.]
    Mr. Taylor, do interest rates, relative interest rates, 
affect currency valuations?
    Mr. Taylor. Yes, among many other factors, they do.
    Mr. Ose. There is also productivity.
    Mr. Taylor. Productivity, prices.
    Mr. Ose. Inflation? Inflation affects it?
    Mr. Taylor. Yes, very much so, many factors.
    Mr. Ose. You said something a little bit ago about how 
Treasury had advocated to the Bank of Japan that they increase 
the domestic money supply in Japan. Does domestic money supply 
affect interest rates?
    Mr. Taylor. In Japan, the interest rate is now effectively 
zero because of the deflation. So they are trying to get to a 
situation where inflation is above zero, equal to or greater 
than zero, as they say. And they want to keep the rate of money 
growth up until that happens. Until that happens, the interest 
rates are going to be zero. And so effectively in Japan, it is 
not a direct impact.
    Mr. Ose. It does come around, though.
    Mr. Taylor. Ultimately when you get a situation where the 
deflation is over, which I hope is soon, then it will be more 
back to the natural situation where you have a nominal interest 
rate which fluctuates as in most countries.
    Mr. Ose. So there is a connection between money supply 
activities taken to reflate an economy, a relative inflation 
rate, and ultimately around the circle to interest rates.
    Mr. Taylor. Yes.
    Mr. Ose. The question I have is, in advocating for an 
increase in money supply, is that currency manipulation? 
Because if you affect interest rates, you affect relative 
currency valuations.
    Mr. Taylor. I would answer your question as no. There are 
many, many factors that affect exchange rates. The importance 
of growth of the money supply ultimately is that it will 
increase money growth, it will get translated into higher 
inflation, and higher inflation makes the currency less 
valuable. So in an extreme, extreme situation of very high 
money growth, there isn't going to be an effect on the exchange 
rate.
    What we have noted, after years and years of looking at 
exchange markets, is there are many manufacturers and it is 
always hard to trace the impact of any one. But certainly in 
extreme situations you can see countries, for example, which 
have very high money growth and very high inflation, they have 
depreciating currencies.
    Mr. Ose. Correct.
    Mr. Taylor. We saw that in the past and will in the future.
    Mr. Ose. I would argue that there is a connection. It may 
well be round-about, but there is a connection. And there are 
multiple factors.
    Mr. Aldonas, I find your testimony fascinating, because you 
are out there on the front line, so to speak. Both of you have 
mentioned not only the current account, but also the capital 
flows out of China in terms of the overall net effect. Can you 
expand, if you will, on your estimation of the relative 
importance of capital outflow and the inability of the Chinese 
to freely flow capital out?
    Mr. Aldonas. I really should defer to John on that. I am 
happy to give you my personal view, but I think we should let 
the Treasury speak for the administration with respect to that.
    Mr. Ose. All right. Mr. Taylor?
    Mr. Taylor. The extent to which capital outflows are 
restricted in any country, it effects the currency because it 
restricts the amount that people can buy of other currencies. 
That certainly is not a factor that would affect the pressure 
on the yuan if the changes in the capital restrictions went 
through.
    That is one of the reasons why when we engage with the 
Chinese, when you just talk about the exchange rate, you 
automatically start talking about capital controls.
    Mr. Ose. Let us talk basics here. A restriction on capital 
outflow supports the value of the currency is what you are 
saying.
    Mr. Taylor. Yes.
    Mr. Ose. All right. Now I just asked that question because 
I just want to be very clear on that, because I have heard a 
lot of argument about what is supporting the value of the 
currency right now is demand for Chinese goods. But as you have 
pointed out, the restriction on capital outflow is part and 
parcel of this argument too.
    Mr. Taylor. It most certainly is. I go back to the 
beginning. There are a multitude of factors that affect 
exchange rates, as you know from your course.
    Mr. Ose. Thank you, Mr. Chairman.
    Chairman King. Thank you, Mr. Ose.
    Ms. Hooley?
    Ms. Hooley of Oregon. Yes, thank you, Mr. Chair.
    Mr. Taylor and Mr. Aldonas, thank you very much for being 
here today.
    This is an important issue facing American workers. I would 
venture to say, however, that the reason this issue has 
received so much attention is not the Chinese manipulation of 
its currency, but what is happening to the loss of American 
jobs. People are very concerned what is happening to 
manufacturing in this country and what is happening to jobs.
    So I have a three-part question and a little story to tell 
in between. Aside from the policy of tax cuts and maybe dealing 
with the Chinese currency issue, what else is the 
administration doing to help create jobs?
    And then, I was talking to a gentleman the other day who 
happens to manufacture furniture. He was talking about most of 
the manufacturing in furniture-making having left this country. 
He said at first they went to Mexico, and then they have now 
really left Mexico and gone to China.
    So I want to know what part does this currency issue play 
in the loss of manufacturing jobs? And what other factors are 
contributing to the loss of jobs and manufacturers leaving this 
country that Congress should be aware of or that we can do 
something about?
    Thank you.
    Mr. Taylor. Well, let me start.
    First of all, I think dismissing the tax cuts at the 
beginning is a mistake. I think the tax cuts are an important 
part of what we can do to raise----
    Ms. Hooley of Oregon. I didn't dismiss the tax cuts. I said 
aside from that.
    Mr. Taylor. I just wanted to mention that. Anyway, sorry.
    In addition to that, the health care reform proposals to 
reduce the very high and rising cost of health care will create 
more opportunities for workers. President Bush has emphasized 
the importance of tort reform to reduce the costs on small 
businesses, in particular start-up firms. Of course, it is a 
concern right now; and the medical field as well. Those are 
things that are very important.
    I think from speaking with the international portfolio at 
the Treasury, that getting growth to be high in other countries 
is very, very important. And that is what I have spent most of 
my time on, is getting higher growth not only in China, but 
higher growth in Japan and especially Europe right now.
    Because a number of people have mentioned how the United 
States really cannot and should not be the sole engine of 
growth, because the U.S. economy is doing quite well now as it 
is starting to move ahead. And that is going to create more 
jobs in the manufacturing sector, as in other sectors. But 
growth in other countries, growth around the world, is a very 
important part of this, in my view.
    Mr. Aldonas. If I could add, the first question was what 
else is the administration doing and what has the President 
proposed. One thing I always like to make clear is, the 
President has never said it is only about tax cuts. What he has 
identified are a lot of other drivers in the economy.
    What was interesting about it, Congresswoman Hooley, was 
that it is exactly what we heard from manufacturers themselves. 
When they talked about keeping our side of the street clean, 
what they were talking about were things like health care costs 
and energy costs, tort reform, cost of tax compliance, just to 
give you an example.
    We have an alternative minimum tax that applies to 
corporations in this country. We collect almost no revenue from 
the alternative minimum tax as applied to those. And yet, for a 
manufacturer, what it means is, it used to be illegal to keep 
two sets of books. Now, by virtue of the alternative minimum 
tax, you keep four.
    So you have a dead-weight economic loss that flows simply 
from the cost of compliance. And the depreciation schedules, 
under the alternative minimum tax, deeply erode some of the 
competitiveness and the productivity gains that our 
manufacturers are trying so hard to achieve.
    So what they talked about, and really a number of the 
comments went right to the heart of the agenda that the 
President has put forward about trying to match what the 
private sector has done in manufacturing to cut costs so that 
the government is lowering the burden on our guys as well.
    Ms. Hooley of Oregon. Do you believe that manipulation of 
the Chinese currency is adding to the loss of manufacturing 
jobs?
    Mr. Aldonas. I think we need to be careful about the word 
``manipulation.'' They are maintaining a peg.
    Ms. Hooley of Oregon. Okay, maintaining a peg. Do you think 
that is contributing?
    Mr. Aldonas. I think to the extent that it contributes, to 
the extent that it is currently undervalued, it would mean both 
higher import competition and less of an export market. And 
that has the potential to affect both the competition we feel, 
even if it is simply on the basis of price and there was no 
greater volume in the goods, or in terms of our export 
potential.
    But I always like to think past the exchange rates, because 
it is the fundamentals that drive it that are probably more 
important to be working on. In some respects what Secretary 
Snow and Secretary Taylor have been doing is really to go to 
the heart of the problem. The problem is not so much the 
exchange rate. It is what you have to do with the underlying 
financial markets so that you can have that freedom.
    The thing that I really want to get to is that, and this is 
what I think the hearing is really about, just as you were 
saying, Congresswoman Hooley, is that when there is something 
like a peg, and when another government has intervened in the 
market, it creates a perception of unfairness. And in fact, 
what we see is the friction that comes in the trade accounts.
    One of the reasons we are having trouble with this, and we 
are grappling with some of the pressures on trade, and you see 
folks who have lost their jobs point to this as a problem, is 
simply by virtue of the fact they can see the government 
visibly intervening. I think that is a lot of the issue and a 
lot of what we have to grapple with in terms of trying to make 
sure that we are having this constant agenda with the Chinese 
on trade, on finance, that keeps the spotlight on the problem 
and tries to remove these things, because it is that perception 
of unfairness which drives a lot of the demand for protection.
    Chairman King. The time of the gentlelady has expired.
    Votes have been called. What I would like to do is I will 
be recognizing Mr. Paul to ask one question, then I understand 
that the two witnesses have to leave.
    I would ask if our third panel, Dr. Goldstein and Mr. 
Vargo, can stay around, and we will recess until approximately 
4:15 p.m.
    Ms. Hooley of Oregon. Mr. Chairman, a point of 
clarification, if I could. Mr. Chairman, I just want to add 
something to the record in answer to Mr. Aldonas's comment on 
the household and the establishment surveys of unemployment.
    He said we should ask the Bureau of Labor Statistics about 
the two surveys. I just wanted permission to place into the 
record comments from the Bureau of Labor Statistics 
Commissioner at a recent joint economic hearing endorsing the 
use of the establishment survey as a more accurate measure of 
unemployment in an exchange that he had with Senator Bennett. I 
would like to get the relevant comments and place them in the 
record establishing that as the one that they believe is the 
most accurate on unemployment.
    Thank you.
    Chairman King. I would also like to say to members that 
they can submit questions to the witnesses up to 30 days.
    And with that, Mr. Paul.
    Dr. Paul. Thank you, Mr. Chairman.
    This is directed to Secretary Taylor. Has the 
administration taken a position on this legislation that was 
briefly described earlier, H.R. 3058? Does the administration 
have a position on that?
    Mr. Taylor. No. I have not fully digested it myself.
    Dr. Paul. But it essentially threatens the Chinese if they 
don't do what we want. We put on a possibly a 40 percent 
tariff. In general, would you support something like that?
    Mr. Taylor. With what I have looked at so far, it seems to 
me the approach that we are taking now to this issue is more 
productive than an approach which raises tariffs. As far as I 
know, there is not a formal position, but it seems to me that 
we have a good strategy in place with respect to this issue and 
we would like to pursue that.
    Dr. Paul. Okay. Also, very briefly, we are talking about 
flexibility, we are talking about really devaluation of the 
dollar in comparison to the yuan. Is it not true that 
throughout history when countries have used competitive 
devaluations that they don't work that well? That generally 
they do not achieve what is sought and that frequently prices 
go up rather quickly and most of those who promote devaluations 
are somewhat disappointed?
    Mr. Taylor. I agree with that very much.
    Chairman King. That will have to be the last question 
unless Secretary Aldonas wants to add to that.
    I want to thank both of you for your testimony today. It 
has been very illuminating. I appreciate your time and your 
patience.
    If the third panel can wait, we will reconvene at 
approximately 4:15 p.m.
    Thank you very much.
    [Recess.]
    Chairman King. It is very seldom we have a panel of 
witnesses with such exceptional credentials. It is even more 
unusual to have experts who are so patient and tolerant and 
understanding of the foibles of the House of Representatives. 
So I do thank you for enduring all this and for waiting around 
for this length of time.
    So I would like to introduce to the subcommittee Dr. Morris 
Goldstein, Senior Fellow of the Institute for International 
Economics, and Mr. Frank Vargo, Vice President of International 
Economic Affairs at the National Association Of Manufacturers.
    I would certainly welcome any statements you wish to make. 
We will begin with Mr. Vargo.

 STATEMENT OF FRANKLIN J. VARGO, VICE PRESIDENT, INTERNATIONAL 
    ECONOMIC AFFAIRS, NATIONAL ASSOCIATION OF MANUFACTURERS

    Mr. Vargo. Thank you, Mr. Chairman. I have a prepared 
statement for the record and some very brief remarks to make at 
this time.
    Exchange rates are one of the main things that have been 
affecting our trade, and that is why the NAM has been making 
such a big fuss over them for a while now.
    China poses an enormous opportunity for American exporters, 
workers and investors, but also a huge, huge challenge through 
its exports to the United States, a huge challenge to a growing 
range of U.S. manufacturing industries such as plastics, tool 
and die, furniture and many others that are feeling 
particularly impacted right now.
    China has an increasingly modern infrastructure, low wages, 
productive work force and a significantly undervalued currency. 
So it is simultaneously the largest threat that many NAM member 
companies see and also the largest prospective market for 
exports and investment that other members see.
    Our trade deficit with China is the largest in the world 
now. The growth of that deficit and the rapid spread into more 
and more products and industries is leading to significant 
increase in calls for protection. I have never seen anything 
like it in my years at NAM or my many years at the Commerce 
Department.
    I want to stress the NAM wants a productive trade 
relationship with China, and we are very concerned about the 
present trends. We need to see our trade move in a more 
sustainable direction and we do not have much time. We have to 
reject protectionism. That road will not work.
    We believe that the best direction for the future with 
China is for China to move as quickly as possible to market 
forces. Most importantly, that means the Chinese currency has 
to stop being held at a very undervalued level. There is no 
question, as you have heard repeatedly already, that the 
Chinese yuan is very undervalued. Last year, the U.S. trade 
deficit with China was $100 billion. So far this year it is 
running close to $130 billion.
    It is important not to overstate China's importance in the 
current U.S. manufacturing slowdown, for China is not the 
principal cause of that difficulty, but it is a factor. Other 
factors including the drop in our global exports, which is a 
larger factor, and cost pressures are also very important. But 
the greater importance of China lies not with the present, but 
in the future. Because if the 20-year trends continue, our 
deficit with China will triple in five years.
    I have a lengthy prepared statement, but I do encourage you 
to look at some point at the table in the very back of my 
statement which gives a matrix showing alternative trade 
balances under varying assumptions of export and import growth 
rates for the next five years. What that shows is that even the 
most robust export growth rate of, say, 30 percent a year or so 
is still going to leave us with a trade deficit that will be 
more than two-and-a-half times as large.
    So it is clear, if we are going to have a more balanced 
relationship, the rate of import growth is going to have to 
slow. We don't want to do that through protection or through 
legislation. So the best way to do it is through the currency 
valuation that is either market-determined or that emulates 
that.
    We want to be very careful to note that China cannot be the 
scapegoat for our economic difficulties. It is a mistake to say 
that if we just fix the China currency we have done everything. 
That is not so. We have to work on the cost of regulation, the 
cost of litigation, so many things in the United States as 
well. But still, if we do not deal with the China currency now, 
we are going to have a problem that is just going to get away 
from us and we will not be able to deal with it.
    We are very pleased at the administration's very active 
program in seeking to bring about a more market-determined 
currency and we support that, and we want to see the 
administration have the maximum leverage.
    Finally, just let me note that there are already is some 
legislation being introduced that would put on tariffs across 
the board, and the NAM has not taken a formal position, but it 
is extremely unlikely that we would be able to support that 
legislation.
    One piece we do support is Manzullo-Stenholm, Congressional 
Resolution 285. We hope that it will get a lot more cosponsors. 
We see it as very WTO-consistent and a very reasonable way to 
go. We hope that that will pass before the President goes to 
Asia later this month.
    Thank you, Mr. Chairman.
    [The prepared statement of Franklin J. Vargo can be found 
on page 91 in the appendix.]
    Chairman King. Thank you, Mr. Vargo. Your full statement 
will be made a part of the record.
    Dr. Goldstein?

   STATEMENT OF MORRIS GOLDSTEIN, DENNIS WEATHERSTONE SENIOR 
         FELLOW, INSTITUTE FOR INTERNATIONAL ECONOMICS

    Mr. Goldstein. Mr. Chairman and Ranking Member Maloney, 
thank you for the opportunity to testify before this committee 
on the important issue of China's exchange rate regime and its 
effects on the U.S. economy.
    I have a written statement for the record, and then I am 
going to give just a brief summary of it now.
    Chairman King. Without objection, your full statement will 
be made a part of the record.
    Mr. Goldstein. My colleague, Nicholas Lardy, and I have 
recently been analyzing China's currency regime, and I would 
like to share with the committee five of our main conclusions.
    First, so long as China maintains controls on capital 
outflows, runs surpluses on both the overall current and 
capital accounts and its balance of payments, and accumulates 
international reserves in large amounts, there is a compelling 
case that the Chinese currency, the remimbi, is significantly 
undervalued. Our preliminary estimates suggest that the 
undervaluation of the remimbi is on the order of 15 to 25 
percent.
    Second, a revaluation of the remimbi is in China's own 
interest as well as in the interest of the global economy. If 
China does not revalue the remimbi, net capital inflows and the 
large accumulation of reserves will continue. With its mountain 
of bad loans, China should not permit capital inflows and 
reserve accumulation to exacerbate the already excessive 
expansion in bank lending, money supply growth and investment.
    And appreciation of the remimbi is, likewise, in the 
interest of the United States and the wider community. Unless 
China permits the value of its currency to rise, it will be 
much more difficult to obtain the broader realignment of key 
exchange rates in Asia and elsewhere needed to produce a marked 
correction in global payments imbalances, including a reduction 
in the U.S. current account deficit.
    Third, urging China to adopt a flexible exchange rate 
regime and to open its capital markets, as U.S. Treasury 
Secretary Snow and others have suggested, is sensible advice 
for the longer term. But that advice is not appropriate for 
China's current circumstances, especially its weak banking 
system. Therefore, it is not likely to be heeded anytime soon, 
providing little relief for current exchange rate and payments 
problems.
    A more practical approach is to urge China to reform its 
currency regime in two steps. In the first step, China would 
immediately revalue the remimbi by 15 to 25 percent, it would 
widen the currency band to between 5 and 7 percent from less 
than 1 percent, and it would switch from a unitary peg to the 
dollar to a three-currency basket with roughly equal weights 
for the dollar, the euro and the yen.
    Step two should be adoption of a managed float after China 
takes further reforms to put the domestic financial sector on a 
sound enough footing to permit significant liberalization of 
capital outflows.
    The advantage of a two-step approach is that it neither 
asks the rest of the world, including the United States, to 
live too long with an undervalued remimbi, nor does it ask 
China to ignore a key lesson of the Asian financial crisis by 
prematurely opening its capital account.
    Fourth, the United States should take a multilateral tack 
in persuading China to alter its exchange rate policy and 
should reject proposals for unilateral trade measures directed 
against China's exports. Other countries also have a strong 
interest in seeing the remimbi rise closer to the level implied 
by fundamentalists. If China resists a rise in the remimbi, too 
much of the global exchange rate adjustment will fall, for 
example, on the euro, worsening Europe's anemic growth 
performance.
    The U.S. Treasury should therefore continue to enlist the 
support of other countries in convincing the Chinese 
authorities that a more appreciated exchange rate for the 
remimbi is in the common interest.
    As the institution charged with exercising firm surveyance 
over the exchange rate policies of its members, the IMF should 
take a more active stance in monitoring exchange rate 
misalignments and in applying a mix of persuasion and pressure, 
both private and public, to reduce the duration of such 
misalignments. Endorsing a vague G-7 call for more exchange 
rate flexibility is not exercising firm surveyance.
    ``Multilateral'' does not mean everybody but the United 
States. The United States also needs to do its part to 
contribute to global adjustment by improving our savings and 
investment balance, and in particular by adopting a workable 
plan to reverse the now projected long stream of U.S. budget 
deficits.
    What the United States should not do is impose a unilateral 
import surcharge on China's exports. China is not the only 
country to have used or is now using prolonged large-scale 
unidirectional exchange market intervention to maintain an 
undervalued exchange rate. China's import ratio relative to GDP 
now stands at a level three times higher than Japan and twice 
as high as in the United States.
    An import surcharge directed exclusively at China's exports 
might well invite retaliation against U.S. exports to China and 
could risk a wider upsurge in protectionism when the opposite 
is needed to support global growth. An improvement in U.S. 
competitiveness calls for a broad-based decline in the value of 
the dollar, not for a tax on one side of one developing 
country's trade.
    Fifth and finally, the impact of a medium-sized revaluation 
of the remimbi on the external accounts of the United States 
should not be exaggerated. Even if China did revalue the 
remimbi by, say, 20 percent, and even if other emerging 
economies in Japan followed that by half, that is appreciated 
by 10 percent, the trade-weighted value of the dollar would 
decline by about 5 percent.
    By my numbers, that might produce an improvement in the 
U.S. current account on the order of $50 billion. The current 
account deficit in the United States this year is expected to 
be $550 billion. If we wanted to reduce the U.S. current 
account deficit by half, it would require a much larger and 
more broadly based further depreciation of the dollar in the 
neighborhood of 25 percent on a trade-weighted basis.
    The long-running decline in U.S. manufacturing employment 
started well before the Chinese currency became undervalued and 
has a much wider set of origins than exchange rate factors.
    Thank you, Mr. Chairman.
    [The prepared statement of Morris Goldstein can be found on 
page 71 in the appendix.]
    Chairman King. Thank you, Mr. Goldstein.
    You are talking about the practical approach of urging 
China to immediately devalue by 15 to 25 percent. What leverage 
do you think we have to bring that about? And what is the 
possibility or probability of that happening?
    Mr. Goldstein. I think we have some leverage, first of all, 
because such revaluation is actually in China's interest. China 
is having a problem with an excessive increase in bank lending, 
money supply growth and investment.
    Investment share is 42 percent of GDP, the highest it has 
ever been. Bank lending is going up at double-digit rates, near 
20 percent, and they are starting to worry about financial 
stability. So part of the leverage is convincing them what is 
in their own interest.
    Second of all, I mean, this is a large export market for 
China. China participates in the International Monetary Fund 
and other fora, so I think there are levers that we can use. 
The problem with asking them to float now and open their 
capital markets is they are not going to do it. So you are not 
going to get anything now. The reason why they are not going to 
do it is a very good reason: Their banking system is very weak. 
If they get bad news, and the capital market is completely 
open, capital is going to flow out in very large amounts, and 
the exchange rate is going to depreciate by a large amount, not 
appreciate.
    Household savings deposits in China are 100 percent of GDP. 
If 5 percent of that flows out, that is bigger than the current 
account adjustments or other things that we are asking for. So 
until China gets its banking system in better shape, they are 
not going to do a float, and they are not going to have free 
capital movements.
    So it seems to me a better strategy is let's ask them for 
something they really can do. They have a preference for a 
fixed rate. Let's revalue the rate by 15 to 25 percent now. 
Let's try and get them to agree to that. Let's get them to 
agree to a basket peg where the dollar is one of three 
currencies so that if the dollar has to depreciate more in the 
future, we won't have to have the remimbi-dollar changes parity 
every time.
    That would bring some relief right now if they could do it. 
Later on, we can get the float. But a doctrinaire insistence on 
a float and an open capital markets now is going to get us 
neither. I don't see why the world should live with a seriously 
undervalued remimbi now.
    Chairman King. Assuming there is this revaluation of 15 to 
25 percent, what impact would that have on other Asian 
economies? And would they follow, for instance, Korea, 
Singapore?
    Mr. Goldstein. I think it would make it much easier for 
them to appreciate. As I say, even if they follow halfway, 
well, it starts to add up.
    The main message I want to leave with the committee is, if 
you want to get a real correction in the U.S. current account 
deficit, I mean a large one, you have to get a broad-based 
decline in the dollar, not just against one currency. As I 
said, even if China goes 20 and the others in Asia go 10, that 
is $50 billion. And if you want to get $200 billion off, you 
need a 25 percent trade-weighted depreciation; 5 percent would 
be helpful. We should push for it, but I think people are 
exaggerating.
    If you just pick one country and you just pick one side of 
the trade accounts, it is small. That is why these import 
surcharges, even if they were legal, which I think they are 
not, is not going to do much.
    Chairman King. Mr. Vargo, how would you react to that, the 
15 to 25 percent adjustment? And also, what impact would it 
have on other currencies in Asia? And also, how would it impact 
our economy and our jobs?
    Mr. Vargo. It would make a very significant impact on our 
trade with China. We would start to see the import growth rate 
moderate very significantly by market forces, not by any 
protection action. Second, we would start to see our export 
growth rate pick up with China.
    I agree with Dr. Goldstein's analysis that we would also 
see the other Asian currencies come up. Because while they are 
looking at our market, I can tell you they are terrified of 
China. I was down in Cancun representing the NAM at the Cancun 
WTO ministerial and can't tell you how many other countries 
told us, ``We are happy to do a free trade agreement with the 
United States, or a regional, but we are not going to cut our 
tariffs. It is because of China.'' So the Chinese currency in a 
sense could be affecting the entire WTO negotiation. So getting 
it up would have a very broad effect.
    Could I just add the point that we have to have an overall 
realignment of our currency. The dollar is still too strong 
globally. People are too used to seeing in the press all of the 
euros at a new 2-year high, and other currencies are high. The 
dollar is still stronger today measured by the Federal Reserve 
Board currency index. It is stronger today than it was the day 
Secretary Rubin left office. It was too strong then, it is too 
strong now. The basic reason is the Asian currencies have not 
come down.
    Chairman King. In the earlier testimony today we heard a 
possible impact would be if China stopped buying our paper, 
stopped buying treasury notes. Do you see this 15 to 25 percent 
impact having any impact, any effect that way?
    Mr. Vargo. No, Mr. Chairman, I don't, because the impact 
will be a moderation of the increase of the deficit with China. 
They will still have a lot of funds to put in, and there is 
nothing else they can do with it but put it in the United 
States, or in some other country's market, but then they have 
the dollar. The dollar has got to come back to the United 
States to earn interest.
    Chairman King. Well, I would be interested in Dr. 
Goldstein's view of that.
    Mr. Goldstein. I agree with Frank. I don't think that is 
the primary worry right now. In any case, even if we were 
worried about foreign holdings of U.S. Treasury securities, the 
way to get that problem down is to shrink the current account 
deficit, which of course we need to finance. That is why we 
need a broad-based decline.
    China is very important because without getting the Chinese 
to move, it is going to be harder to get others to move. That 
is why it is a very key part of the puzzle, even though by 
itself it is not that big.
    Let me also say, I think the focus that we have heard a lot 
about at this hearing, about the $100 billion U.S.-China 
bilateral deficit, is misplaced. China has a deficit with the 
rest of the world of $75 billion. It is the overall current 
account deficit we want to look at. In China, this year, that 
is about 1.5 percent of GDP. It is going to be about $20 
billion. We have a bilateral trade surplus with Australia. It 
doesn't mean we are manipulating the Australian-U.S. dollar.
    I understand why people focus on it, but really, we want to 
look at the overall position of the Chinese balance of 
payments.
    Chairman King. Ms. Maloney?
    Mrs. Maloney. Thank you for your testimony.
    Dr. Goldstein, you stated that the U.S. was working in a 
multilateral way on the currency in China and this issue and 
that unilateral measures, such as the tariff, would not 
succeed. How effectively are we working on a multilateral basis 
on this issue? And do you have ideas of how our government 
could be more effective in working in a more multilateral 
broad-based way as you advocated?
    Mr. Goldstein. I think we are going in the right direction, 
but I think we have got to press harder. I think we ought to 
particularly press harder in the International Monetary Fund. 
There are provisions in the Fund where you can have a special 
consultation with a country to talk about exchange rate 
problems. I think we ought to use every venue we can to push on 
this issue.
    Under the IMF rules, countries can pick any currency regime 
they want, fixed, floating, something in between. But what you 
are not allowed to do, or supposed to do, is have the wrong 
exchange rate. You can have the wrong exchange rate when you 
are fixed, you can have the wrong exchange rate when you are 
floating. And I think they have the wrong exchange rate. We 
ought to press on it.
    The Fund, I think, has not been strong enough, active 
enough. That is the institution we have that was created to 
deal with this problem in a multilateral way. I think we have 
to get more serious about monitoring the rules that we have and 
enforcing them.
    Mrs. Maloney. Many of my colleagues, during their testimony 
and their questioning, talked about the large and growing 
unemployment challenge in our country. Some of them believe 
that it is tied to this, China's currency peg. What is your 
belief as to the aggregate impact of China's currency peg on 
U.S. unemployment across all sectors, not just manufacturing? 
Is it having a huge influence or is it a minor influence?
    Many people believe that our unemployment is tied to this 
currency exchange, but possibly it is not. What is your 
opinion?
    Mr. Vargo. Could I begin by answering that?
    The currency with China is certainly not the main reason 
that we have lost 2.7 million American factory jobs you talk 
about, but it is a significant factor.
    Mrs. Maloney. How much of a factor?
    Mr. Vargo. Well, let me just get back to the first part of 
your question saying the whole economy. This is a manufacturing 
recession. Manufacturing is about 14 percent of the American 
workforce, but about 90 percent of the increase in 
unemployment. So we really have to look at manufacturing here.
    If we look strictly at the role of China, one way of 
looking at it would be to say how much has China's import 
penetration, its share of the U.S. market increase since 
unemployment started to increase back in 2000? Viewed that way, 
about 15 percent, not 50, percent of the decrease in U.S. 
manufacturing production, the increased import penetration by 
China is equivalent to 15 percent of the drop in our 
manufacturing production. I will say that the larger factor in 
trade has been the drop in our exports worldwide, and China has 
relatively little to do with that. That is about 30 percent of 
the drop.
    So you take the increased import penetration, which is all 
from China, the import penetration from the rest of the world 
has been flat, and you take our export drop, that is about half 
of the drop in U.S. production and the other half can be 
attributed to domestic factors.
    Mrs. Maloney. Dr. Goldstein?
    Mr. Goldstein. I would agree with the general conclusion. I 
think there are many factors going on that are important in the 
decline of manufacturing employment.
    First is a slow growth in this country. Second, you have 
slow growth in our trading partners, particularly Europe. We 
have rapid productivity growth in manufacturing. We have a high 
dollar more generally. China's weight in the broad trade-
weighted index for the dollar is a little less than 10 percent, 
so that tells you something right there. We are talking about 
9, 10 percent of a high dollar.
    I would also note that the manufacturing share of 
employment has been falling for 40 or 50 years. It has fallen 
in most industrial countries. So it can't be mainly the Chinese 
rimimbi. That is just not plausible. It contributes some. We 
ought to try and get rid of the undervaluation, but it is not 
the main thing.
    Mrs. Maloney. So blaming China for our unemployment is not 
the proper policy? It is wrong?
    Mr. Goldstein. I think the fact that China has the wrong 
exchange rate is an important part of policy, and we ought to 
push as hard as we can to get that misalignment taken care of. 
But to blame it as the key factor behind the manufacturing 
employment situation is I think inaccurate.
    Mr. Vargo. Could I add to that for just a moment, because I 
agree with that. My testimony states that and the NAM has never 
claimed that. It would be a mistake for us to be able to 
resolve the China currency problem and dust off our hands and 
say the job is done, because we have huge cost increases in the 
United States to deal with. We have a lot of problems.
    But with China, it is not just where it is today. The 
problem, even though for some industries this is very, very 
painful right now, today, the problem is going to be so much 
worse in the future. As I noted in my testimony, if the trends 
continue for just 5 more years, we will have a tripling of the 
trade deficit. We have to head that off. The best way to do 
that is by moving towards market-oriented mechanisms.
    If China is unable to go to a floating exchange rate very 
quickly, then certainly emulating that by removing some of the 
undervaluation is a very important thing to do for China as 
well as for the United States.
    Mr. Goldstein. If I could, let me just mention one other 
quick point. Some people assume that if the Chinese currency 
goes up and they lose competitiveness, we will be the main 
beneficiary. Not so. Who will be the main beneficiaries? Other 
low-cost producers. Most of the substitution that occurs 
between China's exports to the United States occurs with other 
low-cost producers.
    So some of the people that are getting complaints from 
their constituencies about China displacing jobs are going to 
find out they are being displaced by the Taiwanese or by the 
South Koreans or others. So that is a large part of the 
picture.
    Again, one doesn't want to exaggerate and assume whatever 
they get will be our gain. We will get some of it, but a lot of 
it will go to others. That is why you need the broad-based 
decline in the dollar. One piece won't do it.
    Mrs. Maloney. Secretary Taylor, though, in his comments 
testified that he was for a strong dollar, that after the 
decision of the G-7 countries in Dubai and the dollar declined, 
he more or less said that was not a desirable outcome, that is 
not what they wanted. They wanted a strong dollar. But you are 
saying that is not going to help us economically?
    Mr. Vargo. I can tell you from our position, and again I 
will go back to the Federal Reserve data, the dollar, using 
their broad measure of all currencies, today is still 15 
percent higher than in early 1997, which is the last time when 
the NAM believes that our trade was in deficit, but a 
sustainable deficit. We are still 15 percent higher than that, 
largely because of the Asian currencies, and we are still 
higher than when Secretary Rubin, the architect of the strong 
dollar policy, left office.
    So the dollar still has to come down if our trade accounts 
are to move more into equilibrium. There is no question of 
that. I don't want to speak for the administration on what they 
mean by a strong dollar policy. I will note that the 
administration has also been saying that markets should set the 
value of the dollar, and they have been saying that for over a 
year. And the currencies that are free to move have been moving 
in beneficial directions. The currencies that are not free to 
move, they have not.
    Mr. Goldstein. I think Secretary Snow and Under Secretary 
Taylor are in a difficult position. The strong-dollar mantra 
has been around a long time.
    If you are the one to say, ``Well, we no longer believe in 
a strong dollar,'' you risk the dollar falling very rapidly, 
too rapidly, which could have an effect on our financial 
market. So once it has been out there, it is difficult to pull 
back from it.
    I think a better expression would have been a sound dollar, 
because a sound dollar can move down and still be sound. When a 
strong dollar moves down, people start to say, ``Well, if you 
are for a strong dollar and it is weakening, the policy must 
not be working.'' But I think if you worry about the U.S. 
current account deficit, as I do, as a medium-term problem, 
then a lower value of the dollar, broad-based, would be 
helpful. The dollar would still be strong and sound.
    Mrs. Maloney. My time has expired. Thank you both for your 
insights.
    Chairman King. Going from a sound dollar to a very sound 
congressman. Mr. Kennedy?
    Mr. Kennedy. Thank you very much, Mr. Chairman and Ms. 
Ranking Member, as well as both of you for your excellent 
testimony.
    I would like to, first, Mr. Goldstein, explore the banking 
issue, the concern that we cannot really float the Chinese 
currency right now because the banking system is not able to 
sustain it. What changes do we need in the banking system for 
them to be able to sustain it, that we need to encourage them 
to move towards? And is part of this a function of them 
restricting U.S. financial firms, from participating in their 
financial industry?
    Mr. Goldstein. I think we want to distinguish between 
floating and open capital markets. The administration has 
called for both of those things.
    It really is the open capital market that is the problem 
for them, because if people could take their money out freely 
and send it out of the country, well, whenever there is bad 
news about the banking system, they could move it out in very 
large amounts, and that would leave strong downward pressure on 
the currency.
    They have made some progress in the last couple of years 
trying to bring down the nonperforming loan ratio. You need to 
get to a system where loans are made more on a commercial basis 
and less on a government-directed basis. I think it would be 
good if they had a larger role for foreign-owned institutions.
    But they have to change the way they allocate credit. They 
are trying to do that. Instead of just doing it for various 
objectives that we wouldn't think of as kind of good loan 
policy, they have to move away from that. They have to 
recapitalize some of those weak banks, and that is going to 
take some time. The problem is, if you say, ``We want you to do 
that instantaneously,'' go to free capital markets, they are 
very unlikely to do it. And then you want the rate to be freely 
floating also. It is too risky for them.
    So I think in a 3-year, 5-year time horizon, they can make 
quite a lot of progress on banking reform. Once they have done 
that, then they might seriously consider moving to a float. But 
asking for too much risk, getting very little right now that, 
and what we could get now I think if we press is something 
helpful.
    Mr. Kennedy. Now, you also mentioned that the change in the 
Chinese currency might only bring down the trade-weighted value 
of the dollar by 5 percent or so. We have already seen a fairly 
significant decrease versus European currencies. How much has 
that really been? I am also trying to understand why the other 
Asians want to try to just stay in lock step with China, why 
China would let them really appreciate vis-a-vis them.
    And what do we really need to do, and is it even realistic 
to try to get to this 25 percent adjustment in the trade-
weighted basis without competitive reaction by other countries? 
What is really the best we could hope for in this type of 
scenario?
    Mr. Goldstein. China's weight, again, in the broad index is 
about 10 percent. So when I was saying the 5 percent kind of 
weighted average, that was China did 20 percent appreciation 
with its 10 percent weight, Japan did 10 percent, the other 
emerging economies did 10 percent. All together, they have a 
weight of almost 40 percent. But if you assume those kinds of 
exchange rate configurations, you get about 5 percent. Since it 
has peaked, the dollar has come down 10, 12 percent, on 
weighted average, depending on which index you look at.
    The rule of thumb that I use is, for every 1 percent you 
get in the trade-weighted dollar, that gives you about $10 
billion on the current account. So you get 10 percent, you have 
50. If the current account deficit this year is $550 billion, 
and we were to say, well, what would be safe would be, let's 
say, half, 275 or so. Well, we still need about 20, 25 percent, 
in that ballpark.
    To get that, it is very hard to get it out of a few 
currencies. You have to get a lot of people participating in 
that by nontrivial amounts. I think that could happen. I think 
that could happen, and it would be a good thing for us and the 
world economy if it did happen. The tricky part is trying to 
manage it so that it doesn't happen too fast and in too sharp a 
manner. But if it stops now, we are still a long way away from 
what I think is a safe external position.
    Mr. Kennedy. You are saying if we have already had a 10 to 
12 percent reduction in the trade-weighted value of the dollar, 
and this may give us another 5 percent, so we are really 
talking an impact of $50 billion to $170 billion, maybe up to 
$170 billion, combining the Chinese impact with the current 
impact.
    Mr. Vargo, how would we think about that in terms of jobs? 
I mean, how much does adjusting the trade-weighted balance, or 
the export, current account balance by $50 to $170 billion, how 
many jobs is that really going to help us create here in 
America?
    Mr. Vargo. It will have a very significant impact because 
of changes in trade, not because of trade agreements or WTO or 
permanent normal trade relations, but basically because of the 
dollar and because of slower economic growth abroad have 
accounted for perhaps half of the decrease in U.S. production. 
Getting our production back robustly cannot happen until we are 
able to get our net exports to start moving back up, and that 
means that the currencies have to become much more realistic.
    I would be a little bit more optimistic than Dr. Goldstein 
in that I believe that the Asian currency reaction to China is 
even more robust and that everybody is looking over their 
shoulders at China. As China comes up, I think there would be 
even more of an upward movement on the part of other 
currencies. So this is a very necessary thing.
    Is it the only thing that needs to be done and we can all 
go home and say we have put everybody back to work? No, but it 
is perhaps the single most definable thing. We still have to 
address the cost of litigation in the U.S., the rising cost of 
health care, so many things, but it is a very important thing 
to do.
    Mr. Kennedy. Mr. Goldstein, did you have a rule of thumb of 
1 percent reduction trade-weighted equals $10 billion change in 
the current account, how many jobs, you know, would $10 billion 
in the current account equal?
    Mr. Goldstein. No, I don't.
    Mr. Kennedy. We have talked about Europe and about the 
impact on Europe. Clearly, when we would have our currency 
weaker versus Europe, but the same versus China, China has got 
to just be killing Europe right now. If they are hurting us, 
the pain is double over there. Presumably, there would be a 
secondary effect by making the European economy stronger by 
having China devalue vis-a-vis the U.S. dollar as well, I would 
presume.
    Mr. Goldstein. Yes. That is why I said other countries have 
a big interest. This should not be about, ``Oh, we are taking 
it by ourselves.'' Because many countries have a very strong 
interest in the same outcome.
    We need a decline in the dollar, but the euro has already 
taken a fair amount of that adjustment. If the Chinese rimimbi 
doesn't move, then the euro is going to get too great a share. 
We want that shared out in a more equitable way. The Asian 
emerging economies as a group have to take a larger share of 
the total adjustment. Europe will have to take some more euro 
appreciation, but we need to put relatively a bigger slice of 
that pie in Asia, and that starts with China.
    Mr. Kennedy. Thank you both for your comments.
    Chairman King. Thank you, Mr. Kennedy.
    The gentleman from California, Mr. Sherman.
    Mr. Sherman. Thank you.
    I think this is, when we look back at it, in which we 
fiddled while Rome burned, we have the largest trade current 
account deficit in the history of mammalian life. I assume you 
gentlemen don't think that we can continue it for half a decade 
or a full decade without the whole thing exploding. We hope the 
dollar slides instead of crashes.
    I am not so sure because, as you have pointed out, although 
you haven't used these phrases, we suffer from testosterone 
poisoning. It just feels so good politically and 
nationalistically to say we want a strong dollar, when more 
mature societies are all trying to have a ``weak currency.'' 
Put another way, they want a strong manufacturing capacity. 
Every time we say we want a strong dollar, what we are really 
saying is we want a weak manufacturing capacity. Only we don't 
phrase it that way and so the politics work against us. Now, it 
is not just currency values. There are a host of other things.
    There is a horror story where a man is tied up in a crypt 
while someone builds a brick wall, brick-by-brick, until he is 
completely enclosed. And you can turn to the man who is tied up 
in that crypt and say, ``You should not object to any one of 
these bricks. After all, it is less than 1,000 of anything that 
would wall you in or deprive you of oxygen or any other 
sustenance.''
    And so, to give you an example, we export to China almost 
nothing compared to what we should, compared to what Europe 
does. That is I think in significant part because the Chinese 
government instructs its entities to do it that way. And if you 
do it wrong, well, it is implied that you might go to a re-
education camp. And since this is all oral, it is not a 
violation of WTO because oral intimidation is not a violation 
of anything. You can't prove it. And of course, you have to be 
aware of it because you see the examples.
    Of course, we are not going to do anything about it, 
because the way you make money and power in our society today 
is figure out a way to make something for a nickel over there 
and sell it for $10 bucks over here, and that is where the 
fortunes have been made. Now they are being made in the service 
sector as people figure out a way to import services as well as 
importing goods.
    My colleague asked how many jobs for each $10 billion. I 
have heard rules of thumb that each billion is 40,000 jobs. Do 
you gentlemen have any reason to think that that is in gross 
error?
    Mr. Vargo. Yes, Congressman. The figures that have been 
worked up by the Commerce Department, and we have looked at 
them, are much more like somewhere in the range of 10,000 to 
13,000 for jobs, 40,000 once upon a time, but that is overall 
in the economy, with all of the multipliers.
    Mr. Sherman. Is that with a multiplier?
    Mr. Vargo. It is indeed, sir, yes.
    Mr. Sherman. So still, for each 1 percent, you are talking 
about 130,000 jobs. If they would all be in Los Angeles, so 
much the better.
    That is a lot and shows the expense that we are paying for 
the testosterone high over at the White House and the Treasury. 
Because when they say they are for a sound dollar, every 1 
percent of that is 130,000 unemployed Americans, a painful, 
painful discussion.
    But I don't think it is enough to just reduce the trade 
deficit a little bit. In theory, we have to pay off the 
accumulated trade debt. We have to pay for the Mercedes we 
brought in last decade. It is not enough just to stop bringing 
them in sometime in the middle of this decade.
    What currency slide would the dollar have to have for us to 
reach a balance of payment equality, let alone start repaying 
for the deficits we have accumulated when we in effect bought 
all of those Mercedes on time and haven't made any payments on 
them?
    If we had a euro at 220 to the euro, maybe 60 yen to the 
dollar, would that be enough, assuming we reach there over a 
period of 2 or 3 or 4 years, to bring us into the trade 
balance? Gentlemen?
    Mr. Vargo. Congressman, I don't see anything that extreme.
    Mr. Sherman. Would something that extreme bring us into 
trade balance, or actually give us a trade surplus?
    Mr. Vargo. Oh, I think it would throw the world into such 
turmoil that we would all be in the soup, that we wouldn't 
care.
    Mr. Sherman. Even over 2 or 3 or 4 years?
    Mr. Vargo. Yes.
    Mr. Sherman. So what would bring us into trade equilibrium? 
Or do you really think that we can continue to run some sort of 
trade deficit for the rest of this decade and well into next 
decade?
    Mr. Vargo. Let me start by noting that the NAM chairs a 
coalition for a sound dollar, not a strong dollar. We believe 
that the dollar has got to return at least to the relative 
level of 1997, which means it has got to come down.
    Mr. Sherman. But would that give us a balance of trade?
    Mr. Vargo. It would bring us to a deficit that probably 
would be about 1 percent or so of our GDP. It would not balance 
our trade.
    Mr. Sherman. One percent of GDP meaning?
    Mr. Vargo. It would be about $100 billion.
    Mr. Sherman. $100 billion.
    Mr. Vargo. Yes.
    Mr. Sherman. That is still huge for our society which has 
already run up this huge debt. I mean, our credit card is 
already in double arrearages, and now you are just going to add 
another $100 billion.
    Mr. Vargo. To get it above that would take a further 
downward movement of the dollar.
    Mr. Sherman. Twenty, 25 percent and we are in balance?
    Mr. Vargo. Oh, over a couple of years, I think that would 
certainly do it, but our goal has been to get us back to a 
sustainable level.
    Mr. Sherman. Sustainable deficit is an interesting----
    Mr. Vargo. Well, something in the range of 15 to 20 percent 
further I think would suit manufacturing quite well.
    Mr. Goldstein. Representative Sherman, just a few points.
    I think one has to be careful about saying we want just a 
weak dollar as if that is always a good thing. I think the 
strong dollar in the second half of the 1990s had a lot of 
advantages and was appropriate, given the way the U.S. economy 
was performing at that point.
    Mr. Sherman. If I can interrupt, I have been following 
these things, perhaps not as long as you, but I have heard 
every conceivable excuse from the business-as-usual folks as to 
why we are running a trade deficit. We are running a trade 
deficit because we had a federal budget deficit. Well, then we 
had a federal budget surplus. Oh, well then it is because we 
have a strong economy. Well, then we have a weak economy. Well, 
we have a bigger trade deficit because we are running at a, all 
that happens is every possible combination of fiscal, monetary 
and economic circumstances between us and our trading partners 
has existed over the last 20 years, and there is only one 
constant: a U.S. trade deficit.
    Mr. Goldstein. If you want me to continue, I will try and 
give you an answer.
    I think you have to look at the dollar, given the 
circumstances and what the economy is doing and what other 
economies are doing. The strong dollar in the second half of 
the 1990s was appropriate, given the way the U.S. economy was 
expanding. If the dollar was weaker, we would have been even 
more overheated at that point. But over the past 2 or 3 years, 
that has not been the case. The economy has been much slower, 
and therefore a lower dollar is appropriate, and the current 
account position has gotten worse.
    Mr. Sherman. So you are saying the trade deficit of 1999 
was a good thing?
    Mr. Goldstein. I am saying that a stronger dollar had an 
advantage, given the cyclical position of the economy. 
Similarly, in Europe the weaker exchange rate had an advantage, 
given that they were having very, very slow growth.
    Mr. Sherman. If I can interrupt for a second, I think 
cyclical trade deficits make sense in a world in which they are 
genuinely cyclical. But if, because we ignore how many 
different ways we are taken to the cleaner brick by brick, we 
never run a trade surplus, then I would argue that a trade 
deficit is never cyclical and is therefore never appropriate 
because it is part of the brick wall.
    Under your circumstance, where you say in 1999 it was 
appropriate for us to have a trade deficit and to have a high 
dollar, you would also have to----
    Mr. Goldstein. No, that is not what I said.
    Mr. Sherman. Well, you said a high dollar, which led 
inevitably, inextricably----
    Mr. Goldstein. No, we were talking about a high dollar 
versus a low dollar. Then we can talk about what is the 
sustainable, with all due respect, what is the sustainable U.S. 
current account deficit.
    Mr. Sherman. Sustainable, so over a century we would 
accumulate $20 trillion, $30 trillion worth of accumulated 
debt?
    Mr. Goldstein. Well, no, not without limit. I would say a 
sustainable U.S. current account deficit is about 2 percent of 
GDP, not 5 percent.
    Mr. Sherman. But if you do that for a century, then at the 
end of the century how large is your accumulated debt?
    Mr. Goldstein. It depends on what the return is on U.S. 
investments. One of the things you find is that investments in 
this country have yielded a much higher return than, I mean, a 
much lower return than investments abroad. So actually net 
interest payments that we have are quite low.
    Where the sustainability issue comes in, I think, is that 
over time foreigners who are holding U.S. assets, dollar-
denominated assets, those dollar assets become a larger and 
larger share of the foreign portfolio that they want to hold. 
When that gets too high, then they are very uncomfortable with 
it. But the economy grows, the rate of return on those is 
important. I think it is not the case that we necessarily have 
to have a U.S. current account surplus. We can have a deficit, 
but it has to be one that is coincident with our ability to 
service it. It has to be coincident----
    Chairman King. If the gentleman would yield for a moment, I 
hate to inject myself into this testosterone-charged dialogue, 
but the gentleman has far exceeded his time. If you could begin 
to wrap it up, it would be much appreciated.
    Mr. Sherman. Yes. I would simply say that talking about a 
sustainable deficit is like talking about a sustainable carry-
forwarded-forever credit card balance that expands every year 
as the bank decides to grant you a little bit more credit, and 
that what you should have is a credit card that you actually 
pay off from time to time, and that we ought to be talking 
about a much lower dollar versus the yen and versus other 
currencies.
    My time has expired.
    Chairman King. I thank the gentleman for his illuminating 
questions.
    I would hope that now that the word has gotten out that we 
deal with such testosterone-rich issues, that in a subsequent 
hearing there will be standing room only with people out into 
the hallways.
    I want to thank the witnesses for their time and their 
patience. Again, I can't thank you enough. It was very 
interesting testimony, very illuminating testimony. I also 
thank you for your patience.
    Without objection, the record of today's hearing will 
remain open for 30 days to receive additional material for 
members and supplementary written responses from witnesses to 
any question posed by a member of the panel.
    I would also ask unanimous consent to members of the full 
committee that were unable to be present today be allowed to 
insert their statements into the hearing record.
    The subcommittee is adjourned.
    [Whereupon, at 5:15 p.m., the subcommittee was adjourned.]


7                            A P P E N D I X



                            October 1, 2003

[GRAPHIC] [TIFF OMITTED] T2336.001

[GRAPHIC] [TIFF OMITTED] T2336.002

[GRAPHIC] [TIFF OMITTED] T2336.003

[GRAPHIC] [TIFF OMITTED] T2336.004

[GRAPHIC] [TIFF OMITTED] T2336.005

[GRAPHIC] [TIFF OMITTED] T2336.006

[GRAPHIC] [TIFF OMITTED] T2336.007

[GRAPHIC] [TIFF OMITTED] T2336.008

[GRAPHIC] [TIFF OMITTED] T2336.009

[GRAPHIC] [TIFF OMITTED] T2336.010

[GRAPHIC] [TIFF OMITTED] T2336.011

[GRAPHIC] [TIFF OMITTED] T2336.012

[GRAPHIC] [TIFF OMITTED] T2336.013

[GRAPHIC] [TIFF OMITTED] T2336.014

[GRAPHIC] [TIFF OMITTED] T2336.015

[GRAPHIC] [TIFF OMITTED] T2336.016

[GRAPHIC] [TIFF OMITTED] T2336.017

[GRAPHIC] [TIFF OMITTED] T2336.018

[GRAPHIC] [TIFF OMITTED] T2336.019

[GRAPHIC] [TIFF OMITTED] T2336.020

[GRAPHIC] [TIFF OMITTED] T2336.021

[GRAPHIC] [TIFF OMITTED] T2336.022

[GRAPHIC] [TIFF OMITTED] T2336.023

[GRAPHIC] [TIFF OMITTED] T2336.024

[GRAPHIC] [TIFF OMITTED] T2336.025

[GRAPHIC] [TIFF OMITTED] T2336.026

[GRAPHIC] [TIFF OMITTED] T2336.027

[GRAPHIC] [TIFF OMITTED] T2336.028

[GRAPHIC] [TIFF OMITTED] T2336.029

[GRAPHIC] [TIFF OMITTED] T2336.030

[GRAPHIC] [TIFF OMITTED] T2336.031

[GRAPHIC] [TIFF OMITTED] T2336.032

[GRAPHIC] [TIFF OMITTED] T2336.033

[GRAPHIC] [TIFF OMITTED] T2336.034

[GRAPHIC] [TIFF OMITTED] T2336.035

[GRAPHIC] [TIFF OMITTED] T2336.036

[GRAPHIC] [TIFF OMITTED] T2336.037

[GRAPHIC] [TIFF OMITTED] T2336.038

[GRAPHIC] [TIFF OMITTED] T2336.039

[GRAPHIC] [TIFF OMITTED] T2336.040

[GRAPHIC] [TIFF OMITTED] T2336.041

[GRAPHIC] [TIFF OMITTED] T2336.042

[GRAPHIC] [TIFF OMITTED] T2336.043

[GRAPHIC] [TIFF OMITTED] T2336.044

[GRAPHIC] [TIFF OMITTED] T2336.045

[GRAPHIC] [TIFF OMITTED] T2336.046

[GRAPHIC] [TIFF OMITTED] T2336.047

[GRAPHIC] [TIFF OMITTED] T2336.048

[GRAPHIC] [TIFF OMITTED] T2336.049

[GRAPHIC] [TIFF OMITTED] T2336.050

[GRAPHIC] [TIFF OMITTED] T2336.051

[GRAPHIC] [TIFF OMITTED] T2336.052

[GRAPHIC] [TIFF OMITTED] T2336.053

[GRAPHIC] [TIFF OMITTED] T2336.054

