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




U.S.-CHINA TRADE: PREPARATIONS FOR THE JOINT COMMISSION ON COMMERCE AND 
                                 TRADE

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
                COMMERCE, TRADE, AND CONSUMER PROTECTION

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 31, 2004

                               __________

                           Serial No. 108-74

                               __________

      Printed for the use of the Committee on Energy and Commerce


 Available via the World Wide Web: http://www.access.gpo.gov/congress/
                                 house


                               __________

93-302              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

                    COMMITTEE ON ENERGY AND COMMERCE

                      JOE BARTON, Texas, Chairman

W.J. ``BILLY'' TAUZIN, Louisiana     JOHN D. DINGELL, Michigan
RALPH M. HALL, Texas                   Ranking Member
MICHAEL BILIRAKIS, Florida           HENRY A. WAXMAN, California
FRED UPTON, Michigan                 EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida               RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio                EDOLPHUS TOWNS, New York
JAMES C. GREENWOOD, Pennsylvania     FRANK PALLONE, Jr., New Jersey
CHRISTOPHER COX, California          SHERROD BROWN, Ohio
NATHAN DEAL, Georgia                 BART GORDON, Tennessee
RICHARD BURR, North Carolina         PETER DEUTSCH, Florida
ED WHITFIELD, Kentucky               BOBBY L. RUSH, Illinois
CHARLIE NORWOOD, Georgia             ANNA G. ESHOO, California
BARBARA CUBIN, Wyoming               BART STUPAK, Michigan
JOHN SHIMKUS, Illinois               ELIOT L. ENGEL, New York
HEATHER WILSON, New Mexico           ALBERT R. WYNN, Maryland
JOHN B. SHADEGG, Arizona             GENE GREEN, Texas
CHARLES W. ``CHIP'' PICKERING,       KAREN McCARTHY, Missouri
Mississippi, Vice Chairman           TED STRICKLAND, Ohio
VITO FOSSELLA, New York              DIANA DeGETTE, Colorado
STEVE BUYER, Indiana                 LOIS CAPPS, California
GEORGE RADANOVICH, California        MICHAEL F. DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire       CHRISTOPHER JOHN, Louisiana
JOSEPH R. PITTS, Pennsylvania        TOM ALLEN, Maine
MARY BONO, California                JIM DAVIS, Florida
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
LEE TERRY, Nebraska                  HILDA L. SOLIS, California
MIKE FERGUSON, New Jersey            CHARLES A. GONZALEZ, Texas
MIKE ROGERS, Michigan
DARRELL E. ISSA, California
C.L. ``BUTCH'' OTTER, Idaho
JOHN SULLIVAN, Oklahoma

                      Bud Albright, Staff Director

                   James D. Barnette, General Counsel

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

                                 ______

        Subcommittee on Commerce, Trade, and Consumer Protection

                    CLIFF STEARNS, Florida, Chairman

FRED UPTON, Michigan                 JANICE D. SCHAKOWSKY, Illinois
ED WHITFIELD, Kentucky                 Ranking Member
BARBARA CUBIN, Wyoming               CHARLES A. GONZALEZ, Texas
JOHN SHIMKUS, Illinois               EDOLPHUS TOWNS, New York
JOHN B. SHADEGG, Arizona             SHERROD BROWN, Ohio
  Vice Chairman                      PETER DEUTSCH, Florida
GEORGE RADANOVICH, California        BOBBY L. RUSH, Illinois
CHARLES F. BASS, New Hampshire       BART STUPAK, Michigan
JOSEPH R. PITTS, Pennsylvania        GENE GREEN, Texas
MARY BONO, California                KAREN McCARTHY, Missouri
LEE TERRY, Nebraska                  TED STRICKLAND, Ohio
MIKE FERGUSON, New Jersey            DIANA DeGETTE, Colorado
DARRELL E. ISSA, California          JIM DAVIS, Florida
C.L. ``BUTCH'' OTTER, Idaho          JOHN D. DINGELL, Michigan,
JOHN SULLIVAN, Oklahoma                (Ex Officio)
JOE BARTON, Texas,
  (Ex Officio)

                                  (ii)




                            C O N T E N T S

                               __________
                                                                   Page

Testimony of:
    Attaway, E. Fritz, Executive Vice President and Washington 
      General Counsel, Motion Picture Association of America.....    45
    Freeman Hon. Charles W., III, Deputy Assistant U.S. Trade 
      Representative, Office of the United States Trade 
      Representative.............................................    13
    Levinson, Mark, Chief Economist and Director of Policy, UNITE    73
    Lowenstein, Douglas, President, Entertainment Software 
      Association................................................    37
    Papovich, Joseph, Senior Vice President, International 
      Recording Industry Association of America..................    68
    Primosch, William, Director of International Business Policy, 
      National Association of Manufacturers......................    56
    Tonelson, Alan, Research Fellow, The U.S. Business and 
      Industry Council Educational Foundation....................    62

                                 (iii)

  

 
U.S.-CHINA TRADE: PREPARATIONS FOR THE JOINT COMMISSION ON COMMERCE AND 
                                 TRADE

                              ----------                              


                       WEDNESDAY, MARCH 31, 2004

              House of Representatives,    
              Committee on Energy and Commerce,    
                       Subcommittee on Commerce, Trade,    
                                    and Consumer Protection
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2123, Rayburn House Office Building, Hon. Cliff Stearns 
(chairman) presiding.
    Members present: Representatives Stearns, Upton, Whitfield, 
Shimkus, Shadegg, Bass, Bono, Terry, Otter, Sullivan, Barton 
(ex officio), Schakowsky, Brown, Stupak, Green, McCarthy, 
Strickland, and Davis.
    Also present: Representative Norwood.
    Staff present: David Cavicke, majority counsel; Shannon 
Jacquot, majority counsel; Jon Tripp, deputy communications 
director; Brian McCullough, majority professional staff; Jill 
Latham, legislative clerk; and Jonathan Cordone, minority 
counsel.
    Mr. Stearns. Good morning. The subcommittee will come to 
order.
    Today we'll hear from a number of distinguished witnesses 
on a topic that is both important and timely. The U.S.-China 
Joint Commission on Trade is scheduled to meet on April 21 and 
April 22 for its annual cabinet level meeting. It is a 
significant meeting because there are many pressing issues 
involving the U.S. trade with China. The subcommittee called 
this hearing to further a dialog with industry about what 
industry priorities are with regard to the Joint Commission 
meeting.
    I thank the witnesses in advance for their participation 
today and obviously I look forward to a frank and hardy 
discussion on this matter.
    U.S. economic ties with China have been growing in 
remarkable ways over the past 25 years. Since 1980, U.S.-China 
trade has risen from roughly $5 billion a year to $181 billion 
a year. China is now the third largest U.S. trading partner. On 
the whole, this has been a benefit to the United States 
businesses and workers because China is becoming an 
increasingly important market for U.S. exports. Since China has 
one of the world's fastest growing economies, this export trend 
is likely to continue.
    In addition, Chinese imports have brought lower price goods 
to many U.S. consumers. However, obviously there are challenges 
as this trading relationship evolves. The U.S. trade deficit 
with China is $124 billion as of 2003. This trade deficit is 
continuing to grow. A healthy bilateral trading relationship 
with deficits of this magnitude is not sustainable in the long 
term.
    Obviously, all of us would like to see increased attention 
to piracy and counterfeiting issues. Counterfeiting of 
manufactured products and piracy for intellectual property are 
big business in China. Piracy of U.S. intellectual property in 
China may exceed $1 billion per year. This is a real problem 
for U.S. exports and if remedied, would help in balancing the 
U.S.-China trade deficit.
    In short, my colleagues, we are buying Chinese products. 
They are stealing many of ours. We have several distinguished 
witnesses here to testify about the piracy problems in 
intellectual property and the counterfeiting problems with 
manufactured goods. I want to tell those witnesses that I am 
committed to assisting them in their efforts to reduce 
counterfeiting and piracy in China. I think we've had some 
success in Singapore and some success in Taiwan.
    China's entry into the World Trade Organization was a 
watershed event. WTO entry required China to reform its trade 
practices significantly. China's progress in meeting WTO 
requirements has been mixed--progress has been consistent but 
we still have a very long way to go to really ensure fair trade 
practices.
    Each year the United States Trade Representative, USTR, 
issues a China WTO compliance report. The report issued in 
December of 2003 found that while China had made significant 
progress in meeting WTO obligations, many problems still 
remain.
    These are just a few: agricultural and industrial quotas; 
tariff-rate quotas, industry subsidies; confusing and 
discriminatory regulation of services businesses; 
discriminatory taxes on imports; insufficient transparency in 
regulation; and lack of protection for U.S. intellectual 
property rights.
    I look forward to the hearing and to hear from the 
Honorable Charles Freeman, Deputy Assistant Trade 
Representative, testify about his feelings here. I commend the 
USTR for its tireless efforts in promoting the interest of U.S. 
industry around the globe and in China in particular.
    My colleagues, these are difficult issues, but they must be 
solved if the U.S. is to have some day fair trade with China. I 
encourage the administration to ensure that China fully 
complies with the WTO obligations and it seems the 
administration is willing to do just that.
    One of the important issues we debated in the 106th 
Congress when we considered Permanent Normal Trade Relations 
with China was the issue of human rights. I do believe that 
free trade can increase freedom for people living under 
communist or totalitarian governments but it can only do so if 
democratic trading partners insist on those freedoms as part of 
the trade negotiations and insist on those freedoms as part of 
the implementation.
    China's international trade commitments require it to 
develop institutions that respect the rule of law. The U.S. has 
not just an economic incentive, but also a moral obligation to 
ensure China does just that. The work the U.S. Government does 
today must aim to nurture the fledgling freedoms of the Chinese 
people.
    With that I look forward to the testimony today and I hope 
the hearing will bring focus on the important issues before the 
April Joint Commission Meeting.
    With that, the ranking member, Ms. Schakowsky.
    Ms. Schakowsky. Thank you, Mr. Chairman, and I want to 
welcome all of our witnesses, including Mr. Freeman and all the 
others as well. I appreciate your taking the time to come here 
to discuss our trade policy with China.
    I want to offer a special welcome to Mark Levinson, the 
Chief Economist and Director of Policy of UNITE. I'm a proud 
member of UNITE myself and really appreciate that a member of 
my union is here to present the critically important views of 
working Americans of organized labor to us today.
    This is a very important hearing. For most Americans, the 
U.S. economy is in bad shape. We've lost over 2.3 million jobs 
since President Bush took office. China, an important strategic 
trading partner and world power, enjoys a trade surplus with 
the United States that has swelled over the last year in 
particular. China's trade surplus with the United States 
increased 20 percent in 2003 to $124 billion. We have a more 
imbalanced trade relationship with China than with any other 
nation.
    I recognize the importance of China to the United States 
and the need for the United States to engage China in a 
constructive way, but our lack of engagement with China on 
issues of critical importance to our economy and to principles, 
issues of labor rights, human rights and the environment, in my 
view, is shameful and misguided.
    I visited China on a CODEL that was led by Congressman Don 
Manzullo, the Chairman of the Small Business Committee. We met 
with top Chinese officials and had conversations about numerous 
issues, including China's lack of progress on human rights and 
labor rights. And I'm sad to say that since that trip the 
situation in China has not improved and workers in that country 
and the United States are paying the price.
    Despite being morally reprehensible, China's disregard for 
workers' rights give that nation an unfair trade advantage. 
That, according to the AFL-CIO, has cost more than 727,000 U.S. 
jobs. It's bad enough that China denies its work force the 
right to join unions and to bargain collectively and it is 
unacceptable that there is no true minimum wage in China. It's 
unacceptable because Chinese workers deserve better and it's 
unacceptable for the United States in economic terms.
    Chinese workers' wages are between 47 percent and 86 
percent lower than they should be which, in turn, reduces the 
price of Chinese manufactured goods. This provides China with 
an unfair market advantage over U.S.-made products and 
undermines the U.S. job market.
    The Industrial Union Council of the AFL-CIO recently filed 
a petition with the USTR under Section 301 of the Trade Act on 
behalf of the 13 million members of the AFL-CIO including 
nearly 6 million manufacturing workers because of the dangerous 
and damaging effects that China's behavior is having on the 
U.S. economy and on the rights of its labor force.
    Mr. Chairman, by unanimous consent, I'd like to place that 
petition into the record.
    Mr. Stearns. By unanimous consent, so ordered.
    Ms. Schakowsky. I'll be spending most of my time in 
questioning, exploring the subject today, but before I conclude 
my opening statement I want to say that I'm really 
disappointed. I'm not just disappointed over the current state 
of our economy or the lack of leadership by the Bush 
Administration in pressing China on core human and labor rights 
and environmental issues, but I'm disappointed and actually 
surprised at the prepared testimony of our United States Trade 
Representative witness did not even mention labor rights or 
human rights or the environment. And it doesn't even 
acknowledge the AFL's position.
    Is it any wonder that organized labor in this country feels 
abandoned by this administration? Judging from the USTR's 
testimony it would be safe to say that labor is not even on the 
radar of the Bush Administration. I share many of the concerns 
that are raised in the Deputy Assistant Trade Representative's 
testimony, but I think it represents a shameful trend in our 
Nation's overall approach to trade.
    While we race to the bottom, force free trade agreements 
and expand U.S. market access, workers' rights, human rights 
and our natural environment take a back seat. It is just wrong. 
We need a fundamental shift in the way we approach the world, 
our trading partners and new trade deals. We need to put people 
and the environment right on a par with new profit 
opportunities. If we fail to do so, we fail our economic 
obligation to America's work force and we fail our moral 
obligation to the international work force. We can do better.
    Again, I want to welcome our witnesses and I look forward 
to their testimony.
    Mr. Stearns. I thank the gentlelady and distinguished 
Chairman of Telecommunications.
    Mr. Upton of Michigan.
    Mr. Upton. Thank you, Mr. Chairman. I appreciate the 
opportunity of this hearing. I do believe in free trade and 
I've supported it. Most of the time I think free trade is 
beneficial for our U.S. manufacturers and for our economy, 
however, with respect to China it does seem like something has 
gone awry. In fact, the playing field looks so uneven, I don't 
blame folks back home for wanting to plow it over. A trade 
deficit with China is beyond the point of acceptability.
    I'm concerned about a number of aspects of our relationship 
with China on trade. First of all, I think the on-going 
currency manipulation is a real problem. The drastic under 
valuation of the currency makes it seems like it is cheaper to 
do business than it really is.
    Mr. Chair, the Telecommunications Subcommittee, I'm very 
worried about piracy issues, particularly in the realm of 
computer software, movies and music. I'm worried about safety 
issue which it comes to counterfeit medical devices and I've 
not been satisfied with the level of response by the Chinese 
government with regard to piracy and counterfeit goods and I 
hope that our witnesses today will talk about that issue.
    I also believe when China joined the WTO that there was an 
expectation that they would adhere to principles of fair trade 
through that organization. It doesn't seem like that is 
happening when we watch jobs continuing to move there on a 
routine basis. I've got great concerns when it comes to steel 
and China's impact on the steel industry. It seems like China 
is the only country that's immune to the current shortages and 
inflated prices. Why is it a problem here and it doesn't seem 
to be a problem there?
    Thank you, Mr. Chairman, I look forward to today's 
testimony and the ability to engage the witnesses on these 
important issues. I yield back.
    Mr. Stearns. I thank the gentleman. Mr. Strickland?
    Mr. Strickland. Thank you, Mr. Chairman. Mr. Chairman, 
members of this committee, I feel a deep sense of anger today 
because yesterday our Treasury Secretary John Snow was in Ohio 
and our President was in Wisconsin. According to newspaper 
accounts, Mr. Snow in Ohio, in economically hard hit Ohio, said 
that outsourcing was an integral part of our global trading 
system. And the President, in Wisconsin, was defending 
outsourcing apparently in a State that has lost 80,000 
manufacturing jobs. And I just am frustrated. The American 
people are frustrated. How anyone can come to Ohio and with a 
straight face support such a statement is almost beyond belief.
    I quote, this is from the Cincinnati Enquirer. The Treasury 
Secretary said that the practice of moving American jobs to low 
cost countries is ``a part of trade'' and ``there can't be any 
doubt about the fact that trade makes the economy stronger.'' 
And then there's the comment that his remarks were reminiscent 
of the remarks made by Mr. Mankiw in the report that the 
President signed, the Economic Report to the Nation where he 
said among other things that ``if a good or a service can be 
produced at lower cost in another country, it makes sense to 
import that product rather than to produce it domestically.''
    And I asked our Secretary of Commerce last week to please 
give me a list of the products that cannot be manufactured for 
lower cost in another country. I think given the fact that the 
people that I talked with in Mexico were getting $38 a week and 
that situation exists around the world, that nearly every 
product can be produced at lower cost in another country.
    Now those remarks required Mr. Mankiw to apologize to our 
House Speaker, Mr. Hastert. I wonder if the President and Mr. 
Snow will apologize.
    According to a report in the National Political News, the 
President told his audience in Wisconsin that he understood 
there was concern about jobs going overseas, for some people 
looking for work, I understand that. The some people looking 
for work are hundreds of thousands of people who have seen 
their jobs outsourced.
    I look forward to the testimony because I also have 
questions about the steel industry, about the restrictions on 
the exporting of coke, about the importation of scrap metal 
from this country that is providing a serious, serious problem 
to our steel fabricators and our machine shops and our steel 
producing companies.
    We are facing a crisis and I simply ask myself and I think 
the American people are asking when is this administration 
going to understand what is truly happening and take actions 
which will save the American economy.
    Thank you, Mr. Chairman, I yield back.
    Mr. Stearns. I thank the gentleman. Mr. Otter.
    Mr. Otter. Thank you, Mr. Chairman. I want to thank you, 
Mr. Chairman, and ranking member for holding this hearing and 
allowing us the opportunity to highlight some of the important 
commerce issues facing the United States and China.
    As an Idahoan and as a rancher I know the importance of 
private property. There we talk in terms mostly of dirt. Here, 
I think we have to talk in a much broader concept and as you 
know, the Founding Fathers defended private property rights as 
a fundamental tenet of our United States Constitution. In the 
fifth amendment, in fact, to the Constitution it says ``nor 
shall private property be taken for public use without just 
compensation. Compensation must be required to pay for all 
properties taken physical, dirt, or intellectual, creative.''
    Through this founding concept, our copyright system 
preserves the rights of authors of intellectual properties and 
their estates to profit from their creativity. And I fully 
support protecting the rights on the international scene. 
Copyright laws encourage people to creatively express 
themselves and to make a livelihood in doing so. As we enter 
into another round of talks in U.S.-China Commission on 
Commerce and Trade next month, I think it's important to 
recognize the importance of protecting our citizens' 
intellectual property not from under costs, not from low cost 
producers as has been suggested by the other side, but from 
theft, out and out theft.
    The effects of China and other nations to protect 
intellectual properties can only be described at best as very, 
very lax and probably insincere. An estimated 9 out of every 10 
CDs sold in China are pirated. That means no one in America is 
compensated for his or her investment on 90 percent of the 
transaction in music trade. In 2003, the Motion Picture 
Industry estimated they lost at a minimum $175 million in 
China. Interestingly enough, that's more money than the film 
industry made in China in 2003.
    As we move forward in outlining an appropriate exchange of 
markets with China, we must recognize the importance of 
protecting our resources and our interests. We must also 
recognize that we in the U.S. have to continue in the effort to 
be more responsible in how we value those intellectual 
properties.
    In minutes, a child in the United States can purchase a CD 
or a DVD, upload it on a file sharing internet service. Shortly 
after, someone in China can download a perfect copy of that CD 
or that DVD, package it and illegally sell it in an open street 
market with little or no concern about any repercussions.
    Protecting intellectual property must be a collaborative 
effort. I am pleased to see this listed as a high priority in 
the upcoming discussions with China and diverting from my 
prepared testimony, Mr. Chairman, I would only suggest as I 
have with many, in many cases, with much of our trade 
negotiations and efforts, that I would invite the USTR and all 
those who are really concerned about getting the best deal that 
we can, as I have in farm products, as I have in some of our 
manufactured products, to put a person on that negotiating team 
that knows what they're doing in real life rather than just out 
of theory and because they went to college somewhere.
    I'd like to see a person that actually drove the wheat 
combine negotiating on a wheat trade. I'd like to see somebody 
who worked in a processing plant, perhaps a union member 
sitting at that table. I've had the opportunity to negotiate 
contracts with both union members and farmers and they're 
pretty tough negotiators and I think we need that kind of 
advantage at our negotiating table.
    And finally I would say in this context, I would hope that 
you would invite somebody from the motion picture or the 
entertainment industry to the negotiating table to help you 
find that safe road for fairness in our negotiations.
    Thank you, Mr. Chairman.
    Mr. Stearns. I thank the gentleman.
    Gentleman from Texas, Mr. Green.
    Mr. Green. Thank you, Mr. Chairman, and I thank you and the 
ranking member for holding this hearing on U.S.-China trade and 
I'm pleased that both the chairmen of the full committee are 
interested in trade issues and I think it's very appropriate 
that our subcommittee exert its jurisdiction over trade issues.
    Article 1, Section 8 of the Constitution clearly states 
that the U.S. Congress has the sole authority to regulate trade 
with foreign countries. With the approval of fast-track 
authority, I think Congress abdicated a lot of our authority 
except for one vote on the floor of the House. However, I 
wholeheartedly support the efforts, our committee's efforts to 
renew so our voices can be heard.
    This subcommittee's trade jurisdiction extends to non-
tariff related trade issues and in my opinion most of this 
country's problems with China falls squarely within that 
jurisdiction. China's currency manipulation, lack of regulation 
and State subsidies gives them an unfair competitive advantage 
when it comes to trade with the United States. But their 
largest advantage and our largest disadvantage remains in the 
issue of the standard of living. The United States cannot 
engage in a race to the bottom to be able to compete in a 
global marketplace that rewards low wages and substandard 
living conditions. The American people simply can't afford that 
kind of battle.
    Faced with this reality, we have few options that can help 
us truly level the playing field and considering $124 billion 
trade deficit with China, we must take every avenue available.
    I have joined several efforts in this chamber to encourage 
China to stop undervaluing its currency. The Chinese currency 
has been fixed at 8.3 yuan to the dollar which results in a 
seriously under valued yuan. This makes Chinese exports even 
less expensive and results in an unfair competitive advantage 
that American products simply can't compete against. In fact, 
many economists have concluded that the under valued currently 
amounts to a 40 percent subsidy for all Chinese exports to the 
U.S. and a 40 percent tariff on all U.S. exports to China.
    Mr. Chairman, I represent the Port of Houston which is the 
largest U.S. port in foreign tonnage. The ships that come from 
all over the world, but particularly China, have kept our port 
busy and provided good paying jobs for my longshoremen, yet to 
put it simply as much as I like to see those ships coming in 
full containers into the Port of Houston, I'd like to see them 
leave our ports full of American goods going to a foreign 
market. The cost of containers is so cheap in China that sadly 
in most of our foreign ports we have an excess of containers 
because it's cheaper to build a container in China than it is 
to ship one back empty. It would be much better if we could 
ship it back with some of our products.
    There's no question we must take quick action against the 
unfair trading practices in China and I'm interested in 
suggestions of our witnesses that have to offer and I thank 
them for appearing today. And again, Mr. Chairman, I thank you 
and yield back my time.
    Mr. Stearns. The gentleman from Oklahoma, Mr. Sullivan.
    Mr. Sullivan. Thank you, Chairman Stearns. As a new member 
of the committee, I'm very interested to hear the testimony 
presented today. The U.S.-China Joint Commission on Commerce 
and Trade has played a very important role in issues of trade 
between our two nations. Issues of intellectual property 
protection and piracy, non-tariff barriers to the U.S., 
manufacturing products in China are extremely important to me 
and the people of the First District of Oklahoma.
    My District has lost over 16,000 jobs in the last year. 
While not all of this is in the manufacturing sector, much of 
it is. And part of that concern involves trade with China. For 
the second time, the U.S. Trade Representative found that China 
continues to have problems meeting its WTO obligations, 
especially in regards to agriculture, services, IPR protection, 
tax policies, trade rights and distribution and transparency of 
trade laws and regulations.
    If the U.S. is to continue in the multi-billion trade 
relationship with China, these issues must be addressed. I'll 
look forward to hearing today's testimony and yield back the 
balance of my time.
    Mr. Stearns. I thank the gentleman. The gentleman from 
Florida, Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman. Obviously, there's a 
lot of anxiety in the country as manifest in this committee 
today over the aggressive business activity in China and 
increasingly sophisticated manner in which the country is 
taking advantage of trade. This is understandable.
    It is the same approach we take here in the United States 
in our trade with China and other countries. But at the core of 
the issue here is the rule of law. The Chinese government has 
bound itself, its businesses and its citizens to the rule of 
law and to the terms and conditions of the WTO and are 
bilateral. And it is essential that we focus on living up to 
that agreement and that they live up to it as well.
    I have, as I'm sure you know, been a consistent supporter 
of many of the trade agreements that were presented by the 
Clinton Administration and this administration. I think it's 
time for us to take a second look at how we define success. I 
think it's fair to say success has largely been defined at the 
USTR's office under any administration in the number of 
agreements that were signed as opposed to how effectively we 
enforce the ones that were signed. If that presents resource 
issues on your part, I hope that you'll mention that today or 
your office will follow up with this committee and others, but 
it is important that we do a better job and put more priority 
on making sure these agreements are adhered to.
    I also hope that you will comment upon what efforts we are 
taking to help the country of China start to develop a more 
reliable and sophisticated judiciary. I've heard anecdotally 
there are some judges in China that don't even have a law 
degree. There's a lot of democracy building that needs to be 
done there both on the human rights, political and civil 
rights, and on commercial. This should be an era we can bring 
all the competing interests together.
    Finally, I don't see any reference in your testimony to the 
issue that you're going to hear from everybody here about the 
monetary policy of China. If you don't think it's an issue or 
you don't think there are any easy solutions, you should say so 
and I'm sure there are other committees that will be talking 
about that as well, but it's clearly something we should at 
least be discussing.
    I think the ranking member's comment about labor and 
environment has some merit from that standpoint. I also would 
encourage you today and in the future to simply try to address 
those issues. One of the ways that President Clinton was trying 
to develop a Center on Trade Agreements and I'm referring 
specifically to Jordan, Singapore and to some extent Chile, was 
to begin to put more emphasize on labor and environment. We 
will not always agree as to how we get there and how quickly we 
get there, but it is a mistake not to at least address those 
issues and try to develop some common ground, both in the 
enforcement on the China trade agreement in the WTO and in 
other trade agreements we'll be talking about.
    So I hope you'll take those comments to heart as a 
constructive way that we can try to figure out how to solve 
some of these problems instead of just spending most of our 
time identifying them.
    Thank you, Mr. Chairman.
    Mr. Stearns. I thank the gentleman.
    Mr. Shimkus?
    Mr. Shimkus. Thank you, Mr. Chairman. Briefly, I want to 
welcome Mr. Freeman here and basically a lot of us are talking 
about job losses and a lot of job gains. I've been really 
talking about the difference between the household survey and 
the payroll surveys because I have a lot of self-employed 
individuals. They're never counted in a payroll survey because 
they're household employed and I think we lose that argument in 
this whole job. And I just throw that out as--for the public to 
understand that when self-employed individuals are not counted 
in job gains or job losses, we lose a lot of people who are 
really entrepreneurs.
    On the subject particularly, China's currency is 
significantly undervalued. I agree with Congressman Davis. I 
think it's a WTO violation and we ought to be aggressive in 
addressing that issue.
    Piracy would be another, I think, breaking of the WTO 
agreement and we ought to be very aggressive, especially on 
intellectual property. I'm also concerned about the safety of 
products. Again, big conflict when we're concerned about safety 
of maybe manufactured goods and we're not concerned about 
safety of reimported drugs, but that's a political debate that 
we'll continue to have.
    We have an additional cost to manufacturing in this country 
with high health insurance, high worker comps, high litigation, 
high regulation that also has to be part of the debate on the 
competitive nature of our manufacturing sector and that's also 
part of the struggle that we have as we try to define how 
we're--where we're doing well and how we're having challenges. 
So I look forward to the hearing. We all have a great concern 
in this issue and I yield back the balance of my time.
    Mr. Stearns. I thank the gentleman.
    The gentleman from Ohio, Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman. I appreciate your 
leadership and Ms. Schakowsky's leadership on trade issues and 
your support for fair trade that you have both advocated for as 
Members of this body.
    I share Mr. Strickland's concern about the President's trip 
to Wisconsin and his comments and Secretary Snow's trip to 
Ohio. When I hear the President calling us economic 
isolationists that is not helpful in this debate and calling 
people who believe in fair trade as Mr. Chairman Stearns and 
Ms. Schakowsky and most of here who believe that trade should 
include environmental labor standards, doing name calling like 
that doesn't really help us engage in the debate.
    I want to welcome Mr. Tonelson and Mr. Levinson, friends of 
mine, thank you for being here and lending your thoughts to 
this debate.
    Free trade ideologues are quick to point out that America 
has significant exports to China. That's true, but stopping the 
analysis there is like trying to balance your checkbook by 
counting only the deposits and ignoring the withdrawals. It 
makes for an assessment that makes us feel better, but it 
really isn't terribly accurate. The U.S. trade deficit with 
China topped $124 billion last year, the largest deficit, as we 
all know, with one country in U.S. history. The monthly trade 
deficit with China the last month we know, this past January, 
stood at a record $43 billion. That's four times the trade 
deficit in January is four times the annual trade deficit we 
had with China my first year in Congress in 1993.
    The main reason for China's comparative advantage when we 
harken back to ideology of sixteen decades ago is obvious. An 
exiled Chinese labor activist, Wei Jinsheng, told The 
Washington Post, the reason Chinese products are so cheap is 
the workers have no rights. China's government employs forced 
labor, slave labor, and child labor to minimize costs. They 
prevent workers from joining unions. They prevent workers from 
bargaining collectively. They deny citizens safe working 
conditions. They provide no minimum wage.
    The AFL-CIO estimates that by using abusive labor policy to 
stack the deck in its favor, China unfairly costs U.S. 
companies and businesses and workers 727,000 jobs. The AFL-CIO 
sought relief from the U.S. Trade Rep. under Section 301 of the 
Trade Act of 1974. That petition, a first of its kind in trade 
history filed on the basis of labor policy is an important 
first step toward a level playing field with China.
    I urge Mr. Freeman, Mr. Zoellick, the USTR, and President 
Bush to act quickly and forcefully in support of the AFL-CIO 
petition. I think this would substantially dramatically change 
the trade relationship we have with China. If this hearing 
could lead to one thing it would be, Mr. Freeman, your support 
of that AFL-CIO petition, to give workers, put workers on the 
same field as we put intellectual property.
    Well, I totally agree with my friends on the other side of 
the aisle and Mr. Davis, both who mentioned, many of whom 
mentioned the whole issue of intellectual property, why we need 
to stand strong on that issue. We should stand strong, as the 
Jordan agreement did on labor, environmental standards. It's 
the right thing for human beings. It's the right thing for 
trade policy. It's the right thing for jobs here and it's the 
right thing ultimately for economic development in the 
developing world.
    I yield back the balance of my time, Mr. Chairman.
    Mr. Stearns. I thank the gentleman.
    The gentleman from Nebraska, Mr. Terry.
    Mr. Terry. Waive.
    Mr. Stearns. Waives. The gentleman from Arizona, Mr. 
Shadegg.
    Mr. Shadegg. Mr. Chairman, other than to thank you for 
holding this hearing and welcome our witnesses, I too, will 
waive.
    Mr. Stearns. The gentleman from Georgia, Mr. Norwood.
    Mr. Norwood. You're very kind, Mr. Chairman, but I'm just 
here to listen today, thank you.
    [Additional statements submitted for the record follow:]

 Prepared Statement of Hon. Joe Barton, Chairman, Committee on Energy 
                              and Commerce

    I want to commend Chairman Cliff Stearns for holding this hearing 
on U.S.-China trade today. Trade is a vital engine for economic growth. 
Our committee has jurisdiction over non-tariff impediments to 
international trade and I intend to pursue this jurisdiction vigorously 
during my Chairmanship.
    No bilateral trading partner of the United States has received more 
attention than China. Trade with China has expanded from $5 billion in 
1980 to $181 billion in 2003. China is our third largest trading 
partner, and the rate of growth of U.S.-China trade is staggering. 
China is our second largest source of imports and our sixth largest 
export market. This trade has allowed for substantial economic growth 
for both countries.
    There are important issues in this relationship that merit our 
attention today, however. The U.S. trade deficit with China was $124 
billion in 2003 and it is growing. Trade deficits of this magnitude are 
not sustainable in the long term. China exports quality products to the 
United States for which we pay free market prices.
    The United States is the world's leading producer of intellectual 
property--movies, music, books and software are some of our high value 
added products. We have three witnesses today from industries that 
produce intellectual property--movies, music and video games. I am 
particularly interested to hear their views of what can be done to get 
China to enforce intellectual property rights.
    China joined the World Trade Organization at the end of 2001 after 
fifteen years of negotiations. China's accession required it to 
eliminate many tariff and non-tariff impediments to the Chinese market. 
These restrictions included those on manufactured imports, and those on 
foreign ownership and investment.
    In December 2003 the USTR issued a report on Chinese compliance 
with its WTO obligations. I commend the USTR for its fine work on the 
report and its tireless work to open markets to U.S. trade. The 
conclusions in the report were troubling. It indicated that China has 
failed to live up to its WTO obligations in areas as diverse as 
agriculture, services, protection of intellectual property, tax 
policies and transparency of laws generally.
    The USTR has filed a case against China for discriminatory tax 
treatment of imported semiconductors. This case is important, and we in 
the Congress support the USTR in its effort to see that our trading 
partners live up to their obligations.
    I expect that the Committee will be active in the trade area for 
the remainder of this Congress. We will look at the Free Trade 
Agreements with Australia, Morocco and Central American countries. We 
will also look at specific impediments as they affect sectors of U.S. 
industry.
    I thank the witnesses for their participation and yield back the 
balance of my time.

                                 ______
                                 
 Prepared Statement of Hon. Bart Stupak, a Representative in Congress 
                       from the State of Michigan

    Mr. Chairman, thank you for calling this hearing. I would like to 
take this opportunity to thank all of the witnesses for joining us 
today to discuss the issue of U.S.-China trade and the upcoming Joint 
Commission on Commerce and Trade (JCCT) meeting between our two 
countries.
    Everyday our trade deficit grows. U.S.-China commercial relations 
have been strained particularly by the surging $124 billion U.S. trade 
deficit with China which is by far the widest trade gap the U.S. has 
with any other country.
    Everyday we are losing jobs to China. We need to go further in 
combating the illegal and unfair Chinese trade practices that are 
creating an un-level playing field for U.S. manufacturers and costing 
our country valuable manufacturing jobs. They don't seem to understand 
the meaning of ``playing by the rules.''
    Since joining the World Trade Organization (WTO) two years ago, 
China agreed to certain concessions. China has a mixed record, at best, 
when it comes to implementing its WTO obligations. The Bush 
Administration says it is closely monitoring China's compliance with 
its WTO commitments, but monitoring isn't enough. We need to do more.
    Despite China's ascension to the WTO and its adoption of the 
Agreement on Trade-Related Aspects of Intellectual Property Rights, the 
Chinese government has failed to effectively enforce its Intellectual 
Property Rights (IPRs) protection. The IPR enforcement mechanism is 
failing to curb widespread piracy and counterfeiting of U.S. products. 
The U.S. loses more than $18 billion every year as a result of Chinese 
piracy of everything from film and recorded music to a steady increase 
in auto parts and research results. Counterfeited products account for 
15 to 20 percent of China's total production--that is about 8 percent 
of its GDP.
    Another problem we face is that China's currency is significantly 
undervalued compared to the U.S. dollar by between 15 and 40 percent. 
This policy has been devastating to U.S. manufacturers, who are 
struggling to compete against cheap Chinese imports. It's time for the 
Administration to take concrete steps to get the Chinese to establish a 
specific timetable for floating the yuan.
    These practices give Chinese manufacturers an unfair competitive 
edge over U.S. companies. I know that given a fair chance to compete 
with foreign workers, American workers can compete because they are 
proven to be more efficient and better educated than many workers in 
developing countries. It is simply not fair to our workers when foreign 
governments, and China is one of the worst, throw up road blocks to 
U.S. imports. That's when our workers cannot compete and jobs are lost.
    During the upcoming JCCT meeting on April 21st, I strongly urge the 
Administration to insist that China fully comply with its WTO 
obligations on market-opening commitments, press China to take 
immediate steps to put a stop to the production and exporting of 
counterfeit U.S. products, and to make it absolutely clear that the 
U.S. will no longer sit by while they undervalue their currency at the 
expense of Americas workers.
    While I recognize this might not fall under the scope of the JCCT, 
I will end by saying that over the next few years, auto imports from 
China are expected to explode, as is the number of workers employed in 
China by Detroit's automakers and suppliers. We need to find ways to 
discourage U.S. companies, such as Detroit's three automakers from 
making a product in say, China, and shipping it to the U.S. and 
encourage them to keep jobs in the U.S.
    Mr. Chairman, I look forward to hearing from the Deputy Assistant 
U.S. Trade Representative Freeman on exactly what actions the 
Administration plans to take to combat the illegal and unfair Chinese 
trade practices as well as from members of the second panel on their 
suggestions on how to deal with this issue.

    Mr. Stearns. With that, it appears that the opening 
statements are complete and so we welcome our first panelist, 
the Honorable Charles W. Freeman III, the Deputy Assistant U.S. 
Trade Representative, Office of the United States Trade 
Representative.
    I understand, Mr. Freeman, you just arrived here from 
China, I think my staff said, so we appreciate very much your 
attendance and your willingness to participate and with that, 
we look forward to your opening statement.

   STATEMENT OF HON. CHARLES W. FREEMAN III, DEPUTY ASSISTANT 
 U.S. TRADE REPRESENTATIVE, OFFICE OF THE UNITED STATES TRADE 
                         REPRESENTATIVE

    Mr. Freeman. Thank you, Mr. Chairman and Congresswoman 
Schakowsky, it's an honor and a privilege to be here, members 
of the committee and to testify here today. I have to tell you 
that I've just had two trips to China in the last 3 weeks, so 
I'm not exactly sure whether I'm coming or going right now, so 
to the extent that I'm at all incoherent today, I hope you'll 
blame me and not the administration's trade policy.
    But that said, obviously China's trade issues are a high 
profile issue these days. China is our third largest trading 
partner now. It's our six largest export market. In the last 3 
years, while the global economy has stagnated, and exports to 
the rest of the world have declined 9 percent to China, they've 
actually increased about 76 percent. The pace of export growth 
to China is actually faster than the pace of import growth on a 
percentage basis for what it's worth. That's of course the good 
news. As you all know, it's not what any of us really focus on.
    The trade deficit with China, as you've pointed out, is 
over $124 billion in 2003 and you can rationalize and credibly 
explain some of the reasons for that number, but by any counts 
it's striking.
    When President Bush met with Chinese Premier Wen Jiaboa 
this past December, they talked about the rising deficit and 
the powerful impact it's had not only on the American pysche, 
but also on the consensus in this country that favors open 
markets.
    To his credit, Premier Wen agreed with President Bush that 
the right way to deal with the deficit is actually increase 
U.S. exports to China rather than to reduce the ability of U.S. 
consumers to purchase Chinese products. One of the decisions 
that was taken during those discussions this last December was 
to take the Joint Committee on Commerce and Trade, the JCCT, 
and elevate it. It's not only been a U.S. Department of 
Commerce-Chinese Ministry of Commerce exercise, the President 
and Premier Wen agreed to elevate that so it's actually an 
exercise between Vice Premier Wu Yi chairing her side and a 
group of ministries on the Chinese side.
    Ambassador Zoellick of USTR, Secretary Evans of Department 
of Commerce, with support from Secretary Veneman of Agriculture 
and others, to actually not only try to resolve some of the 
bilateral problems that we face in our trade relationship, but 
actually to promote U.S. exports to China.
    USTR's fundamental role in U.S.-China trade policy is to 
ensure that U.S. manufacturers, farmers, workers, service 
providers and consumers actually get the benefits of a deal 
that we struck that brought China into the WTO in 2001.
    While therefore some of the discussions within the JCCT 
deal with some of the fundamental concerns that some of you 
have raised with respect to the structural underpinnings of the 
U.S.-China trade relationship, many of our priority concerns 
have to do with China's lack of implementation or lack of 
complete implementation of their commitments on entering the 
WTO.
    I know that many of the excellent witnesses later today 
will address these concerns in greater detail, but along with 
other matters, but I wanted to briefly point out some of the 
broad areas on which we are focused as part of our attempts to 
utilize the JCCT to achieve the goals set by President Bush and 
Premier Wen.
    The first broad area, as some of you have alluded to is 
intellectual property rights. There's no getting around it. 
Intellectual property rights in China are not well protected. 
Enforcement of IPR is very, very lax and piracy is absolutely 
rampant. Even though in 2001, China implemented a legal regime 
which is consistent with the agreement on trade related aspects 
of intellectual property rights, the actual level of 
enforcement and the actual level--well, the actual level of 
enforcement seems to have gone down and the actual level of 
piracy seems to have increased.
    Other areas with which we're concerned are industrial 
policies that seem to discriminate against U.S. exports, 
including tax policies, in new industrial standards in other 
areas. These are things which fundamentally alter the playing 
field for some of our companies that are not only trying to do 
business there, but trying to export U.S. manufactured goods.
    In services, we have a range of issues, whether it's 
through the incomplete implementation of China's commitments on 
trading rights and distribution services which fundamentally is 
where the rubber meets the road in terms of China's WTO 
commitments. Trading rights is the ability to import and export 
products into China. Distribution services is the right to 
actually distribute those products to the Chinese people and to 
the Chinese marketplace. Incomplete implementation of those 
rights and services would, in essence, undercut the entire 
value of the deal.
    With respect to agriculture, we continue to be troubled by 
what are perceived to be an effort by some Chinese bureaucrats 
to lean on the tap in terms of imports from the United States 
into China, some of our key grains and other commodities. This 
is something that is critical to us and on which we've been 
extraordinarily concerned and focused for the last few years, 
couple of years anyway.
    I should note cutting across all of these areas is the 
critical issue of transparency. Really, what we need to see 
from China and what China committed to in the WTO agreement was 
a broad agreement to make sure that the processes for putting 
in place new regulations and for enforcing those regulations 
would be transparent. We'd have the opportunity to comment on 
them. We'd have the opportunity to help correct that. China's 
transparency commitment has been very unevenly enforced.
    I should say that while our primary goal through all of 
this is to resolve these concerns through dialog, we have not 
been shy about utilizing the measures we have available in the 
trade policy toolbox to assert U.S. interests when it's not 
possible to resolve them through dialog. As many of you know we 
did utilize special safeguards provided through us through the 
WTO agreement to impose remedies on three categories of textile 
products last year. We recently on March 18th brought the first 
WTO dispute settlement case against China, first of any other 
WTO member for its discriminatory treatment of foreign 
semiconductor products. And the administration has demonstrated 
its willingness and its right to employ other WTO legal means 
to ensure that our producers get a fair shake in the face of 
unfair competition with China.
    But the bottom line is that this country was built on open 
markets and we'd like to keep our markets that way. It appears, 
at least from my discussions today with the Chinese in 
preparing for the JCCT, China would like us to keep our markets 
open too. I hope we've been effective in reminding our Chinese 
friends that that will in no small part be dependent on what 
they do over the next few months.
    Thank you very much. I look forward to your questions.
    [The prepared statement of Charles W. Freeman III follows:]

  Prepared Statement of Charles W. Freeman III, Deputy Assistant U.S. 
                          Trade Representative

                                OVERVIEW

    Chairman Stearns, Congresswoman Schakowsky, Members of the 
Committee, I appreciate the opportunity to testify before the 
subcommittee today on the U.S.-China trade relationship. This is a 
subject of considerable importance to the Administration and the Office 
of the United States Trade Representative (USTR), in particular, in our 
capacity as the lead agency with responsibility for trade policy.
    On December 11, 2001, after 15 years of negotiations with the 
United States and other World Trade Organization (WTO) members, China 
became a member of the WTO. Under the terms of its entry, China 
committed to implement a set of sweeping reforms designed to implement 
the WTO's market-oriented rules. It agreed to take concrete steps to 
remove trade barriers and open its markets to foreign companies and 
their exports in virtually every product sector and for a wide range of 
services. It also agreed to observe the WTO's national treatment 
standards, to protect and enforce intellectual property rights (IPR), 
to accept disciplines on the use of trade distorting subsidies and to 
make other changes to bring its legal and regulatory system in line 
with those of other WTO members and to add transparency and 
predictability to business dealings. China viewed joining the WTO as a 
means to preserve and expand China's access to export markets abroad, 
particularly the United States. In turn, other WTO members envisioned 
that faithful WTO implementation by China would reduce the ability of 
non-market forces, including government policies and officials, to 
intervene in the market to direct or restrain trade flows.
    Total U.S.-China trade in 2003 topped $180 billion, with imports 
from China exceeding U.S. exports by $124 billion. China has now 
surpassed Japan and become the United States' third largest trading 
partner. China has become our second largest source of imports, with 
most of the increase displacing imports from other sources, including 
economies in Asia and Latin America. China has also become the sixth 
largest market for U.S. exports. In fact, China is currently the 
fastest growing export market for U.S. goods. Indeed, over the last 
three years, while U.S. exports to the world have decreased by 9 
percent, exports to China have increased by 76 percent. China is now a 
major importer of U.S. manufactured exports, such as electrical 
machinery and numerous types of components and equipment, among other 
goods. China is also a major importer of agricultural products from the 
United States, and U.S. service suppliers in many sectors have been 
able to increase their share of China's market.
    But, statistics are not the yardsticks by which the Administration 
measures China's compliance with its trade agreements. China's 
accession to the WTO, in particular, was conditioned on China's 
commitment to open its markets and to play by the rules of 
international trade. In that sense, the true measure of China's 
compliance with its WTO commitments is the extent to which China has 
institutionalized market mechanisms and curtailed direct governmental 
actions or complicity with nongovernmental actions to intervene in the 
marketplace. By that score, China's WTO compliance record falls short 
of the mark.
    As suggested in USTR's second annual Report to Congress on China's 
WTO Compliance, issued last December, China has made important headway 
since its WTO accession two years ago, and has completed much of the 
nuts and bolts work of WTO implementation. It has reviewed thousands of 
laws and regulations and made changes necessary to effect its new WTO 
obligations, established new transparency procedures in many national 
and sub-national ministries and agencies and the courts, and reduced 
tariffs to their committed levels, among other things.
    Despite these gains, China's compliance with its WTO commitments 
has, over the past two years, been uneven at best. The Administration 
has engaged the Chinese government at every opportunity, whether 
through discussions in Washington or Beijing or at the WTO in Geneva, 
to address perceived shortcomings in Chinese WTO compliance. In some 
cases, USTR and other agencies were able to resolve U.S. concerns. For 
example, over the course of the past year, China has taken steps to 
correct systemic problems in its administration of the tariff rate 
quota system for bulk agricultural commodities. It relaxed certain 
market constraints in soybeans trade that allowed U.S. exporters to 
achieve record sales. It reduced capitalization requirements in certain 
financial services sectors. It opened up the motor vehicle financing 
sector. It solved outstanding concerns that had prevented China's 
membership in the WTO's Committee of Participants in the Expansion of 
Trade in Information Technology Products.
    In its first year of WTO membership, China's incomplete 
implementation of WTO commitments could in some cases be attributed to 
startup problems or incomplete understanding of WTO rules and 
practices. These rationales are less meaningful two years into WTO 
membership, however. In fact, while China made significant initial 
strides toward WTO implementation in its first year, China's WTO 
efforts seemed to have lost a significant amount of momentum last year. 
Indeed, in a number of different sectors, including some key sectors of 
economic importance to the United States, some Chinese ministries 
seemed to spend as much energy avoiding China's WTO obligations as 
living up to them. Institutionalized market mechanisms remain elusive, 
and intervention by Chinese government officials in the market is 
largely unchecked.
    We acknowledge that China's WTO implementation efforts have taken 
place against a challenging political and social backdrop. In 2003, 
China underwent a major leadership change, passed through a harrowing 
national SARS epidemic, undertook a sizeable restructuring of the 
government's economic and trade functions, and confronted a host of 
dislocations inherent in its transition from a planned economy to a 
more market oriented economy. These factors may have presented 
challenges, but they are not grounds for foot dragging or other 
incomplete WTO implementation efforts.
    Our markets are certainly open to exports from Chinese companies, 
and we need to ensure that China operates with fair, transparent and 
predictable rules when it comes to our companies' access to China's 
market. That means, most importantly, that China must live up to the 
commitments that it made upon joining the WTO. We also need to ensure 
that China engages in fair trade when it comes to its exports to the 
United States. Our companies want, and are entitled to, a level playing 
field.

             U.S. MANAGEMENT OF WTO IMPLEMENTATION CONCERNS

    The Administration has stepped up its efforts to engage senior 
Chinese leaders. Over the course of the past year, as China's WTO 
implementation progress has slowed, President Bush met with the current 
President of China, Hu Jintao, and emphasized the importance of China's 
WTO obligations. United States Trade Representative Zoellick made two 
separate visits to China for talks on WTO implementation matters with 
China's Premier, Wen Jiabao, and Vice Premier Wu Yi. The Secretaries of 
Commerce and Treasury made similar trips to China, again carrying the 
message that China's WTO implementation was a matter of the highest 
priority. Sub-cabinet officials from various U.S. economic and trade 
agencies also met with their Chinese counterparts in China, Washington 
and Geneva to work through areas of concern, including WTO 
implementation issues, on numerous other occasions.
    In 2003, the Administration also utilized the newly established sub 
cabinet dialogue on WTO compliance and other trade matters (the Trade 
Dialogue), which brings together U.S. economic and trade agencies and 
various Chinese ministries and agencies with a role in China's WTO 
implementation. Trade Dialogue meetings were convened twice in 2003, 
once in February, led by then Deputy United States Trade Representative 
Huntsman, and later in November, led by Deputy United States Trade 
Representative Josette Sheeran Shiner. The Trade Dialogue meetings have 
proven to be effective venues for raising, and seeking the resolution 
of, specific trade concerns, and in serving as an early warning 
mechanism for emerging trade disputes.
    This year, in a concerted effort to solve bilateral trade issues, 
the United States and China agreed to elevate the annual Joint 
Commission on Commerce and Trade (JCCT) talks, with United States Trade 
Representative Zoellick and Commerce Secretary Evans chairing the U.S. 
side and Vice Premier Wu Yi chairing the Chinese side. Over the past 
three months, through a series of meetings in Beijing and Washington 
leading up to the April 21 talks, staff from USTR and the Commerce 
Department have been working with their Chinese counterparts to achieve 
tangible progress on the key issues. We are pressing China to take 
major, concrete steps in a number of areas where China's WTO compliance 
has been lagging, including:

 Substantially improved enforcement of intellectual property rights in 
        China, including through the use of deterrentlevel criminal 
        penalties, and the crackdown on those who export or traffic in 
        counterfeit or other IPRinfringing products;
 China's full adherence to commitments to open its agricultural market 
        and to refrain from the use of arbitrary limitations on market 
        access, including sanitary and phytosanitary measures and other 
        restrictions not based on science;
 The removal or modification of discriminatory aspects of Chinese 
        industrial policies and other measures that fail to accord U.S. 
        and other WTO member firms national treatment and fair market 
        access, particularly with regard to integrated circuits and 
        wireless encryption technology;
 The lifting of excessive restrictions imposed by China's regulators 
        on foreign service suppliers;
 China's use of fair and transparent technical standards and 
        regulations, including the establishment of procedures that 
        guarantee the public's right to notice and comment; and
 Full and timely liberalization in the areas of trading rights and 
        distribution services.
    Of course, while we prefer to resolve our concerns through 
collaborative mechanisms like the JCCT, we are not hesitant to use 
other means when necessary. Indeed, there are forces in China, as 
elsewhere, that are resistant to the changes wrought by WTO 
implementation. Despite the best of intentions of many Chinese trade 
officials, these forces have not been unsuccessful in limiting China's 
progress toward the goals the United States and other WTO members 
foresaw through China's WTO accession. As a result, some markets in 
China are not as open as they should be, and our engagement with China 
has not always been as useful as it should be.
    One area where collaboration has not been successful affects key 
U.S. technology products, namely, integrated circuits. China provides 
preferential value-added tax treatment to integrated circuits produced 
or designed in China, thereby disadvantaging U.S. and other imports and 
distorting international investment. The United States believes that 
this discriminatory tax policy is inconsistent with the national 
treatment obligations that China assumed when it joined the WTO. The 
United States has repeatedly pressed its concerns with China, but it 
recently became clear that China was not prepared to address our 
concerns in any meaningful way. As a result, on March 18, 2004, the 
United States filed a case at the WTO regarding China's policy. This 
move commences a 60-day consultation period required by WTO rules. If a 
resolution cannot be reached within that time period, we can then 
request that a WTO panel rule on whether China's policy is consistent 
with its WTO obligations.

                   ENFORCEMENT OF TRADE REMEDIES LAWS

    The rapid expansion of trade between our two countries has 
inevitably led in some cases to competition between our domestically 
produced goods and Chinese imports. When our industries face injurious 
trade with China, the Administration is fully committed to enforcing 
U.S. trade remedy laws and to exercising the important rights that the 
United States has under China's WTO accession agreement.
    One of our tools is the use of the antidumping laws, which, under 
the terms of China's WTO accession, includes our ability to continue to 
apply a special ``non-market economy'' methodology to China. In 2003, 
more than 50 percent of antidumping orders put in place by the 
Department of Commerce involved Chinese imports.
    China also agreed to two separate Chinaspecific safeguard 
mechanisms as part of its WTO accession package. These mechanisms are 
designed to allow WTO members to cope with market disruptions caused by 
increasing economic integration with China following its WTO accession.
    One of the safeguards agreed to by China is specific to textiles. 
It allows WTO members under certain circumstances to invoke limited 
import relief against Chinese imports--specifically, a 7.5 percent cap 
on growth in imports of a given textile category for up to one year (6 
percent for wool products)--until December 31, 2008. Late last year, 
the Committee for Implementation of Textile Agreements found for the 
petitioners in all three of the investigations that it conducted and, 
in December, the import relief contemplated by the safeguard went into 
force.
    Another safeguard, now codified in U.S. law as Section 421 of the 
Trade Act of 1974, as amended, applies to any product imported from 
China and is available until December 11, 2013. Since the 
implementation of Section 421, five petitions have been filed 
requesting the imposition of import restrictions. In two cases, the 
U.S. International Trade Commission (ITC) found that our domestic 
producers' market had not been disrupted by imports from China. In 
three other cases, while the ITC found market disruption, the President 
weighed the costs and the benefits to the U.S. economy, as the statute 
contemplates, and determined that the adverse impact on the U.S. 
economy was clearly greater than the benefits of import restrictions. 
While to date no import relief has been granted under Section 421, the 
President, in his most recent determinations, has reiterated his 
commitment to using this safeguard when the circumstances of a 
particular case warrant.

                               CONCLUSION

    While the U.S.-China economic and trade relationship is growing 
rapidly, there are a number of structural impediments that remain, 
making further improvements in that relationship problematic. The 
Administration is committed to resolving the United States' concerns 
through all available means. It will use bilateral engagement, whenever 
possible. For the most part, bilateral efforts have been effective or 
continue to hold some nearterm likelihood of success. However, when 
those efforts are not productive, or it becomes clear that bilateral 
engagement on a particular issue has reached stasis, as in the case of 
China's tax policy on integrated circuits, the Administration is fully 
prepared to assert the United States' rights under U.S. law and through 
multilateral means, including dispute settlement at the WTO.

    Mr. Stearns. Mr. Freeman, thank you. I'll start with my 
questions and I'm going to go to the heart, I think of this 
whole debate with China. I called attention to you earlier 
before the hearing the article by Robert Samuelson in today's 
Washington Post and I hope your staff got a copy of that for 
you.
    And I think Mr. Strickland and people on this side, Mr. 
Brown, Mr. Davis and people on our side, this is, I think, the 
crux of what we're talking about here. It's almost a universal 
canon or common perception that China is taking away all of our 
jobs. And I'm going to ask you this question. Mr. Samuelson 
posits the question that China is not likely to be a 
significant cause of U.S. job losses. He indicates that adverse 
labor conditions in China may affect less than 1 percent of 
U.S. jobs.
    So the first question, do you agree with that statement and 
he points out that if the United States practices 
protectionism, it will not create new jobs in this country and 
he points out the AFL-CIO's demand for tariffs would likely 
invite Chinese retaliation which would have an immediate 
negative impact on job growth in the United States.
    So this universal canon--and I think people on both sides 
of the aisle feel this and it's universally accepted in 
America. Now it's a chance for you as a representative of the 
administration and USTR is to answer that question whether the 
adverse labor condition in China affects less than 1 percent of 
U.S. jobs.
    Mr. Freeman. I'm not an economist, so I'm not qualified to 
categorize that percentage.
    Mr. Stearns. Okay.
    Mr. Freeman. I will say that----
    Mr. Stearns. Obviously, you're not an economist, but you're 
involved with trade negotiations and you talk to a lot of 
economists. You have economists on your staff and I mean you 
certainly--do you agree with that statement, yes or no?
    Mr. Freeman. I'm not sure. With respect to the AFL-CIO 
petition we've just received, we're looking at it, we're 
reviewing it. Let me say a couple of things about the petition.
    Mr. Stearns. Let me just ask you a question though. If the 
perception is that China is taking our jobs away and Samuelson 
is saying it's not, do you think he's correct or not? I'm 
putting you on the spot.
    Mr. Freeman. You are putting me on the spot and I wish I 
was back on that plane, I'll tell you. Let me, again, let me 
say that one of the issues, we haven't been able to analyze. 
The AFL-CIO's petition----
    Mr. Stearns. I'll give you some leeway.
    Mr. Freeman. Give me a little leeway.
    Mr. Stearns. Go to the AFL-CIO petition which he points out 
will invite Chinese retaliation and would have a negative 
impact. Do you think that's true?
    Mr. Freeman. I will say in the course of U.S. history that 
protectionism has not resulted in job creation, in fact, quite 
the opposite. I'm not sure that that's what we need to be doing 
with respect to China.
    I think the issue is making sure that the playing field is 
made increasingly fair. That said, it's hard to deny that the 
substance of the AFL-CIO petition which is that for all intents 
and purposes workers' rights in China are oppressed.
    Mr. Stearns. That we agree on.
    Mr. Freeman. How that manifests in the trade relations is 
another question.
    Mr. Stearns. And how it impacts jobs is quite complex.
    Mr. Freeman. And that's something which we need to look at 
in the context of our review.
    Mr. Stearns. Let me go through some quick things that 
really get to the jurisdiction of this committee. Please 
describe some of the restrictions on U.S. service providers in 
China. Are there specific restrictions that apply to insurance, 
to other financial services, to telecommunications services, to 
accounting services, and please comment on our strategy for 
encouraging more open market in China for services which is 
really directly our jurisdiction?
    Do you want me to repeat that?
    Mr. Freeman. I've got it.
    Mr. Stearns. Okay.
    Mr. Freeman. I think the issue is with respect to services 
there are a number of areas that we're particularly concerned 
about. The primary thing we're concerned about is China seems 
to be really trying to limit the number of service providers 
that play in its marketplace and have these large players and 
just a limited number of them. So what they've done is they've 
set very high capitalization requirements for companies that do 
business there. The capitalization requirements have no 
relation really to what are prudential requirements. They just 
seem to be fairly arbitrary. So there's no real rhyme or reason 
to those requirements.
    They've also limited the scope of businesses that service 
providers can engage in, seemingly arbitrarily. They've limited 
the geographic scope of some of these businesses. They've 
limited again, the scope of the kinds of businesses that they 
can engage in.
    Really, the primary goal of these things seems not to be 
encouraging their own industries to grow, but really to prevent 
U.S. and other service providers to operating the marketplace. 
What we tell the Chinese is we have to come back and tell the 
U.S. Congress that we want to keep our markets open and you 
tell us you've got a comparative advantage in these X, Y and Z 
products. And we say well, we have a comparative advantage in 
services and high tech and certain manufactured goods, 
agriculture. Unless you're giving us a fair shake, unless 
there's reciprocity, we can't argue in front of Congress that 
we should keep our markets open to your products.
    So in the area of services, we think we've got a 
comparative advantage. We think we've got a WTO deal that would 
allow us to assert that advantage and we're going to continue 
to achieve the goals of the WTO agreement.
    Mr. Stearns. This would include accounting service, 
telecommunication service, financial service, as well as 
insurance?
    Mr. Freeman. Across the board.
    Mr. Stearns. Okay, my time is expired. The gentlelady, Ms. 
Schakowsky.
    Ms. Schakowsky. I want to echo some of the concerns that 
were raised by Mr. Brown over remarks and I think Mr. 
Strickland as well, remarks that were made by the President and 
by the Commerce Secretary over the last couple of days. The 
President said ``when you hear people talk about let us 
reconsider free trade agreements, what they're really saying is 
is that perhaps we ought to wall ourselves off from the rest of 
the world. See, I think that would be absolutely wrong for 
America to be so pessimistic about our ability to compete that 
we become economic isolationists.''
    And last week, Secretary Evens said, ``America is not a 
fortress. It's a bridge. Traffic goes two ways. Economic 
isolationists are waving a surrender flag, rather than the 
American flag.''
    That last comment, something that I really took great 
exception with because I felt that that was questioning the 
patriotism. It seems that the term now ``economic 
isolationist'' is the term of the moment, of the week, of the 
month, to describe people who, in my view, are those that are 
concerned or alarmed about the job losses that in our view have 
accompanied free trade agreements and that's why the question 
by our Chairman is very, very important. It hadn't even 
occurred to me that one would think that our relations with 
China, with Mexico, wherever our jobs are going actually has 
nothing to do with job loss in the United States.
    So I'd really like you to comment, first of all, if you 
think that those Americans that are out of work, who at least 
perceive themselves to have lost their jobs because they have 
gone overseas somewhere, are they economic isolationists? Are 
they not waving an American flag? What is the view of this 
administration? We continue to hear what I consider to be 
sliming of people who are concerned about the effects of these 
trade policies.
    Mr. Freeman. I'm not particularly qualified to comment on 
whether or not workers or people who are concerned about job 
losses are economic isolationists.
    Ms. Schakowsky. Well then, who are they? Who are the 
economic isolationists?
    Mr. Freeman. Again, my job is to focus on market access 
issues with respect to China and to open the markets so that 
people in this country that are working extraordinarily hard to 
put food on the table for their families and to produce quality 
products are able to make sure that those products reach the 
markets that they're intended to reach. And my strong sense is 
that this administration is committed 100 percent, 110 percent 
if you like, to making sure that that happens.
    We continue to focus on across the board with respect to 
China certainly, to make sure that the goal of this 
administration is to open markets overseas, not to necessarily, 
not to shut down our markets here.
    Again, I'm not going to suggest, to get into the debate on 
economic isolationism. I think the key for this administration 
is opening markets overseas and not closing markets here.
    Ms. Schakowsky. It is important--the real crux of the issue 
was the question though that the Chairman asked, whether or not 
this administration acknowledges that as we open up, as we do 
trade with countries like China, who have policies that exploit 
cheap labor, whether we acknowledge that that has an impact on 
jobs at home.
    To me, it's a no brainer. It's obvious to me that that is 
the case. When I went to Ciudad Juarez, saw maquiladoras that 
are moving from Mexico to China, leaving behind workers for a 
pursuit of even cheaper labor, the jobs were lost. We see it 
along the U.S. border, on the U.S. side, jobs leaving. So it 
seems to me troublesome at the very least if there's not an 
acknowledgement that we are losing jobs to other countries.
    Mr. Freeman. I think the issue is the jobs are going--there 
certainly is labor costs that factor in moving production 
overseas, absolutely. There's no argument there. But the 
question is whether with respect to trade agreements you're 
actually gaining more jobs here than you lose and that again, 
I'm not an economist and I'm not going to cite the number of 
jobs that have been gained through any number of trade 
agreements with which we've engaged, but certainly from our 
statistics, jobs have been, the growth has been positive.
    Ms. Schakowsky. Do you believe that labor rights are 
important to be part of our trade relations with other 
countries?
    Mr. Freeman. I think certainly this administration has 
shown that it's willing and able to forcefully push for labor 
and environmental rights within new trade agreements. I think 
that's part of our fundamental policy.
    Ms. Schakowsky. And where have we seen that?
    Mr. Freeman. We've seen it in the Jordan agreement, the 
Chile agreement and the Singapore agreement.
    Ms. Schakowsky. Isn't it true you wanted to renegotiate the 
Jordan agreement, am I wrong about that, that some of the labor 
rights that--I thought the Jordan agreement was negotiated 
under the Clinton Administration and that some of those 
positions, am I wrong about this?
    Mr. Freeman. There was some, maybe you can help me, I don't 
think that's the case.
    Mr. Stearns. You certainly can get back to us, if you want.
    Mr. Freeman. Absolutely.
    Mr. Stearns. The gentlelady's time has expired.
    Ms. Schakowsky. Thank you.
    Mr. Stearns. The gentleman from Michigan, Mr. Upton.
    Mr. Upton. Well, thank you, Mr. Chairman, and thank you 
again, Mr. Freeman for being here this morning. We have coffee 
in the side room if you need a little bit.
    I appreciate your statement and strongly underscore that 
the goal is to open markets overseas. But I have a lot of 
concerns. I look at a Congressional Research Service and a 
bulletin that was published just this last week and it says 
China's restrictive trade and investment practices are a 
failure to provide adequate protection for intellectual 
property rights. China has made significant progress in meeting 
its WTO obligations, but a number of major problems remain, 
especially in regards to agriculture, services, IPR protection, 
tax policies, trading rights, distribution, transparency of 
trade laws and regulations and in your formal written statement 
and I quote on page two, you say ``by that score, China's WTO 
compliance record falls short of the mark.''
    As I look at the tarde numbers, not only last year 2003, 
but 2001 and 2002, the trade deficit went from $83 billion to 
$103 billion to $124 billion in terms of the deficit. The 
amount, interesting to note, is that the increase in each of 
those years of Chinese exports here, the increase from the 
previous year exceeds our total exports to China. Not very 
promising numbers.
    And I'd be curious to know where do you think these numbers 
are going in 2004 and 2005? I've never been to China. Let me 
just make one other point before I hear your answer. I've never 
been to China, but the many people that I've talked to have 
been there, many of which have urged me to go. They've said 
it's not the first visit to China, it's the second, third and 
fourth so you can actually measure the progress of what China 
is doing and as I look at these numbers, I'm very alarmed, 
particularly as I read your statement in here of not complying 
with the WTO and other independent reports that share exactly 
the same information.
    Where are we going in 2004 and 2005?
    Mr. Freeman. I haven't done any independent analysis, but I 
would be very surprised if we didn't continue to rise.
    Mr. Upton. I'm sorry, say that again?
    Mr. Freeman. I haven't done any independent analysis. I 
would be very surprised if the deficit didn't continue to rise. 
What we're attempting to do is try to slow the growth of the 
increase. One of the things about the rise in deficit though is 
it's not simply a bilateral concern. A lot of what we've seen 
in frankly in other markets is we've actually seen a decrease 
in our deficit with other markets particularly in Asia and to a 
lesser extent Latin America.
    Mr. Upton. But isn't that in large part because of the 
currency manipulation? I mean because of the weakening of the 
dollar has helped us in exports, but of course, we don't have 
that same measure for China because of their currency 
manipulation?
    Mr. Freeman. Actually, I think what's happening is that 
China actually is running right now itself running a trade 
deficit with the rest of the world. If you take us out of the 
equation, they're running a rather large trade deficit. What's 
happening is frankly a lot of the countries that used to supply 
us with low labor, labor intensive products are actually 
supplying through China and then there's additional labor and 
value added in China and that's exported to us.
    Mr. Upton. Let me just ask one quick question before my 
time expires and that is where are we in terms of progress in 
the currency manipulation? We've seen legislation introduced 
here. We had a test vote earlier this year. Do you see any 
movement by the Chinese with regard to this issue in the next 
couple of months?
    Mr. Freeman. Again, I think this is an area, as you know, 
currency has always been the area that the President and the 
Secretary of the Treasury have unique oversight of, so this is 
an area where USTR doesn't traditionally comment. We have heard 
about the petition on Section 301 that's coming from people in 
the community and we'll look forward to reviewing that when we 
see it.
    Mr. Upton. I yield back.
    Mr. Stearns. The gentleman yields back. Mr. Strickland.
    Mr. Strickland. Thank you, Mr. Chairman. Mr. Freeman, I 
don't want to quibble over a word, but words are important and 
I noticed that you said a little earlier that we should be 
working to make sure the playing field is made increasingly 
fair. What I wished you had said is that we are working to make 
sure the playing field is fair.
    I think that's what we all want. We don't want this 
incremental maybe 10 years from now things will be better than 
they are and it seems that you and other members of the 
administration have a responsibility to this country and to our 
workers and to our domestic industries to absolutely insist 
that whatever rules there are, that they are fairly implemented 
and fairly enforced.
    Given the fact that we have this trade deficit with China 
and the fact that you've said that if our interaction with 
China was taken out of the equation that China would actually 
have a trade deficit, is this economic relationship that exists 
between our country and China more beneficial to China or more 
beneficial to us, currently?
    Mr. Freeman. Well, I'm going to argue it's more beneficial 
to China, certainly. We certainly benefit from the 
relationship, but when you have $150 billion customer in the 
United States, that's a pretty big customer. That's a pretty 
big benefit. That's one of the reasons that we are so forceful 
and do believe we will make progress in some of our key trade 
concerns because at the end of the day when you have $150 
billion sack of cash that gives you some leverage.
    Mr. Upton. So it seems to me that if this relationship is 
more significant currently to China than to us, that should 
give us leverage. China needs us as trading partner, 
desperately. And it seems that that ought to give our 
government, you and those you work with the ability to exert 
some appropriate pressure on China to deal with things like 
environment and labor and all those kinds of things. And quite 
frankly, I don't see that happening. Maybe it's happening 
quietly, behind the scenes, out of the public's view and 
scrutiny, but it seems to me that we give more than we get and 
that that's fairly constant.
    Mr. Freeman, the National Association of Manufacturers has 
pointed out that under GATT, Article 11, WTO members are not 
supposed to restrict exports except for very narrowly 
prescribed reasons. Just recently, it has come to our attention 
that China has placed restrictions on the export of coke and 
that that is having a direct impact on our U.S. steel 
production and it's exacerbating the shortage of steel products 
in this country.
    They are currently the largest exporter of coke to this 
country, but press and industry reports indicate that they plan 
to further reduce exports substantially this year, further 
limiting access to coke. And at the same time, they are buying 
nearly every bit of scrap that they can get from this country. 
I met in my District a few days with about 25 industry leaders 
who are terribly concerned.
    This is my question and I only have a little time. Will you 
and your agency make it a priority during the upcoming April 
JCCT session to discuss these matters with China, both the coke 
and the scrap issue?
    Mr. Freeman. We do have a very active discussion with the 
Chinese right now on some broad structural concerns and that 
includes their use of export controls, export restrictions on 
certain products and their large purchases of scrap.
    One of the things that's striking to us, China is a huge 
net importer of steel products. And a huge consumer of steel 
products. One of the things we're concerned about is that they 
continue to build capacity to produce steel when there's this 
enormous over capacity in the global steel market. So there are 
certain things--China often says to us, we're a market economy, 
we demand market economy status in the context of your anti-
dumping laws and we say well, if that's the case, then why are 
you doing things which don't seem to be a case of supply and 
demand? Why are you doing things which seem to be fairly 
government sponsored in nature?
    So it is an area of focus.
    Mr. Stearns. The gentleman's time has expired. The 
gentleman from Idaho.
    Mr. Otter. Thank you, Mr. Chairman. Mr. Freeman, in my 
opening remarks you heard me mention something about getting 
some folks on the team that have been part of the real world 
and I want to apologize if I offended anybody that is presently 
on the team. But it seems to me that that would be a reasonable 
expectation for us to have people that are going to be 
negotiating our quote unquote economic lives overseas to 
actually have with overseas trading partners, to actually have 
somebody there that has worked in the real world.
    Do we have that on this team coming up for China now? Do 
you have anybody on there that's been in the entertainment 
business, actually had to make a paycheck or met a payroll from 
the entertainment industry?
    Mr. Freeman. What we have is a very strong advisory process 
in which people from the entertainment industry, from a variety 
of other industries tell us exactly what their priorities are. 
We have a very good line into what business really wants from 
us. So we think while they may not be at the table with us, we 
know exactly what the agenda is.
    Mr. Otter. I think that's good, but I've been on lots of 
advisory committees. I was on the World Bank, Eximbank Advisory 
Committees when I was the president of a large international 
agribusiness company and I know that there's a lot of 
difference in being on an advisory committee and in an advisory 
capacity and simply having an ad hoc position as opposed to 
actually having a seat at the table and where that foreign 
negotiator recognizes that I have driven the combines, so I 
know about the wheat. I have shot the movie. I have been part 
of that creative effort by the entertainment industry. And so I 
have something very personal here. This is not esoteric. This 
is not far fetched. This is the real world that I want to deal 
with.
    I still believe that if you don't have somebody on that 
team, you're anemic in your ability to really be able to 
challenge these people in all potential aspects. I say again, I 
have asked through the Department of Agriculture, through the 
USTR before, especially on ag. products, for them to put 
somebody, put a farmer, put a rancher on that negotiating team 
with a vote just like everybody else has, with an ability to 
argue just like everybody has; and a person out of a plant from 
out of a bargain unit.
    I don't know if you've ever negotiated with farmers or 
unions, but I'll tell you they're tough and they've got a good 
product and they know what their product is worth and I believe 
that's what we need on our teams when we meet foreign trading 
partners is somebody tough at that table that knows what our 
products are.
    So I would encourage you, if you could, to expand that team 
and get those kind of folks on it.
    Thank you, Mr. Chairman, I yield back the balance of my 
time, unless it's gone.
    Mr. Stearns. Mr. Brown, the gentleman from Ohio.
    Mr. Brown. Thank you, Mr. Chairman. Thank you very much, 
Mr. Freeman. I was a little surprised by your comments that 
this trade arrangements is more ``more beneficial to China than 
to us'' and I've heard others in the administration say that we 
get all kinds of benefits so it's equally beneficial to both 
countries and I appreciate your honesty because it pretty 
clearly is--I don't think it's more beneficial to Chinese 
workers, but it's more beneficial to the People's Liberation 
Army and more beneficial to the Chinese communist party and 
more beneficial to U.S. investors as part of that trilogy to 
coin a phrase, maybe.
    I want to talk about Jordan and I appreciate Ms. 
Schakowsky's comments and others about the Jordan trade 
agreement. As you recall, Jordan was actually negotiated by 
President Clinton in past in the year 2000, I believe, and the 
interesting thing about Jordan it passed by a voice vote. I was 
in the hall, as many others were. There was not one dissenting 
vote. If I recall, it wasn't even a recorded vote as a result. 
But Jordan was supported by people across the board, people 
that always voted for free trade agreements, people that always 
vote against free trade agreements and everybody in between, in 
large part because it included strong environmental and labor 
standards and the enforcements systems were similar to those 
available for the agreement's investment protections.
    As I said, it passed without dissent. Now the difference, 
when we talk about Chile and Singapore, Chile and Singapore 
appear to have labor and environmental standards, but they're 
not ILO, International Labor Organization standards, they're 
standards that are enforceable, but they're standards that only 
need to comply with their own labor standards. In other words, 
all they have to do is commit to enforcing their own labor 
standards, whether they're stronger or weaker than ILO 
standards.
    Now the problem with that is one, their standards already 
are weaker. Second, and that's perhaps, arguable, but second, 
it's clear that investors from outside will put pressure on 
those countries, on those two parliaments or legislative bodies 
or countries to weaken their environmental standards and labor 
standards, and then they can enforce weaker standards. So 
that's the problem with Chile and Singapore. And to equate 
Chile and Singapore with Jordan is a bit inaccurate.
    Now my question is this, Tom Donohue said, the President of 
the Chamber of Commerce, talking about Jordan said ``trade 
promotion authority should be unencumbered by requirements to 
advance unrelated labor, environmental and other social agenda 
objectives as part of trade negotiations.'' But 3 weeks ago, 
your boss, the USTR Ambassador Zoellick said because of the 
Jordan FTA ``trade between the U.S. and Jordan has nearly 
tripled in only 3 years.''
    Who's right? Is Zoellick right or is Donohue right? Not to 
speak ill of your boss.
    Mr. Freeman. I would never speak ill of my boss. My boss is 
always right for the record. And I'm not a Jordan trades expert 
so I will close with that.
    Mr. Brown. Comment on that, give me your thoughts. Jordan 
seems to be working with labor and environmental standards. Why 
is this administration not--I'll ask it this way, then why are 
they not pushing for similar kinds of standards, ILO standards, 
not enforce your own standards in these other bilateral 
agreements.
    Mr. Stearns. The gentleman's time has expired. Why don't 
you finish answering the question.
    Mr. Freeman. My strong sense is that this administration is 
very committed to the policy that was used in both Singapore 
and in Chile to include these key elements of a trade 
agreement. I don't believe that those agreements have any 
weaker provisions than Jordan. I truly do not.
    Mr. Stearns. I thank the gentleman. The distinguished 
chairman of the full committee, Mr. Barton.
    Chairman Barton. Thank you, Mr. Chairman. I would ask 
unanimous consent that my opening statement be in the record.
    Mr. Stearns. By unanimous consent, so ordered.
    Chairman Barton. I just have a few brief questions. 
Obviously, the committee supports a trade relationship with 
China, but it certainly does appear to be one sided when 
there's a 5 to 1 imbalance between exports and imports. Is that 
something that concerns the U.S. Trade Rep. that we have such 
an imbalance and it appears to continue to be growing?
    Mr. Freeman. It absolutely concerns us and not just because 
of the raw number but because of the impact of that imbalance 
on the public psyche and the support for open markets. Really, 
that number and it's in and of itself is showing. And when you 
have that kind of shocking number it stimulates debate, it 
stimulates concern and it really stimulates some of the real 
pressures that we feel to justify our trade policies.
    That said, it's also a very useful tool when discussing 
with the Chinese the need for them to follow through on their 
WTO commitments. When we are able to say look, this trade 
imbalance really is a key part of our trade relationship, 
unless you do something about opening your markets and 
following through on your market access commitments, we can't 
sustain support for this relationship in the long time. So it 
is a key part of our----
    Chairman Barton. You can correct me, my memory for 
statistics may be faulty, but back in the 1970's and 1980's we 
had a huge trade imbalance with Japan that became a very large 
part of many of the Presidential campaigns and we don't get see 
that with China, but the percentages are worse with China than 
they ever were with Japan. I think a step and I know that this 
has been raised at the highest levels between our 
administration and the Chinese officials, but the false 
valuation of the Chinese currency has got to be a contributing 
factor to this. What are the prospects of having the Chinese 
more correctly value their currency versus the rest of the 
world financial currencies?
    Mr. Freeman. Again, I've got take a cop out on that because 
it's a Treasury Presidential issue with respect to currency. 
Administration officials are not allowed to comment on currency 
valuations.
    Chairman Barton. We won't tell anybody.
    Mr. Freeman. All right. Well, in that case--on that score, 
I think the President and the Secretary of the Treasury have a 
very active engagement with the Chinese and I think a very 
effective engagement with respect to discussing moves that the 
Chinese need to make and can make in order to move to a more 
liberalized market.
    Chairman Barton. My time is about to expire. My final 
question is much more parochial and closer to home. I have a 
company in my District that the most cost-effective converter 
of scrap steel into new steel products, Chaparral Steel. And 
the price of scrap steel is just skyrocketing primarily because 
there's a huge demand for it in China. What, if anything, can 
we do about that?
    Mr. Freeman. We've love to talk to them. I'll put it this 
way. We've had discussions with other scrap users in this 
country and we're really trying to get a handle on this. So I'd 
really invite you or your constituent to give us a shout.
    Chairman Barton. Thank you, Mr. Chairman.
    Mr. Stearns. Thank you, Mr. Stupak?
    Mr. Stupak. Thank you, Mr. Chairman. Sorry I was late. I 
ask unanimous consent to put my opening statement in the 
record?
    Mr. Stearns. By unanimous consent, so ordered.
    Mr. Stupak. Thank you. Mr. Freeman, I've been sitting here 
and I was late, but listening to questions and all that, it 
seems like we're doing a lot of talking with China, are we 
doing anything else?
    Every question has been well, we're talking to them. We've 
had trade agreements with them since 1979 and I don't know of 
one that they've honored yet. Are we going to do something 
other than just talk about it or are we going to do something 
about it?
    Mr. Freeman. We did just recently file the first WTO case 
that's been filed against China, so I think we are doing more 
than simply talking.
    Obviously, the issue is you do have a trade agreement and 
you do have a bilateral arrangement. It's a lot easier to solve 
problems through discussion and dialog and we have made great 
progress. We've solved problems that allowed record sales of 
soybeans into China. We've allowed----
    Mr. Stupak. When do those start?
    Mr. Freeman. What's that?
    Mr. Stupak. When do those soybean sales start?
    Mr. Freeman. We sold $2 billion of soybeans last year.
    Mr. Stupak. You look at it, $2 billion, okay. Our deficit 
with them is $124 billion. It gets bigger every year. So 
obviously, the talking isn't working and we're not selling 
enough soybeans and I read recently here some reports that 
China is implementing an industrial policy that seeks to 
protect and support its domestic auto industry. So how can the 
U.S. prevent China from implementing this policy that's been 
reported here in the United States that protects its domestic 
industry and restrict imports?
    Mr. Freeman. We actually think we're going to resolve that 
problem, whether it's through discussion or case----
    Mr. Stupak. Have you even brought it up yet?
    Mr. Freeman. Absolutely.
    Mr. Stupak. How are you going to resolve it?
    Mr. Freeman. My strong sense is that we will resolve it 
within a very short order.
    Mr. Stupak. No, how?
    Mr. Freeman. I think China will amend its policy to make it 
WTO compliant.
    Mr. Stupak. And if they don't?
    Mr. Freeman. If they don't, we'll take appropriate action?
    Mr. Stupak. Such as?
    Mr. Freeman. If we need to take a WTO case, we shall do so.
    Mr. Stupak. So we've only had--China has been in WTO now 
what, about 3 years and we've had one case so far, just 
recently filed?
    Mr. Freeman. That's correct.
    Mr. Stupak. What about intellectual property rights? We've 
had this discussion for years in this committee and it's now an 
$18 billion loss to our U.S. industry on piracy and the 
Chairman mentioned last election, I think the last election we 
were running around about CDs or something that China was 
stealing the CDs. That's almost 4 years ago and every year, 
again, intellectual property theft goes up $18 billion. What's 
being done on that aspect?
    Mr. Freeman. I hate to say we're talking to them again.
    Mr. Stupak. We're talking to them.
    Mr. Freeman. We're talking to them again and we think we're 
making progress.
    The issue there is it's hard to get your hands around and 
it's a problem that's not going to go away tomorrow, despite 
whatever we do. So we're going to keep pressing.
    Mr. Stupak. You're right, it's not going to go away 
tomorrow and we've lost our manufacturing jobs, basically to 
China, and they keep saying, the administration keeps saying 
we've got to think better and we've got to have the new 
knowledge, what is the new source of it, but yet, we look at 
China and our intellectual property rights are being stolen all 
the time. So why would the American worker want to move from 
manufacturing to intellectual when it's being stolen all the 
time and we're not doing anything about it?
    Mr. Freeman. The issue is genuine. I think we are doing a 
lot about it.
    Mr. Stupak. Besides talking, what else are we doing?
    Mr. Freeman. My sense is if they don't comply with their 
commitments, if they don't move to make their system more 
effective to protect IPR, we'll take appropriate action?
    Mr. Stupak. Which is what, WTO again?
    Mr. Freeman. Presumably.
    Mr. Stupak. How about this Agreement on Trade-Related 
Aspects of Intellectual Property Rights that they've signed, 
but are violating. Is there any remedy in that agreement?
    Mr. Freeman. The issue there is whether their legal system 
is effective, is an effective system to enforce intellectual 
property rights. I would argue certainly that it is not 
effective. We certainly are talking to our industry and I think 
you'll hear from some of them later today.
    Mr. Stupak. Before we enter into these trade agreements, 
shouldn't we make sure there are courts and legal systems in 
place to enforce agreements or violations of regulations? Why 
do we enter into trade agreements and then we try to help them 
with their courts and help them with the value of their dollar 
and if we're going to do trade agreements, how come these 
things aren't in place before we approve these trade 
agreements?
    Mr. Freeman. The courts that protect IPR in China are in 
place and they were in place before they entered the WTO. The 
question is whether they're effective and I think that's 
something that we'd argue again that they're not.
    Mr. Stupak. The administration talks a lot about in any 
disagreement there would be criminal violations and criminal 
prosecution. Has there been any in China on intellectual 
property rights?
    Mr. Freeman. There has. Not what we'd like to see and the 
issue there is not simply to get one or two criminal 
convictions or criminal prosecutions, but actually to see the 
number increase so that you have deterrence and again, one of 
the issues there is the Chinese say how many criminal 
prosecutions do you want to take? How many IPR violators do you 
want us to throw in jail? We always have problems with you guys 
over human rights, now you're telling us to throw more people 
in jail?
    It's a fairly cynical thing to say, but the point is the 
number of IPR violators in China is so high that you need to 
start small and build on that.
    Mr. Stupak. We should prosecute the government officials 
and then it would get done quicker.
    Mr. Stearns. The gentleman's time has expired. Mr. 
Sullivan? Waives.
    Mr. Shimkus?
    Mr. Shimkus. Great, perfect timing. I thank my roommate for 
the courtesy. First, I've got a guest here, the Mayer family, 
Brian with his wife and niece and daughter and son and they 
were just about to sneak out the door of this scintillating 
testimony and questions. I think they want to see the Air and 
Space Museum, but the reason why I'm glad they're here is our 
debate really and our good friend, Mr. Stupak, is not just 
about jobs today, but it's really about jobs in the future and 
we see the young children there, we do want a growing economy 
for the future, so thank you for visiting us and now you're 
part of the official transcript of the committee hearing and 
we'll get you a copy, but have a great day as you visit 
Washington.
    But the one thing that gets lost in this debate, you know, 
that if we raise tariffs, we encourage manufacturing to move 
overseas. I mean if we really get in a trade war, it just makes 
it easier for people to move. It's just another incentive for 
manufacturing to move. So we want to have these negotiations 
and we want the debate because we want lower tariffs, and as I 
understand, Mr. Freeman, really that's your job is to help us 
get market access of U.S. products to China.
    So we have some challenges in doing that. The three things, 
can you talk about our FIF debate as far as the--you're not 
going to mention that.
    Are we less competitive because we double tax our 
manufacturers? You're going to weasel out of that one too?
    Mr. Stearns. I encourage the gentleman--perhaps weasel is 
not the right word.
    Mr. Shimkus. Okay, okay.
    Mr. Stearns. Euphemistic word----
    Mr. Shimkus. All right, we're not going to talk about 
currency. We're not talking double taxation. That's really our 
problem. Our Nation's problem is we double tax our 
manufacturers. Most countries do not. A tax in the country in 
which the manufacturers occur. So we have a problem there.
    How about the--as I mentioned in my opening statement the 
whole intellectual property realm. Can we get to a point where 
we employed a WTO system to address intellectual property?
    Mr. Freeman. I think we can and I think we're coming closer 
to it. One of the issues that we've had in bringing a case on 
intellectual property in the past, WTO or otherwise, has been a 
lack of consensus within our creative industries about bringing 
such a case. There really has been--one of the issues that 
China has been able to utilize effectively and preventing us 
from taking strong action on different areas is our industries 
are over there. They are fearful of retaliation if they are 
perceived to be pressing the U.S. Government to be taking 
action against China. So in the area of intellectual property 
rights there has been less than unanimity among our creative 
industries and our innovative industries about bringing action 
on WTO.
    One of the things that's changing these days on the IPR 
front is a lot of companies, especially small manufacturing 
industries, enterprises, that don't have any business with 
China are seeing their property ripped off and exported. So 
it's actually competing with them in different markets and 
that's changing the playing field significantly for us in terms 
of our ability to say hey, there's more than simply a case of 
us worrying about whether your industries are going to be 
retaliated against. We have genuine home town issues here that 
it's going to require us for principled as well as economic 
reasons to take action.
    Mr. Stearns. The gentleman's time has expired. The 
gentlelady from Missouri.
    Ms. McCarthy. Thank you very much, Mr. Chairman.
    Thank you very much, Mr. Freeman for sharing your thoughts 
with us today. I want to follow up on the frustration our 
entertainment industry has with regard to what's going on in 
China. And I know Mr. Papovich and others will be visiting with 
us in the next panel, but you won't be here to address the 
issues that they're raising that I read about in their 
testimony, so I want to raise them now and get your thoughts on 
what America should be doing that it's obviously not doing.
    You know, we make these trade agreements, the United 
States, and we call on China to provide criminal remedies 
against this piracy that's at 90 percent now in China. And 
China tells the United States they will and it tells the WTO it 
will and then it doesn't. And I wonder what you as an 
individual are doing and can do so that we get China to 
transfer this whole issue out of the administrative world and 
into a prosecution, criminal prosecution mode, you as an 
individual and that we demand China make these changes, change 
from an administrative venue into one that is a prosecutor-
oriented venue and that's--China has to change some laws and 
regulations to do that. And we need to demand that.
    And then their police don't engage in this whole process 
because it's so administrative. The investigation end in China 
is very weak. And we've got to tell China that they either have 
to have private organizations be allowed to gather the 
information about this piracy so that it can be prosecuted or 
undertake that criminal investigation themselves. Again, it's 
something that we do with other countries and other trade 
agreements. We need to demand it of China.
    And then I understand that the current law has such a high 
threshold of piracy before you can ever even begin an 
investigation that all of a sudden there's this huge loss of 
profits and revenues before they even begin to take a look at 
it.
    I believe all of that should be something that you in your 
venue can negotiate. It's not working. The new WTO laws have no 
impact on what's going on. These are intellectual properties. 
These are ours. And yet they're being stolen from us and it's 
not just the loss of revenue which is outrageous, it is the 
insult to our creative community and our industry that supports 
them.
    I'm going to stop and I would like you to address the 
specifics of what is being recommended by those affected and 
I'm lifting from their testimony and what you as an individual 
are doing about it?
    Mr. Freeman. I just returned from a couple of days of 
negotiating just on this issue. I was waiting to see what the 
final memorialization of those days will be, but I feel very 
good that some of the issues that you raised are going to be 
addressed prior to the Joint Commission on Commerce and Trade, 
specifically on the issue of criminalized thresholds, 
specifically on the issue of the increase enforcement by 
judicial and prosecutorial authorities.
    What's happened now as well as that previously when we had 
discussions about this issue, we were forced to talk to trade 
policymakers or intellectual property rights policymakers, 
people that were writing the laws. Now what's happened is that 
the police, Customs authorities and others have come into that 
dialog and we're actually starting to put in place a dialog 
between our Customs authorities and theirs.
    With respect to intellectual property rights, here's one of 
the central problems that we face. The central Chinese 
authorities are absolutely sincere and I believe them, that 
they want to create an IPR enforcement regime that works for 
China because it's in their economic interest to develop an 
innovative industry. China has to--I saw with somebody this 
past week who said you have to understand, China needs to 
create 50,000 new jobs a day. We're not going to do that by 
going to these old line industries. We need new industries. We 
need to have our own innovative industries. We can't rely on 
ripping off other people's industries in order to produce these 
new jobs. We have to create our own brands, our own--we need 
IPR protection. The problem is that once you get past that 
central government in Beijing, the interests start to get a 
fuzzy and own on the local level, the support for IPR 
enforcement starts to go away.
    We really need to see strong directives from the central 
government that say----
    Ms. McCarthy. I agree.
    Mr. Stearns. The gentlelady's time has expired. I'll let 
Mr. Freeman just wrap up.
    Ms. McCarthy. How do you get the central government to do 
that is my question.
    Mr. Freeman. I think we're getting there.
    Ms. McCarthy. I think I'd like a better answer. I would 
welcome, since my time is expired that those thoughts in 
writing at your convenience because a 90 percent piracy rate 
and sincerity are not going to make the change that we need.
    Thank you, Mr. Chairman.
    Mr. Stearns. I thank the gentlelady. The gentlelady from 
California is recognized.
    Ms. Bono. Mr. Chairman, I believe Mr. Norwood was here 
before.
    Mr. Stearns. Mr. Norwood is not on the subcommittee.
    Ms. Bono. I'm sorry.
    Mr. Stearns. We take the members of the subcommittee first 
and then by unanimous consent, we can let Mr. Norwood----
    Ms. Bono. I'm sorry. Excuse me for trying to act like I was 
the Chairman, Mr. Chairman.
    Mr. Stearns. That's okay.
    Ms. Bono. I'm just trying to be nice to Charlie Norwood.
    Thank you Mr. Freeman for being here today and I too have 
the same concerns that Ms. McCarthy does and all of my 
colleagues have expressed on piracy. In the MPAA testimony they 
have an executive summary that's pretty much a list wish which 
I appreciate and they have a specific hope and they say China 
should agree to a time table to reduce piracy from its current 
market share of over 95 percent to less than 50 percent by the 
end of 2004.
    Is that a reasonable number? Other than just talking, can 
we actually achieve that number by the end of 2004?
    Mr. Freeman. That would be terrific. We've tried to suggest 
to China that they put in certain metrics, some bench marking, 
to help them along. They haven't agreed to anything 
specifically.
    Ms. Bono. And then also there are other barriers that are 
prohibiting American companies from entering the Chinese 
marketplace as well and further in their executive summary they 
state this, the MPAA again, ``that they ask for a fixed time 
table with the removal of the various limits, restrictions and 
structural distortions which hobble the ability of American 
companies to enter the marketplace and to compete fairly and 
effectively for market share, for example, they say for 
theatrical exhibition, they need to increase the number of 
films in which U.S. distributors may share in box office 
receipts.'' So beyond piracy, the Chinese are not even allowing 
us to get into their country. It's effectively, I don't know if 
you want to call it a trade barrier or what, but there are 
other mechanisms in place that are keeping us from competing in 
what we do so well.
    Can you address that a little bit about how the 
entertainment industry is structured over there, keeping our 
companies out?
    Mr. Freeman. Yes, we've spent a certain amount of time 
trying to push this issue and trying to get them to increase 
the number of films that, for example, that they'll allow in 
for a particular year. This is something they negotiated within 
the WTO, a ceiling or a floor, a number that they would allow 
in per year. They've said we'll allow 20 films in per year. 
We've said that's a floor. So that's the minimum number you 
should allow and you should feel free to allow in as many after 
that as you can.
    They've said to us oh no, no, no. Our WTO commitment is 
very clear. It's 20 films. That's what we'll alloy in. And then 
we say we unilaterally in the United States increase market 
access all the time when it's in our interest. It's in your 
interest right to do so with respect to that film limitation. 
And the response to that has not been as encouraging as I would 
hope.
    Ms. Bono. So they, in effect, this is an example of them 
encouraging piracy because it's sort of a hypocrisy, heaven 
forbid, right?
    Mr. Freeman. I would agree. I think one of the problems is 
if you limit the number of legitimate product that comes into 
the market place, you have a certain amount of demand, that 
demand is going to be filed by counterfeit product. What we've 
tried to stress is that linkage to the Chinese. So far they 
have not been as receptive to that argument as we believe they 
ought to be.
    Ms. Bono. Thank you. Changing gears a little bit, he's not 
paying attention, maybe I can go on really fast, agriculture is 
my No. 1 industry. China has long held different sanitary and 
phytosanitary regulations not based on science that affect my 
growers. Can you talk a little bit about the progress we're 
making in agriculture?
    Mr. Freeman. There are a lot of limitations on products or 
standards, policies that prevent U.S. agriculture products from 
going to China. We don't think that they're science-based, so 
therefore they're not sanitary and phytosanitary issues to us. 
They're technical barriers to trade. So we address them on that 
basis, that there's no rationale for them and therefore they 
should be taken out.
    We've made some good progress on some key areas, 
particularly with respect to soybeans, again, but also with 
respect to certain other SPS issues or nominally SPS issues 
that are generally TBTs, but we have a long way to go.
    Mr. Stearns. The gentlelady's time has expired.
    Ms. Bono. Thank you very much, Mr. Chairman.
    Mr. Stearns. We have one more remaining member of the 
committee, Mr. Whitfield for your questions?
    Mr. Whitfield. Mr. Chairman, thank you very much and Mr. 
Freeman, welcome and thank you for your testimony. I was 
wondering if you would maybe just list four or five of the 
major commodities or items that we do export to China and the 
dollar amounts?
    Mr. Freeman. I'll have to get back to you with dollar 
amounts. I'm not good at that, but I will deliver that in 
writing, if I may.
    The No. 1 export, believe it or not, of U.S. to China is 
electrical machinery. We also have a variety of other machine 
parts and components that we export overseas. Agriculture is a 
very large export. The No. 1 single product that we send to 
China, that we export to China is soybeans.
    Mr. Whitfield. Soybeans. Okay.
    Mr. Freeman. We sell a lot of cotton.
    Mr. Whitfield. I missed your testimony, but I was wondering 
if you might just briefly explain the gist of the complaint 
that you recently filed with the WTO against China?
    Mr. Freeman. We've actually been talking again with the 
Chinese for about 16 months on this issue trying to resolve it. 
It's a fairly discrete issue. What it is is Chinese provides a 
rebate, a value-added tax paid on semi-conductors that are 
produced and/or designed within China. So therefore, if you 
export semiconductors to China, you pay a certain value-added 
tax, 17 percent, but you don't get the benefit of that rebate. 
If you design and build your chip in China, you get the benefit 
of that rebate.
    This was clearly designed to encourage investment by 
semiconductor manufacturers in China and it's been fairly 
successful. The issue really is that you're allowed to 
subsidize within certain limits industries in China or 
anywhere. You're allowed to subsidize certain industries or to 
have industrial policies which encourage development of certain 
industries. You can't have discriminatory taxes. And what 
they've done is essentially because of the way they're rebating 
the value-added tax, it's equivalent to charging a different 
tax on the semiconductor itself. So that's clearly, in our 
view, and in the view of certain other key WTO members a 
violation of China's WTO commitments.
    Mr. Whitfield. So it's a discriminatory tax primarily then.
    Now what options are available to the Trade 
Representative's office when you view that they are engaged in 
unfair trade practices. What are the options available to you?
    Mr. Freeman. Again, it depends on if it's a market access 
issue, a market access concern. The ultimate process there is 
WTO enforcement. We do have a number of trade remedy laws and 
specific safeguards that we have available to us through both 
the WTO agreement and through China's specific session package.
    We have some fairly robust tools and I don't think we're 
afraid to use them.
    Mr. Whitfield. Have you utilized any of them at this point?
    Mr. Freeman. We've utilized the special safeguard on 
textile, some textile categories. I think we had one case, 
there was one category of textile industries or textile product 
there was a 28,000 percent increase and so what we've done is 
we've capped that and there's a 7.5 percent growth for this 
year on that product. So it actually acts as a sort of speed 
bump on new Chinese imports to the U.S.
    Mr. Whitfield. I see my time has expired, Mr. Chairman.
    Mr. Stearns. The gentleman's time has expired and Mr. 
Norwood is recognized. He's not a member of the committee, but 
by unanimous consent we'll allow him to ask some questions.
    Mr. Norwood. Thank you very much, Mr. Chairman. I'm 
grateful for that.
    Mr. Freeman, you do understand these little gatherings 
aren't personal, but I want to tell you I think your answers 
have been as poorly constructed as anybody I've seen in a long 
time in not answering the question.
    My attitude is that you just want to say as little as 
possible and get out of here as quick as possible. And that 
attitude stems from I'm thinking you're having a hard time 
justifying the trade policy that's 5 to 1 and you know it's a 
problem just like I do.
    Simple question. Is China cheating?
    Mr. Freeman. Yes. China is cheating on a certain of its WTO 
commitments in our view.
    Mr. Norwood. Would you consider them cheating in a lot of 
areas, not just with us, but around the world?
    Mr. Freeman. Here's the problem. I often get asked, can you 
grade China's WTO compliance with its WTO commitments. And 
people say it's C, it's B, it's F----
    Mr. Norwood. No, no. My question was are they cheating in a 
lot of areas?
    Mr. Freeman. I think they're cheating in some key areas to 
us.
    Mr. Norwood. Intellectual property rights would be one. 
They're dumping all over the place would be two. Are all those 
things true?
    Mr. Freeman. They are dumping. There is cheating on 
intellectual property.
    Mr. Norwood. And you could name a lot more than I could too 
if I had more than 5 minutes.
    Now the question is did I understand you right to say that 
we had one case to the WTO?
    Mr. Freeman. That's correct.
    Mr. Norwood. Which is where we solve these problems. And it 
is like pulling teeth to get you all to institute special, the 
safeguards, very hard to get your office to do any of that. It 
took us a year to do anything about the textile industry. And 
all I'm saying is if they are cheating and they're tearing us 
up, which they are and if you travel in Georgia rather than 
China, I'd show you some. We can't live through this forever. 
And we can't wait on you all every time to maybe take something 
to the WTO and then wait another year maybe for the WTO to act. 
And all I want you to do is being concerned about that.
    Now the Chairman asked you, I thought, a fair question. I 
asked something else in a hearing the other day the same 
question. Nobody answers and it would seem to me you'd need to 
know the answer to this in order to help guide what is our 
trade policy and that is are we exporting more jobs to China 
than other countries are importing to America using our trade 
policy?
    Now nobody, Secretary Evans wouldn't answer that either. It 
looks like you need to know that question. Are we sending more 
jobs out of this country than other countries are sending to us 
to set up business here? It's pretty clear to most of us who 
are out in the Districts and out in the States every weekend. 
It's not a hard answer, but somehow or another you all find it 
hard to figure that out.
    One other question, how many trade agreements have you been 
involved in or has Mr. Zoellick been involved in in the last 3 
years, just a rough number?
    Mr. Freeman. Six.
    Mr. Norwood. Can you name one where the United States of 
America got more benefit than who we made the trade with?
    Mr. Freeman. I'd argue that the benefits are equal, 
generally.
    Mr. Norwood. Well, they aren't. They generally aren't. Just 
name one where we came out ahead as the United States. At least 
ahead of what the other country did. You know, if we lower our 
tariffs 50 percent and somebody else lowers theirs 10 from 50 
percent, we're not ahead. They've got a tariff.
    I want you to take some time to think about this country 
was founded on. You said open markets. Go back and look at that 
carefully. I think we funded the Federal Government for years 
with tariffs when we first started. Second, you implied to this 
committee that oh boy, we're shipping cotton to China. China 
had a drought last year, so we finally got to sell them some 
cotton. But that's the first time. Up until then it had been 
the other way around. Am I over?
    Mr. Stearns. The gentleman's time has expired.
    Mr. Norwood. I'm sorry.
    Mr. Stearns. I think we've finished all the questions for 
you, Mr. Freeman. I'll just give a quote from F. Scott 
Fitzgerald, ``the test of a first class mind is the ability to 
hold two opposing views at the same time and still retain the 
ability to function.'' So you've been able to, I think, 
function very well and I want to thank you very much for your 
time and we appreciate your patience.
    And with that, we'll have the second panel come up. Mr. 
Fritz Attaway, Executive Vice President and Washington General 
Counsel, Motion Picture Association of America; Mr. Bill 
Primosch, Director of International Business Policy, National 
Association of Manufacturers; Mr. Alan Tonelson, Research 
Fellow, the U.S. Business and Industry Council Educational 
Foundation; Mr. Joe Papovich, Senior Vice President, 
International Recording Industry Association of America; Mr. 
Douglas Lowenstein, President, Entertainment Software 
Association; Mr. Mark Levinson, Chief Economist and Director of 
Policy, UNITE.
    So I appreciate all your patience waiting. We had almost 22 
members here. Normally, we don't have that many so that's why 
it's taken a little longer, but you've been kind enough to stay 
and I think what we'll do is start to my left, Mr. Attaway with 
your opening statement.
    We're asking each of you to hold it to 5 minutes, if you 
can. I'll probably tap here because we have six witnesses and 
we probably will have a round of questions, obviously, so if 
you can hold it to 6 minutes, 5 minutes that will be helpful.
    So Mr. Attaway, welcome, and we anticipate your opening 
statement.
    Do you want to have some time here to work on your 
PowerPoint and we can start with Lowenstein?
    Mr. Attaway. I don't know if it's my PowerPoint or----
    Mr. Stearns. Well, why don't we keep moving, Mr. 
Lowenstein, why don't you start and Mr. Attaway, you can work 
with your staff.

  STATEMENTS OF DOUGLAS LOWENSTEIN, PRESIDENT, ENTERTAINMENT 
    SOFTWARE ASSOCIATION; FRITZ E. ATTAWAY, EXECUTIVE VICE 
   PRESIDENT AND WASHINGTON GENERAL COUNSEL, MOTION PICTURE 
     ASSOCIATION OF AMERICA; WILLIAM PRIMOSCH, DIRECTOR OF 
    INTERNATIONAL BUSINESS POLICY, NATIONAL ASSOCIATION OF 
    MANUFACTURERS; ALAN TONELSON, RESEARCH FELLOW, THE U.S. 
 BUSINESS AND INDUSTRY COUNCIL EDUCATIONAL FOUNDATION; JOSEPH 
   PAPOVICH, SENIOR VICE PRESIDENT, INTERNATIONAL RECORDING 
   INDUSTRY ASSOCIATION OF AMERICA; AND MARK LEVINSON, CHIEF 
            ECONOMIST AND DIRECTOR OF POLICY, UNITE

    Mr. Lowenstein. Thank you, Mr. Chairman, members of the 
subcommittee. I appreciate the opportunity to appear before you 
this morning. The Entertainment Software Association members 
that I represent produce the games that 149 million Americans 
play on their video game consoles, their personal computers, 
their PDAs, their Gameboys and even their cell phones. Over the 
last 5 years, this has been the fastest growing entertainment 
industry in the world. U.S. sales alone of hardware and 
computer software and videogame software have now exceed $10 
billion and forecasts are that the game industry will exceed 
$15 billion in revenue in the United States alone within the 
next 3 or 4 years.
    Our message with respect to China is quite simple. While 
the market offers tremendous promise, massive piracy makes 
realizing its potential more a faint hope than a near term 
reality. In fact, we estimate that the annual value of pirate 
entertainment software in the Chinese market today is more than 
$500 million.
    I thought it would be helpful to use some photographs to 
dramatize the scope of the problems American game publishers 
face in China today. I'm going to hopefully have a working 
PowerPoint presentation here.
    This first photo shows a counterfeit PC game complete with 
packaging and documentation that has been localized by pirates 
into China for local sale. This kind of factory production of 
high quality counterfeit disks is one reason the PC game market 
in China is rife with pirate goods.
    In this next photo we see workers assembling counterfeit 
Nintendo Gameboy cartridges. Millions of these pirate products 
are produced each year by Chinese factories, particularly in 
Guangdong Province and then exported throughout the world. As a 
result, potentially lucrative foreign markets for U.S. 
publishers who make some of the most popular games for the 
Gameboy are effectively ruined.
    In this third picture, I wanted you to see how perfect the 
copies are. The left image shows an examine of a counterfeit 
game cartridge and on the right you see the genuine product. I 
actually have the two right here. This being the legitimate 
product and this being the pirate product. And you can see----
    Mr. Stearns. Why don't you have staff bring them up so 
members can actually see them.
    Mr. Lowenstein. So you can see they're virtually 
indistinguishable, particularly to the uninitiated.
    This next photo shows what are called circumvention devices 
such as mod chips which you see on the left, again, here's an 
actual mod chip. And these are used to rig videogame consoles 
to bypass the hardware's access control system, thus enabling 
the hardware systems to play the pirate games.
    Nearly all the consoles in China have been molded in this 
way, virtually obliterating demand for legitimate products.
    And this last photo shows one of the 200,000 internet cafes 
in China, each with 100 to 300 seats. These cafes are the 
primary source of internet access for millions of Chinese 
citizens and if all of them purchased legal games, that would 
really be a boon to the software market, but unfortunately, in 
most cases the games they make available to their customers are 
pirate products.
    Now these pictures somewhat of a discouraging story, but 
despite the enormous rifts our industry is making a serious 
effort to create a legitimate and viable market in China. 
Indeed, several leading companies, including some of our major 
American PC publishers, as well as Nintendo and Sony, are 
seeking to launch their hardware systems into the Chinese 
markets despite these challenges. But their efforts cannot 
succeed unless China makes a sustained and massive commitment 
to reduce piracy levels from the current 95 percent range.
    And we urge the subcommittee to encourage the United States 
Trade Representative to include the following specific actions 
in the upcoming JCCT discussions. First, China should launch a 
highly publicized nationwide crackdown on piracy and 
counterfeiting operations that also reaches factories engaged 
in the production of pirate and counterfeit entertainment 
software.
    Second, China should lower monetary thresholds to trigger 
criminal prosecutions for piracy. We've heard some discussion 
about that, so I won't dwell on it.
    Third, China must criminalize the circumvention of 
technological protection measures like these mod chips I showed 
you and the trafficking of these circumvention devices and they 
should quickly exceed to the WIPO internet treaties.
    Fourth, China should adopt laws such as the Hong Kong 
Organized and Serious Crime Ordinance, a RICO-like statute that 
can be a powerful tool to crack down on intellectual property 
violations. And both China and Hong Kong should be strongly 
encouraged to use this law against organizations involved in 
piracy and counterfeiting.
    And finally, China should be discouraged from instituting 
policies like import restrictions, protracted content review 
procedures and holographic ``stickering'' requirements that 
only saddle legitimate publishers with costs and delays while 
strengthening the position of pirates in the market.
    In conclusion, we believe that if China mounts a serious 
effort to root out piracy, the winners will be not just 
American software publishers, but the creative talent in China 
which in today's environment has absolutely no chance to 
flourish.
    Thank you for your time.
    [The prepared statement of Douglas Lowenstein follows:]
  Prepared Statement of Douglas Lowenstein, President, Entertainment 
                          Software Association

    Mr. Chairman, Ranking Member Schakowsky and Members of the 
Subcommittee, thank you for the opportunity to discuss U.S.-China trade 
issues as they relate to the entertainment software industry. We are 
pleased to assist this Subcommittee in identifying trade impediments--
some that we currently experience and others with real potential to 
thwart healthy and growing commerce in legitimate entertainment 
software products in the Chinese market, and to share some thoughts on 
issues the Administration should address through the Joint Committee on 
Commerce and Trade (JCCT).
    I appear on behalf of the Entertainment Software Association (ESA), 
a trade association serving the business and public affairs needs of 
companies that publish video and computer games for video game 
consoles, personal computers, handheld devices and the Internet. ESA 
members account for more than 90 percent of the $7 billion in 
entertainment software sold in the U.S. in 2003, and billions more in 
export sales of U.S.-made entertainment software to fuel the $20 
billion global game software market.
    It should come as no surprise that by far the most significant 
trade barrier in China is piracy in its many forms. It must be 
understood that in China, the problem is not just the flooding of local 
markets with pirated goods; the problem continues to be, at least for 
certain products, the export of Chinese-made pirated product throughout 
the world. In my testimony, I will provide an overview of industry-
specific piracy concerns, suggest a few productive directions for 
achieving solutions, and identify several other market conditions that 
actually help to fuel the demand for pirate product by slowing or 
reducing the commercial availability of legitimate product in the 
Chinese market.
    Let me be clear at the outset that while we have many problems in 
China, our industry remains enthusiastic about the opportunities to 
build a viable market there, and we are grateful for demonstrations of 
renewed interest in addressing industry concerns. Undeniably, though, 
more can and must be done. Our comments suggest constructive and 
substantive actions that China can take to enhance, by an order of 
magnitude, the protections that can be afforded to ESA member products 
developed in or sold in the Chinese market.

                   THE PROMISE OF THE CHINESE MARKET

    The Chinese market presents a conundrum. It is a market with such 
obviously great potential but also, for industries dependent on 
intellectual property protection, great risk. Our industry knows there 
is a huge audience for--as well as a sizeable and growing demand for--
entertainment software products in China. While there are already 
millions of game consoles and tens of millions of PCs in Chinese homes, 
increasing demand is perhaps best exemplified by the exploding 
popularity of massively multiplayer online games (MMOGs) where 
literally thousands of players can compete against one another 
simultaneously.
    Just a year ago, forecasters estimated that there would be 7.4 
million users of MMOGs in the Chinese market by year's end--accounting 
for online revenues of roughly $95 million. But in an update to their 
2003 study, to be published on April 2, 2004, International Development 
Group & Niko Partners will report that actual 2003 data for both the 
number of MMOG players and online game market revenues will have 
exceeded those initial 2003 projections by 40-45%, marking greater than 
expected demand for this type of game.
    The exploding popularity of online games brings with it even 
further increases in the popularity of Internet cafes, where these and 
other games can be played. It is estimated that there are currently 
200,000 Internet cafes nationwide, many housing between 100 and 300 
seats, and that 60% of the activity in these cafes involves game play.
    We are concerned that the bulk of new demand may be met by pirated 
rather than legitimate product. We know that overall piracy levels for 
entertainment software consistently exceed 95%--meaning that only one 
in twenty copies in circulation is acquired legitimately. The overall 
value of pirated entertainment software product found in the market 
each year is estimated to be in the hundreds of millions of dollars.
    Notwithstanding obvious risks, our industry is responding to 
growing demand. Several entertainment software publishers have been 
bringing PC-based games to the market, and this year, Sony and Nintendo 
announced entry into the market with various dedicated console 
products. Successful entry into the Chinese market means more jobs and 
revenue for the U.S. game software companies that create products for 
these platforms, which also results in additional tax revenue and 
contributes to a more favorable balance of trade. Companies are moving 
forward very much aware of the enormous piracy threat they face, yet 
proceeding on the good faith assumption that the Chinese government 
will improve its enforcement regime to protect their market footholds.
    Measures protecting and supporting intellectual property, of 
course, would also benefit and help foster the growth of China's 
domestic entertainment software industry in a far more direct, dramatic 
and meaningful way than would artificial restrictions on the 
availability of imported entertainment software product.

                       PIRACY AS A MARKET BARRIER

    In this section, I want to address the overall piracy problem we 
face in China, and then break it down into subsets, including the 
domestic pirate market within China, the export of pirate product made 
in China to other markets, and piracy in Internet cafes.
1. Overall Piracy in the Chinese Market
    Our most recent estimates again reveal incredibly high piracy rates 
across all major entertainment software platforms. We estimate piracy 
levels of 97% for PC products, 75% for console products (such as games 
for the Sony Playstation ' and Playstation2 '), 
and 99% for handheld products (such as games for the Nintendo Gameboy 
' and Gameboy Advance '). Sustained piracy at 
these levels reduces significantly the size of the legitimate market, 
and makes it extraordinarily difficult to build legitimate distribution 
and sales.
    Our member companies face different forms of piracy in the market--
including optical disc piracy of console and PC games, counterfeit 
cartridge-based games, piracy at Internet cafes and the recent 
emergence of online download sites for illegal ``warez'' copies. 
Pirated hard goods copies of games for the PC and game consoles remain 
widely available in the domestic market, both in the form of factory-
produced optical media discs and infringing copies resulting from CD-R 
``burning.''
    Although console manufacturers only officially entered the market 
early this year, consoles have been present in the market for many 
years. Virtually all of these have been modified to enable the play of 
pirated copies of video games. This is done through the installation or 
use of modification devices (often called ``mod chips,'' ``game 
copiers'' or ``game enhancers'') that circumvent the technological 
protection measures used by publishers in connection with these works. 
The widespread use and availability of circumvention devices (and 
circumvention services) underscores the need for China to accede to the 
WIPO Internet Treaties, which make mandatory the protection of 
technological protection measures used by right holders to protect 
their works. Addressing this problem must be a high priority for U.S. 
policy.
2. Production of Pirated and Counterfeit Products in China
    Large-scale piracy of products made available on optical media, 
such as on CDs, CD-ROM, or DVD, continues unabated. This form of 
piracy, as well as CD-R and DVD-R ``burning,'' has always impacted the 
entertainment software industry. Recently our members have observed the 
emergence of exceedingly high-quality, pirated PC game product that has 
been fully localized into the Chinese language for sale in the domestic 
market. We share concerns that such product is not being produced 
solely for China's market, but that it is also being exported to 
satisfy the demand for Chinese language product throughout the region.
    China has also historically been the world's leading producer of 
pirated cartridge-based games for play on handheld devices. Guangdong 
Province is home to numerous factory operations that operate openly and 
without fear of being shut-down by government authorities. These large-
scale pirate operations use and even program microprocessors containing 
stolen software code and assemble these, with counterfeit plastic 
casings, into finished products violative of publishers' copyrights and 
trademarks. Still other factory operations specialize in the production 
of the components used in game counterfeiting--including the plastic 
casings, labels, instruction booklets and packaging materials that 
enables the pirated product to sell at a premium.
    These pirate enterprises operate openly, raking in millions in 
illegal profits without incurring the research, development or 
marketing costs already borne by the legitimate publishers. All of this 
significantly hampers the ability of entertainment software publishers 
to recoup the investment required to bring their products to market--
costs that can now exceed $10 million for some top quality titles. 
Neither are these pirate operations forced to incur the risks that are 
part and parcel of the entertainment software publishing business. 
Pirates lose nothing when a game that has cost millions to bring to 
market does not become a hit--indeed, pirates prefer to copy games 
which are already heavily anticipated and thus likely to be 
bestsellers.
    The volume of pirate production remains staggering. In 2003, 
enforcement undertaken by just one ESA member, Nintendo, resulted in 
the seizure of 4.7 million counterfeit items in China (including 
finished cartridges, counterfeit chips and fake packaging and inserts). 
Despite the raids against several factories in the Guangdong Province, 
the Chinese market remains flooded with pirate and counterfeit handheld 
games, further accounting for the estimated 99% piracy levels for these 
products.
3. Pirated and Counterfeit Production for Export
    Illegal copies of handheld products are churned-out systematically, 
not only for domestic pirate consumption, but for export throughout the 
world. While in the late 1990's, China had taken meaningful steps to 
curb pirate optical media production for export, counterfeit cartridge 
games produced in China continue to be found in countries across Asia, 
Eastern and Western Europe, the Middle East and the Americas. Though 
the Guangdong administrative authorities (specifically the Technical 
Supervision Bureau (TSB)) have been helpful in orchestrating raids 
against several factories, these administrative raids have done little 
to curb production of counterfeit video game cartridges, as the factory 
owners are not prosecuted criminally nor have any of them been subject 
to sufficiently high administrative fines so as to deter further 
infringing activity. Indeed, there have been numerous instances where a 
factory that was previously closed is soon re-opened under a new 
corporate name--sometimes in a different location, but often at the 
very same location.
    They are high volume, high profit ventures operating seamlessly 
across borders. There is substantial and mounting evidence of the tight 
connection between individuals and operations in Taiwan (as the 
supplier of counterfeit chips and capital), China (a key assembly 
point), Thailand (a rising large-scale assembly point) and Hong Kong (a 
key transshipment point). As suggested later in my testimony, this 
situation points to the urgent need for new legal and enforcement tools 
to combat criminal enterprises, and to bring these tools to bear 
against enterprises that cross borders. There also needs to be more 
cooperation between authorities on the Chinese mainland and Hong Kong 
to further quell worldwide export of finished, pirated product.
4. Piracy in Internet Cafes
    I mentioned previously that there are estimated to be approximately 
200,000 Internet cafes in the country, each with an average of 100 to 
300 seats--and the Internet Cafe industry is really just beginning to 
take shape. But already, piracy in the cafes has become a significant 
problem for the industry. Some cafes, for example, may buy only one 
legitimate copy of an entertainment software title, but load it on 
hundreds of computers--machines that are then used to attract clientele 
and bring profit to cafe owners. Cafe owners also may turn a blind eye 
to patrons who use the facilities to commit further infringements of 
entertainment software and other digital products--and even allow 
customers to burn infringing product to CD--all while charging patrons 
an hourly access fee. Such flagrant piracy, undertaken for a commercial 
purpose, is precisely the sort of activity that the TRIPS agreement was 
intended to address.
    Our industry is excited about growth of the internet cafe industry 
in China. We embrace it as a great opportunity for our products 
because, given the economic realities of the average family in China, 
these outlets, at least for the foreseeable future, will remain the 
primary means by which most Chinese citizens enjoy the benefits of 
entertainment software. It is our understanding that the Internet cafe 
industry is in a state of flux, and that the government has begun to 
take steps to further guarantee its success and thus the availability 
of these services to the Chinese population. To the extent that these 
measures will involve further regulation of the cafe industry, 
including requirements for companies permitted to own and run them, it 
is essential that the U.S. insist that the Chinese include in these 
regulatory regimes measures to ensure copyright compliance.

               ENFORCEMENT IMPEDIMENTS AND LEGAL REFORMS

    Addressing the myriad piracy and counterfeiting problems in China 
will require high-level leadership, both to assure a meaningful 
departure from past history and a sustained commitment to enforcement 
that brings real deterrence. We are hopeful that the reinvigorated 
efforts by the U.S. and China to consider these issues at the highest 
levels, including through the Joint Commission on Commerce and Trade, 
will be both fruitful and efficient.
    There is a great deal of work that the Chinese must begin to 
undertake in terms of reforms in its legal and enforcement regimes, and 
these objectives should be clearly spelled out to the JCCT delegates. 
Membership in the World Trade Organization entails obligations to which 
China must adhere. We suggest several enforcement- and legal reform-
related objectives below, which, I should mention, are entirely 
consistent with those identified in House Resolution 576, introduced 
last week by Representatives Watson, Lantos and Chairman Hyde--a 
measure we wholeheartedly endorse.

1. Criminal Enforcement
    One of the key legal reforms that must be undertaken immediately is 
in the area of criminal enforcement. Much immediate deterrence can be 
achieved by a swift and sustained nationwide crackdown on piracy and 
counterfeiting operations. China has done this before and indeed was 
successful in shutting down many of the illegal optical disc factories 
in the 1990's. China needs to take the same comprehensive measures 
against the factories illegally replicating copyrighted material on 
optical discs and against those producing counterfeit cartridge-based 
video games. However, reform should also address long-term goals of 
keeping piracy at minimum levels and this would require providing the 
Vice Premier with sufficient authority and resources to coordinate the 
national anti-piracy enforcement effort. National and provincial 
enforcement agencies should likewise be provided with adequate 
resources to effectively undertake a greater level of enforcement 
actions. These stepped-up enforcement measures should be accompanied by 
a (widely publicized) increase in the levels of administrative 
penalties and fines to deterrent levels, as well as a lowering of the 
threshold for initiating criminal action against intellectual property 
violations such that criminal investigations and prosecutions of 
pirates and counterfeiters become a regular and functional part of an 
overall enforcement regime.
    It bears emphasizing that once these legal reforms are in place, 
they must be utilized and actually enforced in practice. Deterrence 
requires more than successful raids being conducted. Although our 
industry remains grateful for the government's efforts in this regard, 
with some raids having resulted in the seizure of millions of pirated 
and counterfeit products and component parts, the sheer volume at issue 
illustrates the ease with which pirate operations can withstand 
periodic raids and seizures as a cost of doing business. Qualifying 
raids and seizures should and must bring about the initiation of 
prosecutions. Prosecutions should proceed swiftly to their conclusion, 
including, as warranted, convictions with the imposition of 
sufficiently deterrent fines and terms of imprisonment.
    Consider the following rare but promising example. In its 2004 
``Special 301'' filing submitted to the U.S. Trade Representative in 
February, one ESA member company makes specific reference to a major 
pirate and counterfeiter of cartridge-based video games. Raids against 
this individual's factories resulted in the seizure of over three 
million infringing items, including finished counterfeit cartridges, 
instruction booklets and packaging materials. The factory owner was 
detained (and continues to be detained, at least as of early February) 
and criminal charges against him (and four senior associates) are under 
consideration--a first against an infringer of video game products. It 
remains to be seen whether China will take this opportunity to show it 
is committed to combating piracy through consideration of appropriate 
criminal sanctions. Should the case be brought and proceed to timely 
resolution, it would be a first signal of a welcome change in China's 
approach to entertainment software piracy. It would certainly give 
pause to others engaged in this illegal activity. However, if the 
ultimate resolution results in a slap on the wrist, the message to 
pirates will continue to be clear: China is an enforcement-free zone 
within which you can operate with impunity.

2. Enforcement Against Criminal Enterprises
    Converging signs point to the increasing involvement of organized 
criminal enterprises in systematic intellectual property abuses. Both 
the International Intellectual Property Alliance (IIPA) and the 
International Anti-Counterfeiting Coalition (IACC), in their respective 
2004 Special 301 submissions to the USTR, provide rich examples of such 
involvement, including the cross-border nature of large-scale piracy 
and counterfeiting operations. We believe that the ability to address 
the growing threat of criminal organization involvement in high-volume 
intellectual property crimes is therefore a logical and necessary 
accompaniment to an improved criminal enforcement regime. Addressing 
this problem would include, but also would go beyond merely assuring 
the availability of appropriate legal tools. It requires, in our view, 
a rethinking of how criminal investigations are undertaken.
    Specialized legal tools and enforcement techniques used by 
governments to combat the involvement by organized criminal entities in 
other forms of illegality should also be brought to bear against the 
highly organized criminal enterprises involved in piracy and 
counterfeiting operations. Investigative efforts of copyright owners 
simply cannot achieve the immediate impact and long-term deterrence of 
appropriately-placed criminal actions. It instead falls to governments 
to protect the legitimacy and integrity of its communities and 
economies by defeating organizations that are well-funded, oftentimes 
protected, and operate with impunity across national boundaries.
    China should assess the adequacy of its legal authorities and 
enforcement mechanisms to address and root-out criminal organizations 
involved in systematic intellectual property crime. A few months ago, 
we encouraged the USTR to include on its list of action items for China 
the adoption of measures similar to those contained in Hong Kong's 
Organized and Serious Crime Ordinance (OSCO), which offers a 
comprehensive package of tools that can be brought to bear against 
these criminal organizations. The Hong Kong law is the essential tool. 
China should adopt similar measures, and together China and Hong Kong 
should ensure that these tools are capable of being used--and are 
actually used--against intellectual property rights offenders. The U.S. 
should insist on such steps.
    Enforcement officials should also be encouraged to think anew about 
the ways in which such investigations are undertaken given the ever-
increasing likelihood of organizational involvement. China's 
policymakers responsible for the administration of criminal justice 
should consider developing an incentive system that rewards efforts by 
investigators to develop evidence against progressively higher subjects 
within criminal organizations. They should not be content merely with 
seizing clearly infringing products, but should also seek and obtain 
regular seizure and subsequent analysis of documentary evidence 
obtained through criminal raids and investigations. Prosecutors should 
base their valuations of the severity of an underlying offense not only 
on the wholesale value of pirate product and components obtained in a 
particular raid, but on the documentary evidence of the quantity of 
harm brought about, over time, by the entire enterprise.
    Effective investigations of this nature are destined to be of only 
limited success without a functional international component. 
Recognizing this inevitability, China should seek to improve 
communication and cooperation with other countries' law enforcement 
agencies, particularly with the territory of Hong Kong. The most well-
funded and well-organized pirates increasingly operate with impunity 
across national boundaries. They should not be further rewarded by 
having their conduct stymie ongoing investigations and effectively 
immunize these most deserving criminals from appropriate criminal 
sanction.

3. Internet Piracy
    The increasing availability of illegitimate content on servers 
worldwide, including those in China, calls for making available 
adequate and effective remedies to online piracy. Because of the speed 
with which unlawful distribution of copyrighted works can and does 
occur, adequate and effective remedies must also include the means by 
which copyright owners can act immediately to effectuate removal or 
disablement of clearly infringing product found online. We note with 
concern that there now appear to be a significant number of Chinese-
language ``warez'' sites which make available virtually all varieties 
of pirated entertainment software for download.
    In China's case, we believe that online remedies should also 
include the provision of NET Act-type criminal liability for large-
scale distribution of infringing works, even when proof of a profit 
motive is lacking, and effective procedure that allows rightholders to 
monitor and obtain immediate removal of infringing content found 
online. (See the No Electronic Theft (NET) Act, Pub. L. No. 105-147.) 
Effective enforcement will also require a continuing commitment to 
training investigators and prosecutors in the appropriate handling of 
Internet piracy cases.
4. WIPO Treaties Implementation
    Adoption and sound implementation of the WIPO treaties provides 
countries in China's position with the essential tools needed to assure 
the healthy development of online commerce in digital products. Given 
the role that online games and the availability of online product will 
play in the growth of China's entertainment software industry, a basic 
necessity is the ability to appropriately assert and protect rights in 
online products. The WIPO Copyright Treaty and Performances and 
Phonograms Treaty are the world's roadmaps for how these protections 
should be afforded and administered, and China, in our judgment and 
experience, would be well-served to embrace and enact its requirements.
    A key requirement of the WIPO Treaties is the effective prohibition 
of circumvention of technological protection measures (TPMs). It is 
essential that these include strong civil and criminal prohibitions 
against the trafficking in circumvention devices. It is essential that 
circumvention devices, in this context, be defined in such as way as to 
include such items as ``modification chips'' and ``game enhancers''--
those items that quite literally, for a substantial segment of this 
industry, make piracy possible. For Chinese game developers, 
technological protection measures are the avenue by which they will 
make products available to consumers under a range of mutually 
agreeable contractual terms. They are deserving of protection in law 
and in practice.

                    ADDITIONAL MARKET ACCESS ISSUES

    At a time when Chinese consumers are seeking new digital products 
and entertainment services in the domestic market, the government 
should avoid creating policies that serve as barriers to entry and, in 
some instances, actually serve to perpetuate the pirate economy. It is 
the experience of this industry that measures which reduce the 
availability of or delay the emergence of new and legitimate products 
in the market serve only to penalize legitimate interests. This delay 
fuels demand for pirated products and rewards pirates by granting them 
an exclusive period in which to sell their wares. Measures that hold 
the potential to create these disruptive effects include overt import 
restrictions, lengthy periods for content review that precede the 
release of new product in the market, and measures intended to assist 
in the identification of legitimate products, such as holographic 
``stickering'' requirements, as further described below.

1. Import Restrictions
    The Chinese government recently indicated that it would consider 
imposing restrictions on imports of entertainment software products 
from those countries that are its leading producers: the United States, 
Japan and, for the Chinese market, South Korea. Import quotas would 
purportedly strengthen China's domestic game industry. We believe it 
would instead perpetuate piracy and not produce expected increases in 
demand for Chinese-developed entertainment software.
    The Chinese market is already replete with pirate and counterfeit 
video game products. To impose import quotas on legitimate 
entertainment software products at this stage would not change consumer 
preferences--but only exacerbate the void in the availability of 
legitimate product in the market--one already exploited effectively by 
pirates and counterfeiters. To foster the development of a domestic 
entertainment software industry, China needs to crackdown on pirate and 
counterfeiting operations. Local industries thrive where strong 
intellectual property protection exists, and when governments ensure 
effective enforcement against the theft of intellectual property. 
Import restrictions are likely to stifle potential market growth, and 
hinder the development of distributors, retailers and legitimate sales.

2. Protracted Content Review Periods
    Entertainment software publishers are also hampered by the 
requirement that their products be subject to lengthy reviews by the 
Ministry of Culture before they are approved for release in the 
domestic market. It takes anywhere from several weeks to several months 
to complete this review process and receive approval for the game's 
release. During this time, entertainment software product destined for 
the market sits idly in warehouses, allowing pirates to saturate the 
market with pirated products.
    For entertainment software titles, this delay is extremely 
prejudicial as videogame titles have a very limited window within which 
profitable sales can be made. By the time the product is cleared for 
distribution and release into the market, pirates will have enjoyed 
between several weeks and several months to peddle pirate copies--thus 
greatly diminishing sales of the legitimate product. It is also rather 
ironic that while entertainment software companies comply with these 
content review requirements, pirates do not. While legitimate software 
companies currently submit for review all titles proposed for sale in 
China to the Ministry for review, pirated versions of the very same 
titles, which have been neither reviewed nor cleared for sale in China 
by the Ministry, are on sale all over China. Further, these unapproved 
pirated products are neither being seized nor taken off the streets by 
the Chinese government. We strongly encourage the Chinese government to 
consistently enforce its regulations prohibiting the sale of these 
pirated, unreviewed and unapproved titles during the time when the 
legitimate version is undergoing review and thereafter.

3. Legitimate Product Identification Formalities
    Early in 2004, Chinese government officials indicated a willingness 
to require affixation of newly-designed identification seals to audio 
and video products as an anti-piracy tool to aid in the identification 
of legitimate product. In our and our members' experiences, these 
``stickering'' requirements create--without fail--more problems than 
solutions. These programs are prone to fraud and corruption, with the 
result being that stickers are issued to third party importers who are 
not licensed to distribute the copyrighted material, and who use false 
documentation to support their application for stickers. The stickers 
themselves are subject to counterfeiting, and thus, ``protect'' pirate 
product as the attendant sticker serves to legitimize pirated product 
and deter its immediate seizure by law enforcement. They also add 
significant delay in the release of legitimate product as titles must 
remain off of retailers' shelves until the stickers are applied. In the 
meantime, pirated product remains readily available in the market.
    Requiring the use of stickers also increases the costs for 
legitimate publishers. No stickering program, however well-intentioned, 
can substitute for aggressive and coordinated enforcement actions by 
law enforcement authorities. We discourage the government from 
considering this course of action, as in our experience it inevitably 
becomes an impediment to, not an enabler of, legitimate commerce.

                               CONCLUSION

    I again thank this Subcommittee for its important work and for this 
opportunity to provide our industry's perspective on the piracy 
situation in China. We look forward to continuing to work with the 
Subcommittee, the U.S. Trade Representative and other government 
agencies to provide the benefit of our experiences as China continues 
to liberalize its trade policies and improve its enforcement practices 
in line with its obligations as WTO member and valued trading partner.

    Mr. Stearns. Mr. Attaway.

                  STATEMENT OF FRITZ E. ATTAWAY

    Mr. Attaway. Thank you, Chairman Stearns, Congresswoman 
Schakowsky, members of the committee, I appreciate this 
opportunity to be here today to present the views of the Motion 
Picture Industry on trade policy with China. I am particularly 
pleased to be here today with my fellow Idahoan and a classmate 
at the College of Idaho, Mr. Otter. Thank you very much for 
stating.
    Regrettably, Mr. Chairman, for our industry the best word 
to describe the trade situation in China is bleak. The piracy 
market and the access barriers have reduced the largest 
potential market on earth for U.S. audio-visual entertainment 
to a land of unfulfilled hopes and promises.
    My boss, Jack Valenti, is fond of describing the U.S. 
motion picture industry as the crown jewel in America's trade 
tiara. Our industry has a favorable balance of trade with every 
nation in which we do business. We contribute $108.4 billion to 
the U.S. GDP and we employ some 500,000 U.S. workers.
    In China, however, the trade climate is inhospitable for 
U.S. audio-visual entertainment. In fact, MPAA member companies 
lose far more potential revenues from piracy of their movies in 
China than they earn from legitimate exploitation. This 
situation must change.
    As you can see from the table on the screen before you, 
piracy rates and losses in China are higher than any other 
country in the region. The piracy rate in China now is about 95 
percent, only slightly lower than it was in 1995 when it was 
100 percent.
    This astronomical piracy rate is reflected in the cost of 
piratical product. Pirate DVDs in China are sold for about 95 
cents as compared with $4.95 in Taiwan where the piracy rate is 
still unacceptably high, but less than half that in China.
    The out of control piracy in China is also reflected in 
industry revenue figures. The chart before you shows that 
theatrical earnings have increased slightly since 1999 because 
more films are being allowed in, but earnings are still lower 
than they were in 1996. Moreover, the average earnings per film 
released in China has actually decreased 75 percent since 1998.
    The home video picture is even more discouraging as the 
number of VCD and DVD players in China has mushroomed, revenue 
from legitimate sales has decreased to near zero.
    There are two principal reasons for the high piracy rate 
and low earnings in China. One is lack of effective copyright 
law enforcement. In order to get piracy under control, the 
government of China must strengthen focused coordination and 
effectiveness of the various law enforcement agencies. It must 
take immediate action to stop the rising volume of pirate 
exports. It must establish credible legal deterrence to piracy, 
especially by lowering the criminal threshold for copyright 
violations.
    It must build consumer awareness of the dangers and 
penalties for engaging in piracy. It must create strong well-
coordinated, local enforcement entities and it must set a fixed 
timetable for bringing piracy rates steadily down from the 
current levels.
    The second reason for the high piracy and low earnings in 
China is lack of reasonable access to the legitimate 
marketplace. Even with energetic copyright law enforcement, 
piracy would still exist at an unacceptable level because China 
will not allow American companies to meet demand for American 
movies, TV programs and home video material. China must provide 
meaningful market access. For theatric exhibition, China must 
increase the number of films from the current 20 in which U.S. 
distributors may share box office receipts and it must 
eliminate the current import monopoly and eliminate the current 
distribution duopoly. It must eliminate blackout periods when 
only local films can be screened and it must reduce the 
confiscatory taxes and fees.
    In the home video marketplace, it must streamline and speed 
censorship. It must streamline and speed licensing procedures 
for retail outlets and it must relax its foreign ownership 
limits for video replication facilities.
    Mr. Chairman, I began by saying the situation in China is 
bleak. I would like to end by saying that it is not hopeless. 
China has taken significant steps to bring piracy under control 
and to increase market access, but it must do much more. We 
look to the deliberations of the Joint Commission on Commerce 
and Trade to produce positive results and we are hopeful that 
China will take many of the steps noted above to meet its 
international obligations to protect intellectual property and 
open its markets.
    This hearing is a very important vehicle for sending a 
message to China and I thank this committee for the opportunity 
to appear before you. Thank you very much.
    [The prepared statement of Fritz E. Attaway follows:]

 Prepared Statement of Fritz E. Attaway, Executive Vice President, and 
   Washington General Counsel, Motion Picture Association of America

    Chairman Stearns, members of the Subcommittee, my name is Fritz 
Attaway and I thank you for giving me this opportunity to present the 
views of the Motion Picture Association of America on U.S.-China trade 
relations. MPAA is a trade association representing the seven major 
producers and distributors of theatrical feature films, television 
programs and home video material. They are Metro-Goldwyn-Mayer Studios 
Inc., Paramount Pictures Corporation, Sony Pictures Entertainment Inc., 
Warner Brothers Entertainment, Inc., Twentieth Century Fox Film 
Corporation, Universal City Studios LLLP, and The Walt Disney Company.
    Since 1995, when a bilateral intellectual property rights (IPR) 
agreement was signed between China and the U.S., American entertainment 
firms have labored to establish a foothold in the Chinese market. A 
combination of trade barriers and rampant piracy have thwarted these 
efforts, resulting in losses that top $175 million in 2003 alone, the 
highest annual loss since 1995.
    The American motion picture industry is a vital component of the 
U.S. economy. The American broadcast and motion picture industries 
accounted for $108.4 billion of the 2001 U.S. GDP. The success of U.S. 
films abroad is a major facet of the industry's revenue. While most 
U.S. industries struggle with trade deficits, the American motion 
picture industry has a trade surplus with every country in which we do 
business, and directly employs 500,000 U.S. workers.
    Unfortunately, market access restrictions and rampant piracy have 
blocked prospects for meaningful business in the large and increasingly 
vibrant China market, hurting both the American and Chinese film 
industries. In simple terms, both American and Chinese filmmakers are 
severely crippled by piracy and a restrictive bureaucracy. Moreover, 
China needs immediately to halt the production and export of pirated 
materials that have once again begun to flood world markets.
    China must demonstrate its commitment to provide market access and 
effective protection against piracy now, before the situation 
deteriorates further. Market barriers that invite piracy and prevent 
legitimate distribution of U.S. entertainment must be removed. The 
enormous entertainment needs of the Chinese nation must be provided 
through legal channels, not by pirates who defy the law. This testimony 
reviews the situation and provides specific recommendations on what 
needs to be done.

                        MPAA GOALS FOR THE JCCT

    MPAA hopes that the commitments made at the April 21 meeting of the 
U.S.-China Joint Commission on Commerce and Trade (JCCT) contain 
specific provisions on improving enforcement against piracy and 
improving access to China's market for all aspects of filmed 
entertainment (films, TV programs and home video entertainment). In the 
section below, I set forth the steps we believe need to be taken and 
the commitments we are hoping to secure at the JCCT. The balance of the 
paper describes the severity of the piracy problems we face and the 
barriers to market access that likewise need to be addressed to ensure 
availability of legal product to meet consumer needs and provide an 
alternative to pirated product.
    PIRACY--What is needed is a series of commitments from China to 
address, on a fixed timetable, the organizational problems which have 
befallen the various agencies involved in intellectual property 
protection and the commerce of entertainment, with clear direction from 
the top levels of Chinese Government, coupled with publicity, and 
education, as well as a lowering of the criminal threshold for 
copyright violations, and the establishment of effective local 
enforcement entities. China should agree to a timetable to reduce 
piracy from its current market share of over 95 percent to less than 50 
percent by the end of 2004.

1. Strengthen focus, co-ordination and effectiveness of the various 
        Chinese enforcement agencies through strong direction from the 
        top Chinese leadership.
    For the overall Chinese anti-piracy effort, the single biggest 
problem is the lack of focus and overall co-ordination among the 
various Chinese enforcement agencies. Oversight of intellectual 
property, the film industry, and enforcement in China involves a 
plethora of entities, including the Press and Publication 
Administration, Customs, the Ministry of Culture, the Ministry of 
Public Security, the National Anti-Piracy & Pornography Working 
Committee, the National Copyright Administration of China, the State 
Administration on Industry and Commerce, the State Administration of 
Film, Radio, and Television, in additional to local organizations such 
as the Beijing Anti-Piracy Alliance and the Shanghai Municipal Special 
Agency for Cultural Affairs.
    No one at the top levels of Government heretofore has been 
providing forceful direction and monitoring performance. While various 
authorities have conducted periodic sweeps of pirate locations, and 
publicized ``crackdowns,'' those activities have failed to truly make a 
dent in the problem. The various Chinese Ministries and agencies 
involved in the film industry and in IPR protection are sometimes 
fighting for control of specific issues. Too often when such conflict 
arises, the result is stalemate and nothing is done at all. Top-level 
direction and coordination of the Chinese Ministries and agencies 
involved in IPR and market access-related issues are urgently needed.
    It is welcome news that Vice Premier Wu Yi has been named to head 
the group to enhance IPR protection in China. In order to be truly 
effective, the Vice Premier's responsibilities will need to encompass 
not only anti-piracy strategy, but the policies impeding market access 
if there is to be any hope for a viable legitimate film industry, which 
is now severely crippled. The Chinese Government has been talking about 
doing this for years, but implementation has been very slow; it is 
imperative that Vice Premier Wu Yi's work in this area move forward as 
quickly as possible.

2. Take immediate action to stop the rising volume of pirate exports 
        from China.
    The Chinese government needs to take urgent and decisive action to 
stop the rising tide of pirate exports to world markets. Specifically, 
the government should:

 Facilitate prompt investigations by police, Customs and other 
        enforcement offices of factories that are supplying pirate 
        optical discs to Chinese trading companies for export.
 Continue to inspect, and to seize pirate products intended for export 
        at key locations throughout the country;
 Encourage prosecutors to criminally prosecute cases, to press for 
        deterrent sentences on those responsible, and to ensure wide 
        publicity of successful prosecutions.

3. Establish credible legal deterrents to piracy to include the 
        lowering of the criminal threshold for copyright violations.
    Credible legal deterrents to piracy are essential for effective 
control of piracy. To achieve credible deterrence, the criminal 
threshold for copyright violations must be lowered substantially. At 
present, a criminal copyright complaint is only triggered when an 
individual defendant has earned profits in excess of $6,000 (or $24,000 
for a corporate defendant.) The threshold for criminal prosecutions 
under U.S. law is ten copies with a retail value of over $2,500. Given 
the disparity of per capita income between China and the U.S., the 
monetary threshold in China should be much lower than in the U.S. 
Moreover, the measure in China should be market value, not earned 
profits. Under the Chinese standard, a pirate can be apprehended with a 
million pirate DVDs, but no criminal prosecution can be instituted if 
the pirate has not actually sold copies and earned a profit. Given the 
low price level of pirate product, and the lack of record keeping by 
pirates, there are seldom any criminal prosecutions.
    It is equally important that Chinese enforcement agencies, courts, 
and all other parts of the Chinese government receive a clear and 
forceful order from the top that IPR protection is a ``must.'' This 
will be the key to making progress and is a core requirement of China's 
WTO membership.
    There is evidence that there has been some recent growth in 
criminal cases undertaken by public security bureau personnel in 
Beijing and Shanghai, using provisions of the Criminal Code which make 
illegal the sale of audio visual product not cleared for release in 
China. Last year, there were 19 such criminal cases, all in Beijing, 
involving piracy of American titles and for which custodial sentences 
were imposed. A further 30 cases were filed in Beijing and Shanghai by 
the end of the third quarter of 2003. Sentences for the 2002 cases (all 
of which were filed in Beijing) ranged from six months to six years, 
with the majority being sentences of two years or more. Unfortunately, 
these cases are too few to have had any real impact on the situation. 
If there is to be deterrent impact from strong and effective court 
action, there must be a quantum leap in the number of cases brought 
coupled with extensive publicity by the Chinese government on the 
penalties levied.

4. Build consumer awareness of the dangers and penalties of engaging in 
        piracy.
    The government also needs to make a much stronger effort to build 
consumer awareness of the dangers and penalties of engaging in piracy. 
Not only does piracy drain the national economy, it breeds expanding 
criminal activity, including tax evasion, and avoidance of censorship 
laws. There needs to be heavy government publicity on the evils of 
piracy with stark media reports of what can happen to those who engage 
in it. All forms of enforcement action and prosecution should be backed 
up with heavy media coverage. The population should see daily that the 
government considers piracy a serious offence. The Chinese government 
has demonstrated that, when determined, it can shape powerful forces in 
society: it can also control piracy, if it decides to do so.
    Over the past 18 months, the American industry has encouraged the 
Chinese government to use anti-piracy trailers to educate the public on 
the dangers of piracy. Samples of anti-piracy trailers used in the US 
and elsewhere have been given to the State Administration for Radio, 
Film and Television (SARFT), Ministry of Culture, China Film and the 
National Copyright Administration. There is apparent enthusiasm for 
doing trailers but bickering over turf and who pays to make them 
continues to slow action in getting them produced and shown to the 
public. These trailers would be but one tool to publicize the problem, 
and should be accompanied with other tools, including news reports, 
television programs, posters, and additional educational and 
promotional methods.

5. Create strong, well co-ordinated local enforcement entities such as 
        that in Shanghai.
    Shanghai has established a local enforcement entity that has proven 
effective. Piracy levels in Shanghai have dropped to around 50 percent, 
almost half the rate of piracy in the rest of the country. Similar 
bodies should be established in other major cities to provide a similar 
level of enforcement.

6. Set a fixed timetable for bringing piracy rates steadily down from 
        current levels exceeding 95 percent.
    An immediate goal should be to bring piracy below 50 percent by the 
end of 2004, as measured by independent market surveys.
    MARKET ACCESS--What is needed is a fixed timetable for the removal 
of the various limits, restrictions, and structural distortions which 
hobble the ability of American companies to enter the marketplace and 
compete fairly and effectively for market share.

    1. For theatrical exhibition: increase the number of films in which 
U.S. distributors may share in box office receipts (revenue sharing) 
beyond 20; eliminate the import monopoly; eliminate the distribution 
duopoly; eliminate or reduce ``black out'' periods when only local 
films can be screened; reduce taxes and fees.
    China should commit to: (1) treating the current benchmark of 20 
revenue sharing films annually as a minimum, not a maximum, and raising 
that level; (2) streamlining of the censorship process, reducing the 
period to a range comparable to other countries in Asia; (3) 
elimination of the Government import monopoly, (4) elimination of the 
Government distribution monopoly, (5) reduction or elimination of the 
``blackout periods'' during which only Chinese films may be screened, 
(6) reductions in the taxes and fees paid on the importation and 
distribution of foreign film.

    2. For home video: streamline and speed censorship; streamline and 
speed licensing procedures for retail outlets; relax the foreign 
ownership limits for video replication facilities;
    The censorship process needs to be streamlined, reducing the period 
to a range comparable to other countries in Asia. The licensing process 
for retail shops also needs to be streamlined, such that approval from 
only one authority is needed to grant retail licenses. Foreign 
ownership of video replication facilities in excess of the current 49 
percent limit should be permitted. China has recently unveiled a new 
DVD format. It is important that this format contain copy protection to 
insulate pre-recorded content on DVDs from widespread copying.

    3. For television: grant broader permission for foreign satellite 
channels to be carried on local cable systems; streamline and speed 
censorship; reduce local content restrictions; reduce investment 
limitations; eliminate local uplink requirement; ensure that technology 
is implemented to support content protection.
    More foreign satellite channels should be granted carriage on local 
cable systems. The censorship process should be streamlined. Local 
content restrictions should be reduced. Investment limitations should 
be reduced. Local uplink requirement for channels distributed by 
satellite should be eliminated. Government measures should ensure that 
new forms of technological protections are adopted to support content 
protection on digital broadcasts, such as the ``broadcast flag'' 
requirements recently adopted in the United States.

    4. For E-Commerce: establish well-coordinated and effective 
Internet policies; issue regulations that clarify the copyright law to 
ensure protection against piracy.
    It is critical that China set well-coordinated and effective 
Internet policies. At present, a see-saw battle is under way between 
various power groups interested in controlling the Internet either for 
security reasons or for potential commercial gain. The State Council 
needs to step in and put in place a clear and comprehensive Internet 
policy, and clearly establish which agency is in charge of Internet 
oversight. Failure to do so will mean the rampant piracy we now see in 
film, video and TV will spread to the Internet, too, which could be the 
death blow to the film industry in China--and have ramifications 
outside of China. That would be a crushing development for the entire 
film industry agenda in China.
    The ambiguities and deficiencies in the Copyright Law pertaining to 
anti- circumvention, alteration or deletion of electronic rights 
management systems, and temporary copies need to be clarified in a way 
which clearly meet the obligations of the WIPO Copyright Treaty.
    China has recently unveiled a new DVD format. It is important that 
this format contain copy protection to protect pre-recorded content on 
DVDs.

                          BACKGROUND ON PIRACY

    RESURGENCE IN PIRATE EXPORTS. The American film industry welcomed 
the 1995 and 1996 bilateral intellectual property rights agreements 
with China because of a concern that pirate exports of illegitimate 
goods from the People's Republic of China were threatening to destroy 
well-established markets in other parts of Asia. Tragically, this 
situation is repeating itself. In 2003 for the first time in six years, 
China re-emerged as a major exporter of pirated DVDs to world markets - 
just as it was in 1995. China is now the third largest source of export 
piracy, as measured by seizures by UK Customs in 2003.
    Chinese pirated DVDs are showing up in alarming numbers in the 
European market. According to UK Customs, China's share of optical 
product seizures catapulted from an almost insignificant half of one 
percent of all seizures in 2002 to the third largest source of pirated 
optical discs in 2003. The 111,264 discs seized represent only a small 
fraction of the total value of pirated goods from China that are 
targeted at world markets. Forensics examination of pirated DVDs seized 
in Belgium, Italy, Canada (en route to the United States), Hong Kong, 
Taiwan and Japan all point back to production in China.
    Despite the seizure in China of 24 optical disc production lines 
through the end October 2003, piracy has still received insufficient 
attention from Chinese authorities to deal with the rapidly increasing 
export problem.
    MPAA has begun working on solutions to the export problem with 
Chinese Customs, particularly in the Guandong area, since most of the 
shipments intercepted in the UK and the U.S. have originated out of 
Guangdong. We are sharing information gathered in customs seizures 
outside China. We had been informed that some successful cases were 
conducted in Fuzhou, however, results of these Customs cases have not 
yet been released. Chinese officials are quite positive about our joint 
efforts in tackling the problem and we will continue to press for more 
investigative action in tracking the source of pirate product in China.
    WORSENING DOMESTIC PIRACY. The impact of DVD piracy has had a 
devestating affect on both the American and the Chinese film industry. 
Many Chinese studios are on the verge of collapse. No supplier of legal 
films, local or foreign, can compete with pirates who pay no taxes, 
endure no censorship obligations, and who carry none of the costs of 
running a studio and paying actors and actresses.
    In 2002, the estimated piracy rate in China for American 
entertainment (films, home video and television) was about 91 percent. 
Last year pirates sold 95 pirated copies for every five copies that 
American companies sold legally in China. The current level of piracy 
is worse than it has been at any time since 1995, when the rate was 100 
percent. In fact, China leads the Asian region in piracy; the rate of 
piracy in China is higher than that of other countries that 
traditionally have been plagued by piracy, including Malaysia, 
Indonesia, India, and the Philippines:
    One indicator of the level of piracy is the price being charged for 
illegally replicated DVDs. As with any product, price levels are 
determined by, among other factors, abundance of supply. Price levels 
in China for pirated DVD discs have sunk to an all-time low--about 95 
cents for a DVD, compared to a retail price for pirated goods in 
Thailand of $3.50 or almost $5.00 in Taiwan. The low prices in China 
are due to the great abundance of supply--lower than any other market 
in Asia.
    There have been some encouraging developments related to domestic 
enforcement in recent months. On February 17th, Beijing North China's 
Hebei Province Public Security Bureau raided a pirated distributor who 
owned eight warehouses in Shijiazhuang City--the provincial capital 
city. The target is believed to be the major piracy supplier for 
Beijing's illicit market. In the two-day operation, six warehouses were 
raided and 230,000 pirated VCD and DVDs were seized. Approximately 70 
percent are believed to be infringing MPAA member company titles. Two 
people were arrested for further criminal investigation. MPAA will be 
assisting with the case and will push for criminal charges to be filed.
    Also in February, the Shenzhen Custom's Anti-Smuggling Bureau 
intercepted three inland trucks in the Huidong and Huiyang areas and 
seized two million optical discs. Of this massive seizure, 269,000 
copies were pornographic VCDs and the remaining were pirate VCDs of 
both local and foreign movies. Three people were arrested for further 
investigation and the trucks were seized. Shenzhen Customs believes 
that the seized products were headed for the local pirate market.

                BACKGROUND ON MARKET ACCESS IMPEDIMENTS

    COMMERCIAL BARRIERS. The piracy problem, itself a barrier to market 
access, is compounded by other, more formal barriers, such as (a) 
government monopoly on film importation, (b) quantitative limits on 
imports, (c) a slow and cumbersome censorship process, (d) a theatrical 
distribution duopoly, (e) limits on the retail sale of legal home 
entertainment, and (f) restrictions on foreign investment, foreign 
satellite channel carriage, and foreign program content in the 
television sector. Ironically, these restrictions further tilt the 
market environment in favor of pirates, who obey none of the 
government's regulations, while reaping at least 95 percent of the 
market's sales.
    SLIPPING FILM REVENUES. Over the past half-decade piracy has 
seriously weakened the legitimate motion picture market in China. Total 
box office from all films in China declined 40 percent since the advent 
of VCD and DVDs, as customers substituted buying pirated copies of home 
entertainment for viewing at home instead of going to the movies. In 
1996 Chinese audiences spent $190 million dollars at the box office. 
Last year, they spent only $120 million. This change in consumption 
patterns has dire, long-term implications for the health of the filmed 
entertainment industry in China, both for Chinese and U.S. films.
    Earnings by MPAA member companies in China from theatrical 
distribution have also fallen during this period, both in terms of 
total box office revenues earned by MPAA member companies and in terms 
of the average amount earned by U.S. pictures released in Chinese 
cinemas. In 1998, the average U.S. film distributed to Chinese cinemas 
on a revenue-sharing basis earned $1.9 million for the member company, 
but by 2002 that amount had fallen to $500,000, and per company 
earnings for American filmmakers fell by 20 percent during the period.
    The home entertainment market in China is estimated by one industry 
expert to total between $1.3-$1.5 billion annually, of which only five 
percent, or around $65 million, is legitimate. Of this potential 
market, earnings by American companies fell 85 percent from 2000, to a 
low of less than $3 million in 2002.
    HELP FOR CHINESE FILM INDUSTRY. This situation has been 
particularly disappointing because American industry has done its 
utmost to expand support for and cooperation with the Chinese film 
industry. This has included co-producing films with Chinese studios; 
assisting in the distribution of Chinese films outside China; investing 
in multiplex cinema development and industry-related projects; training 
Chinese in all aspects of film making; conducting seminars to educate 
authorities regarding copyright enforcement practices; hosting many 
trips to the U.S. for Chinese officials for educational and business 
exchanges; and sponsoring Chinese film festivals in Los Angeles, San 
Francisco, New York and Washington--a collective investment of many 
millions of dollars.
    American industry hopes Vice Premier Wu Yi's mandate will extend 
beyond pure anti-piracy enforcement and to also address the market 
access problems that result from the government's continued efforts to 
maintain restrictive controls. The Ministry of Commerce is working to 
get all weak Chinese industries on stronger commercial footing and 
should also play a larger role in providing a policy environment that 
will stimulate the growth of the film industry.

                 IMPEDIMENTS TO THEATRICAL DISTRIBUTION

    DIMINISHING REVENUES. Box office results of American films imported 
to China have been decreasing every year. Current revenues earned by 
our member companies are now hardly sufficient to meet the costs of 
servicing the market. As quickly as a film is released in the U.S., 
pirates flood the Chinese market with pirate VCD and DVD copies, 
gutting the potential market. By the time American films are approved 
by Chinese censors, passed through the slow import and distribution 
process, and finally become available to the public, they have lost 
much of their value, as most consumers will have already seen the films 
in pirate versions many months ahead of the theatrical release.
    So far this year, the average total box office revenue for each 
U.S. film in China has been in the range of U.S. $1.8-2.0 million 
dollars, of which the U.S. rightsholder is allotted 13 percent by the 
Chinese state distributor, yielding, on average, anywhere from $234,000 
- 260,000.
    Against these meagre proceeds are then posted the costs of bringing 
in films, which can range up to $250,000, including the costs of the 
physical elements needed to duplicate the film, sound materials, 
publicity materials, copies of prints, contributions towards marketing 
the film, and related publicity events.
    This uneconomic revenue picture is the result not only of piracy, 
but of a series of more formal market access barriers.
    LIMITED IMPORTS. The American film industry greatly appreciated 
USTR's achievement in raising the annual number of revenue sharing film 
imports from 10 to 20--yet there is an important difference of opinion 
regarding that achievement. Some Chinese officials view the 20 annual 
revenue sharing imports benchmark as a ``maximum'' number of imports, 
rather than a ``minimum,'' which is the normal WTO interpretation of 
such commitments. And this 20 ``maximum'' is for all foreign films, so 
supply to the market remains artificially choked off.
    So far in 2003, there have been 18 films approved for import, up 
slightly from last year. However, this is far, far short of what the 
market requires--and a far cry from what the US industry is capable of 
supplying. Theatrical demand and video demand increases every year but 
the number of titles supplied to both of these markets is simply not 
sufficient to satisfy the market and wean consumers off piracy. In 
2002, over 400 feature films were released in the US, the majority of 
which were U.S. productions. With the severe shortage of legal films 
across China, some outlying cinemas desperate to stay alive have 
returned to the bad old days of the mid-1990's of pirate screenings, 
this time projecting unlicensed DVDs instead of the VCDs of that 
earlier time.
    SLOW CENSORSHIP. Film censorship in China still often takes a month 
or more, sometimes even longer. This is in sharp contrast to other 
markets where censorship is normally done in a week or less.

                     Asia--Average Censorship Times
                        Theatrical and Home Video
------------------------------------------------------------------------

------------------------------------------------------------------------
China.....................................  15-30, sometimes longer
Japan.....................................  7 days to clear Customs (no
                                             censorship)
Korea.....................................  7-10 days
Singapore.................................  7 days
Taiwan....................................  5-7 days
------------------------------------------------------------------------

    Whether this sluggish process is a way to enforce unstated quotas, 
or is simply the result of antiquated procedures is not known. What is 
clear is that the inordinately slow censorship process is killing the 
business before it can get started. As markets across the world turn to 
multi-national simultaneous releases (known in the industry as ``day 
and date'' releases) to beat pirates, China has yet to change the same 
slow censorship pace it has followed for the past 50 years. It is vital 
that the censorship process be shortened if there is to be progress in 
rebuilding the legitimate market and in beating the pirates. Again, 
there is heartening talk of speeding up censorship but little actual 
follow-through. Meanwhile, the pirates move freely and easily in the 
market with no censorship or other restraints, satisfying consumer 
demand.
    MONOPOLY CONTROL. At present, Chinese authorities permit only one 
film importer and two film distributors to operate--China Film 
Corporation and Hua Xia Film Distribution Company (both components of 
the same monopoly managed by the Film Bureau). A healthy market the 
size of China needs more than one importer and far more than two 
distributors, and importers and distributors should be allowed to 
operate independently in a free and openly competitive market 
environment. The current structure of importation and distribution of 
films remains tightly controlled by the government, which pays little 
attention to the commercial needs of a large and hungry market.
    Because of monopoly control, Chinese distributors dictate 
commercial terms, setting them at levels far, far below anything 
experienced anywhere else in the world, leaving no real opportunities 
for American companies to negotiate individually on a normal 
competitive, commercial basis. This lack of market access provides a 
further advantage to pirates, who are now running an industry that far 
surpasses the sales and profits of the legal industry.
    Under the terms dictated by State-run Chinese distributors, the 
MPAA member company share of the box office is averaging only 13 
percent. Although such terms are elsewhere individually negotiated, and 
vary from territory to territory, they are more typically in the 
neighbourhood of 50 percent or more in other markets.
    BLACKOUT PERIODS: Another continuing problem are the ``blackout 
periods'' for which the Government decrees that no foreign films may be 
screened, with the market totally reserved for Chinese films. This 
practice bites huge holes out of the business.
    TAXES, DUTIES, FEES. An additional severe drag on the very limited 
legal business is the continued heavy burden of taxes, duties, and 
fees. The American industry greatly appreciated USTR's achievement in 
reducing the film import duty from nine percent to five percent. SARFT 
has continually promised to reduce the tax and fee burden but nothing 
has materialized (other than what USTR achieved on the import duty) and 
there are few solid signs that it will.

                 IMPEDIMENTS TO HOME VIDEO DISTRIBUTION

    The American industry's home video business began a number of years 
ago with the Ministry of Culture promising to put home video on a 
commercial footing and to ensure that it be run like a business rather 
than an ideological enterprise. Unfortunately, that drew the ire of the 
Propaganda Department, which ordered Culture to slow down video 
imports, using the censorship process as its tool for doing so. To its 
credit, Culture tried to evade the restrictive orders from Propaganda, 
but unsuccessfully. None of this is openly admitted, but many American 
films are either rejected flatly or processed very slowly in Culture's 
censorship process. There is much encouraging talk from Chinese 
officials but the restrictions remain.
    SLOW CENSORSHIP. It currently takes at least a month for most 
American video titles to pass censorship, a period which, as indicated 
above, lags far behind the typical duration of the censorship process 
in the region. The Ministry of Culture has promised that the pace of 
video imports will pick up and that censorship will be much faster. 
That remains to be seen.
    At the same time, films produced in Hong Kong go through censorship 
in only a few days. Asked about this, the Ministry of Culture says Hong 
Kong films are now treated as local pictures, which means they are 
processed through censorship faster. This is an unintended but frank 
admission of the discriminatory treatment foreign titles receive. 
Meanwhile, pirates move their stolen product easily into the market 
without censorship or any other restraints.
    The pirate DVD industry is now so confident and developed that many 
pirate operators invest in marketing materials and infrastructure. The 
pirate product is presented so professionally that consumers do not 
know they are dealing with pirates. The American companies must slog 
through a slow and inefficient system while the pirates are able to 
operate quickly and effectively to serve the market.
    There are enormous frustrations dealing with the slow and inept 
bureaucracy. For example, the Ministry of Culture issues only one 
``original'' censorship certificate. Customs and several other offices 
each want an ``original'', which means special efforts are required to 
be sure the right people get the right paperwork. This is one small 
example of an overall bureaucratic process that causes delay for legal 
suppliers and leaves the market to the pirates.
    TOO FEW RETAIL OUTLETS. While pirated videos are ubiquitously 
distributed on the street, within bars and in restaurants, market 
barriers to legitimate businesses that sell videos are a significant 
impediment to the growth of legitimate video in China. The American 
industry is urging that Ministry of Commerce (MOC) redouble its efforts 
to get the video industry on the strong commercial footing it has so 
long promised. There have to be more licensed distribution outlets for 
legitimate home entertainment fare.
    Current estimates are that there are more than 80,000 licensed home 
video retail outlets in China. That may at first glance appear to be a 
high number, but for a country as large as China, with its huge 
appetite for filmed entertainment (witness the spectacular success of 
the pirates), this is far short of what is needed. Moreover, many of 
the retail outlets in China are old and not conveniently located. 
Outlets need to be located where many Chinese now go - shopping malls, 
hypermarkets, supermarkets, and convenience stores.
    One important step will be to make it easier for conveniently 
located and modern hypermarkets, supermarkets, and convenience stores 
to get a single license that authorizes them to provide home video 
products throughout their entire chain of stores. Current procedures 
require approval from both the Ministry of Culture and the Ministry of 
Commerce, as well as from a number of provincial and local authorities 
to license each individual store. This system is simply unworkable and 
must be changed.
    The American industry is in discussion with Culture and Commerce 
about this at the present time. Having the U.S. Government raise the 
problem could help get it resolved. A key part of beating the pirates 
is to have an adequate number of legitimate retail outlets with ample 
and up-to-date legal product. China should treat video like any other 
consumer item. Once a title has passed through censorship, it should be 
able to move quickly into as many retail outlets as possible throughout 
the country.
    INVESTMENT RESTRICTIONS. The growth of the legal DVD market in 
China requires secure, affordable DVD replication. Chinese law requires 
foreign video companies to do their replication in China. That means 
product cannot be imported from secure, well-priced replicators outside 
the country.
    Foreign ownership of replicating facilities is currently limited to 
49 percent. This limit must be relaxed in order to attract highly 
capitalized investors needed to expand replication facilities within 
China. The 49 percent limit also hinders effective sales and marketing 
because the minority partner does not have adequate control of these 
critical components of the business. The result is that less is done on 
sales and marketing as is needed.
    Overall, these restrictions contribute to a situation in which 
legal supply of DVDs is far too low to meet the needs of the market, a 
situation which the pirates exploit fully.

                 IMPEDIMENTS TO TELEVISION DISTRIBUTION

    The Chinese government has maintained tight control over the 
television industry, which it uses as a medium for disseminating State 
propaganda. Although the industry has developed considerably and its 
revenue-generating potential is becoming more apparent, the government 
continues to ensure that Chinese television remains under its control 
and subject to strict regulation. All aspects of the television 
industry are tightly controlled by the government, including program 
importation and production. While development in technology has 
facilitated limited participation of foreign parties in program co-
production, advertising and infrastructure development, the government 
continues to prohibit foreign involvement in Chinese media outlets.
    There has been a great deal of discussion by the Chinese government 
about opening and liberalizing the industry. Progress in this area, 
however, continues to be extremely slow.
    MARKET ACCESS. Foreign satellite channels are not allowed carriage 
on local cable systems unless specifically approved by SARFT. A few 
foreign satellite channels have received government approval to do 
``trial distribution'' in the southern part of the country. Carriage of 
satellite channels remains restricted to three to five star hotels, 
government buildings and foreign institutions.
    CENSORSHIP. All television programs that are broadcast in China, 
whether produced locally or overseas, are subject to censorship. The 
Censorship Committee and Review Committee within SARFT handle the 
censorship function. The process is exceedingly slow, especially for 
overseas programs, which can drag out to 12 months. Such bureaucracy 
benefits pirates who undergo no censorship (or other restraints) as 
they move illegal TV product into the market.
    FOREIGN INVESTMENT. No foreign investment is allowed in the 
broadcasting, cable and satellite sectors. There is talk of new, more 
liberal investment regulations but they are slow in coming.
    FOREIGN CONTENT. Foreign programming is restricted to no more than 
25 percent of total airtime by television stations and banned during 
prime time between 6:00 PM and 10:00 PM. Foreign cartoon programming is 
restricted to 25 percent of total time set for youth programs and 40 
percent of total cartoon time.
    UPLINKING RESTRICTIONS. Foreign satellite channels beaming into 
China are required to uplink from a government-owned encrypted 
satellite platform (Sino-Sat) managed by SARFT. The fee for doing so is 
U.S. $100,000. The result of the current regulatory structure is that 
the supply of legal product is far short of the market needs. The 
result, not surprisingly, is more piracy. Provincial television 
stations routinely make unauthorized broadcasts of MPA member company 
titles. They will often rely on counterfeit ``letters of 
authorization'' or ``licenses'' from companies in Thailand, Hong Kong 
and Taiwan, which purport to convey broadcast rights. There are now 
several thousand registered cable systems in China, all of which 
routinely include pirate product in their programs. Very few 
enforcement actions have been taken to date.

                         E-COMMERCE (INTERNET)

    REGULATORY MUDDLE. Overall regulation of the Internet is 
incoherently structured. A number of government Ministries and agencies 
have expressed interest in controlling the Internet (and potentially 
benefiting from it). The result is at least five existing separate sets 
of regulations on Internet. Furthermore, the NCAC and the Ministry of 
Commerce are expected to develop additional regulations. This is 
leading to a situation which, as with anti-piracy enforcement in the 
physical world, is likely to be uncoordinated and confusing, to the 
detriment of copyright holders and businesses seeking to invest in e-
commerce opportunities.
    The State Council has indicated it will issue a comprehensive set 
of regulations, especially focusing on copyright protection, sometime 
early next year. If this happens, in addition to clarification of 
supervision and consolidation of disparate roles and rules, specific 
improvements in Chinese statutes are called for.
    China has not met all of its WIPO Copyright Treaty (WCT) 
obligations. Both technological protection measures and electronic 
rights management systems are protected against circumvention, although 
as set forth below those protections are not fully compatible with WCT 
requirements and were not sufficiently addressed by the December 2001 
regulations to the copyright law that went into effect on September 15, 
2002. It is also unclear whether the copyright law provides sufficient 
protection for temporary copies.
    More specifically:

 Anti-Circumvention. While the Law [Article 47(6)] provides anti-
        circumvention protection, it does not fully implement the WIPO 
        treaties obligation, in that it: 1) does not expressly prohibit 
        the manufacture or trade in circumvention devices, components, 
        services, etc.; 2) does not define ``technical protection 
        measures'' to clearly cover both ``copy-controls'' and ``access 
        controls''; 3) does not make clear that copyright exceptions 
        are not available as defenses to circumvention violations; 4) 
        does not expressly include component parts of circumvention 
        technologies (assuming devices are covered); 5) imposes an 
        ``intent'' requirement as to acts (and business/trade if such 
        activities are covered), which might make proving a violation 
        difficult; 6) does not provide for criminal penalties for 
        circumvention violations (since the copyright law only deals 
        with civil and administrative remedies). Unfortunately, none of 
        these deficiencies was dealt with in the implementing 
        regulations.
 Rights Management. While the law protects against ``intentionally 
        deleting or altering the electronic rights management system of 
        the rights to a work, sound recording or video recording'' 
        without consent of the right holder [Article 47(7)], this 
        protection may not fully satisfy WIPO treaties requirements and 
        requires further elaboration in the implementation process. For 
        example, the Law does not expressly cover ``distribution, 
        importation for distribution, broadcast or communication to the 
        public'' of works or other subject matter knowing that rights 
        management information has been removed or altered without 
        authority, as required by the WIPO treaties, nor does it define 
        ``electronic rights management system'' in a broad, technology-
        neutral manner.
 Temporary Copies. Temporary copies are not expressly protected as 
        required by the WIPO Treaties. As with the Copyright Law prior 
        to amendment, protection of temporary copies of works and other 
        subject matter under the 2001 copyright law remains unclear. 
        According to an earlier (February 2001) draft amendment of 
        Article 10, ``reproduction'' as applied to works was to include 
        copying ``by digital or non-digital means.'' The phrase ``by 
        digital or non-digital means'' was removed from the final 
        version of Article 10(5) prior to passage. Article 10(5) also 
        fails (as did the definition of ``reproduction'' in Article 52 
        of the old Law, which was deleted, and Article 5(1) of the 1991 
        Implementing Regulations) to specify that reproductions of 
        works ``in any manner or form'' are protected. Addition of 
        either of these phrases might have indicated China's intent to 
        broadly cover all reproductions, including temporary 
        reproductions, in line with the Berne Convention and the Agreed 
        Statement of the WIPO Copyright Treaty. As it stands, the 
        current Article 10(5) description of the reproduction right 
        includes ``one or more copies of a work by printing, 
        photocopying, copying, lithographing, sound recording, video 
        recording with or without sound, duplicating a photographic 
        work, etc.''
    Mr. Chairman, again I think you and the members of the Subcommittee 
for this opportunity to testify before you. I would be pleased to 
answer any questions you may have.

    Mr. Whitfield. [presiding] Thank you, Mr. Attaway.
    Mr. Primosch, if you would give your opening statement.

                  STATEMENT OF WILLIAM PRIMOSCH

    Mr. Primosch. Mr. Chairman and members of the subcommittee, 
thank you very much for inviting the National Association of 
Manufacturers to be here today at this hearing. For many of our 
members, China is both the symbol and the reality of the new 
global marketplace. On the one hand, it is a relatively large 
and untapped market for a wide range of our products. On the 
other hand, it is a fierce competitor that sells quality 
products, often at cut rate prices.
    When manufacturers, say therefore, that they are challenged 
as never before in the global marketplace, they often 
immediately refer to China even though the competition comes 
from many quarters.
    Several years ago, China exported mainly low value products 
like toys and clothing and athletic footwear. But now it is 
exporting a wide range of manufactured products from computers 
and auto parts to furniture and tools and metal and plastic 
components used throughout U.S. industry. And the impact of 
China's industry is felt not only in competition for customers, 
but also for raw materials. In the past several months, for 
example, China has been buying so much scrap steel, iron ore 
and coke that it has nearly single handedly raised world prices 
of steel to near record levels.
    Let me be clear though. The NAM wants a positive economic 
relationship with China and we recognize that China is a major 
emerging market for U.S. manufacturers. However, overall, the 
bilateral trade relationship remains heavily unbalanced in 
China's favor as the trade surplus that China has indicates. If 
recent trade trends continue, we estimate that in 4 to 5 years, 
China's trade surplus will top $300 billion.
    One key reason the trade imbalance is so large is that 
Chinese trade and economic policies are perpetuating an unlevel 
playing field. These policies raise barriers to U.S. products 
and provide unfair advantages to Chinese products in the U.S. 
and global markets. Although China has made progress on its WTO 
obligations, it is still not living up to them fully.
    I have identified several problems in my prepared 
statement. Let me emphasize three that are particularly 
important for U.S. manufacturers. The first is China's policy 
of deliberately undervaluing its currency, the yuan. This has 
had the effect of raising the price of U.S. exports to China 
significantly and lowering the price of Chinese products in the 
United States. Some economists estimate that the undervaluation 
is as high as 40 percent. One important indication of 
undervaluation is the high level of foreign exchange reserves, 
$416 billion as of January of this year, 3 to 4 times what the 
IMF and World Bank would recommend.
    The second broad issue of concern relates to indirect 
subsidization of production in exports. Chinese products are 
selling in the United States at prices that don't reflect 
market costs, according to many manufacturers. We believe that 
this is occurring because of a variety of indirect subsidies, 
easy bank credit to insolvent state enterprises, discriminatory 
taxes, particularly value-added taxes, below market energy 
costs and other incentives.
    The third broad concern relates to rampant counterfeiting 
in China. No longer just software and media products as my 
colleagues have brought to your attention, but also 
pharmaceutical, health care products, auto and truck parts, 
food products and many other consumer and industrial products. 
We are encouraged that U.S. tradeofficials have successfully 
raised the profile of this issue, indeed to the point where the 
respected Vice Premier Wu Yi has assumed overall responsibility 
in China for anti-counterfeiting efforts, but China will have 
to take action on several fronts, including legal reforms, 
stepped up enforcement and education to address the problems. 
We don't expect an instant solution, but we do insist on 
steady, concrete and meaningful progress.
    Finally, Mr. Chairman, we also have to do more ourselves to 
redress the trade imbalance. Both industry and government need 
to put more effort into export promotion. We have proposed a 
network of American trade centers in Chinese cities to address 
that need. The JCCT should deal firmly and frankly with all 
these concerns and lay out a practical plan of action that will 
achieve real results in the year ahead.
    Thank you, Mr. Chairman.
    [The prepared statement of William Primosch follows:]

    Prepared Statement of William Primosch, Director, International 
       Business Policy, The National Association of Manufacturers

    Mr. Chairman and Members of the Committee: Thank you for giving the 
National Association of Manufacturers (NAM) the opportunity to testify 
on U.S.-China trade and preparations for the upcoming meeting of the 
Joint Commission on Commerce and Trade.
    The NAM represents 14,000 manufacturing companies, both large 
multinational corporations and over 10,000 small and medium-size firms. 
With a loss of nearly 3 million jobs since July 2000, the manufacturing 
sector has undergone painful adjustment. Virtually every segment of 
industry finds itself competing intensely in the global marketplace. 
Import competition has increased but so also has the competition for 
export markets. In fact, the decline in manufactured goods exports, 
which fell from $645 billion in 2000 to $577 billion in 2003, has had a 
bigger impact on manufacturing jobs than the increase in imports, which 
rose by only $24 billion in that same period.
    No trading partner has attracted as much attention as China for 
manufacturers interested in exporting or concerned about increasing 
import competition. The fastest growing large economy in the world, 
China has emerged within a short span of two decades as a strong 
international competitor in a wide range of manufactured products and a 
key market for U.S. manufactured exports. More recently China has also 
gained prominence as a huge consumer of industrial raw materials, with 
demand so large that it has significantly boosted world prices of 
important inputs such as steel and copper scrap, iron ore and coke used 
in steel production. It is not surprising, then, that U.S. 
manufacturers pay close attention to China's trade and economic 
policies, and how they affect not only bilateral trade and investment 
but the entire global marketplace.
    In 2003 China exported $438 billion in goods, mainly manufactured 
products, making China the world's fourth largest exporter. At the same 
time, high rates of business and government investment and rising 
personal incomes have fueled a strong demand for foreign products and 
services in which the United States is highly competitive. China 
imported products valued at $413 billion in 2003, an increase of 40 
percent over 2002. --
    While China ran a relatively small trade surplus with the world, 
the trade imbalance with the United States has become even more highly 
skewed in China's favor. Chinese exports to the U.S. in 2003 were 
valued at approximately $152 billion and imports, approximately $28 
billion, according U.S. Department of Commerce data. As China produces 
a large volume of its manufactured exports from parts and components 
made elsewhere in Asia (e.g., Japan, South Korea and Taiwan), these 
economies also benefited substantially from the large U.S.-China trade 
imbalance.
    This large and growing trade imbalance often serves as a lightning 
rod for criticism of China's trade and economic policies. Let us be 
clear. The NAM supports a positive, mutually beneficial economic 
relationship with China. But our members also insist on a level playing 
field, one that enables U.S. manufacturers to compete fairly in a more 
open Chinese marketplace while ensuring that Chinese products receive 
no special advantages in the U.S. and other foreign markets. At 
present, that playing field is not level.
    That is why China's membership in the World Trade Organization 
(WTO) is important for U.S. manufacturers. It provides an 
internationally accepted set of rules and standards to evaluate China's 
behavior. The United States should insist that China comply fully with 
its WTO obligations, on both trade disciplines and market-opening 
commitments. But we hope that the Chinese will also see that it is 
their interest to go beyond explicit WTO obligations and work to 
develop a bilateral economic relationship that provides genuine mutual 
benefit and quickly resolves trade and other business problems that 
arise, whether they are related to the WTO or independent of those 
obligations.

         KEY ISSUES FOR U.S. MANUFACTURERS AT THE JCCT MEETING

    The United States has established a variety of channels to discuss 
trade issues with China but none is more important the Joint Commission 
on Commerce and Trade (JCCT). The JCCT is a well established bilateral 
forum that brings together senior officials as well as trade and 
economic experts to discuss key issues of concern to both sides. The 
upcoming meeting on April 21-22 provides a timely opportunity to seek 
progress on several important concerns and work creatively to obtain 
the kind of openness for U.S. products and services in China's market 
that Chinese products and services currently enjoy in the U.S. market.
    The NAM would like to see this year's JCCT meeting focus on the 
following key issues:

 Joint efforts to continue and accelerate recent increases in U.S. 
        manufactured goods exports to China, including through the 
        establishment of American Trade Centers in major commercial 
        centers.
 Effective steps by China to halt the production and export of 
        counterfeit U.S. branded products.
 Progress in reaching new understandings to stop the indirect 
        subsidization of Chinese exports.
 Ending the discriminatory application of value added taxes on 
        semiconductors.
 Obtaining agreement by China to harmonize its wireless encryption 
        standards (so-called WAPI standards) with international 
        standards and to stop requiring foreign firms to partner with 
        Chinese firms as a condition for producing wireless products in 
        China.
 Rolling back restrictions on China's export of industrial raw 
        materials such as coke.
 Reforming the application of the CCC mark system to reduce the cost 
        of compliance for foreign companies and enable U.S. testing and 
        certification bodies to offer their services in China on the 
        same basis as national bodies.
 And finally, while currency issues are not within the JCCT's purview 
        for negotiation, making clear that currency undervaluation is 
        an important concern that must be addressed because of its 
        distorting impact on U.S.-China trade.

                JOINT EXPORT PROMOTION EFFORTS IN CHINA

    Many manufacturers are taking advantage of China's rapid economic 
growth to sell more of their products there. In fact, some large member 
companies have told us that China is their most important foreign 
market for increasing export sales. Smaller companies are also 
benefiting from increased exports to China. But for a variety of 
reasons (e.g., language, culture, lack of transparency in business 
regulations, and limited infrastructure and business facilities in many 
commercial centers), China remains a difficult place to do business. 
Small and medium-size companies, even those successful in other foreign 
markets, often have difficulty entering the market and developing 
profitable business relationships.
    Unless U.S. exports increase at a much higher rate, the bilateral 
trade deficit will grow to levels that are politically unacceptable 
within a relatively short period of time. If past trends were to 
continue for the next four years, for example, the NAM estimates that 
the bilateral trade deficit would exceed $300 billion. Failure to break 
down trade barriers is depriving China, particularly interior markets, 
of a wide range of U.S. quality products and advanced technology that 
would benefit China's development and expand consumer choice. For these 
and other reasons, therefore, it is in China's own interests to work 
with the United State to facilitate a rapid increase in U.S. exports 
and greater U.S. access to China's consumer and business markets.
    The NAM supports the establishment of American Trade Centers in 
major commercial centers to assist U.S. businesses, particularly small 
and medium-size companies, in selling their products and services. In 
the Omnibus Appropriations bill, Congress has authorized six Commerce 
Department positions in China to begin work on the project. China's 
national government should be encouraged to support the initiative by 
officially endorsing the idea and actively urging provincial and 
municipal governments to provide suitable office space and all 
necessary local authorizations for the centers to operate.

               HALTING COUNTERFEIT PRODUCTION AND EXPORTS

    Counterfeiting of branded products--from movies and software to 
auto parts and pharmaceutical products--remains a serious concern of 
U.S. manufacturers. The counterfeiting is occurring on a massive scale, 
with production being sold in China and foreign markets, including the 
United States. NAM member companies are encouraged by the increased 
attention that the U.S. Trade Representative's Office has given to the 
problem. They also applaud the designation of Vice Premier Wu Yi, a 
respected senior official who is also heading the Chinese delegation to 
the JCCT, as the coordinator for Chinese efforts to address 
counterfeiting issues. U.S. manufacturers, however, will not be 
satisfied until they see steady, concrete progress in halting both the 
production and the export of counterfeit products.
    The NAM believes that significant progress will not be made until 
China seriously addresses the following key issues:

 Stopping the export of counterfeit goods at the Chinese border, as 
        China committed in its bilateral agreement with the United 
        States.
 Clarifying in the Chinese criminal code that exporting counterfeit 
        products per se constitutes a ``sale'' and therefore a 
        restricted act under the criminal code. The current ambiguity 
        on whether an ``export'' constitutes a ``sale'' of counterfeit 
        products, under which a manufacturer of counterfeit goods can 
        hide behind a facially legitimate trading company, must be 
        eliminated. Criminal prosecutions must ensue after counterfeit 
        merchandise is seized on the docks.
 Sharply increasing the number of criminal prosecutions for producing, 
        packaging and selling counterfeit products. While Chinese 
        authorities have taken civil actions against counterfeiters, 
        they have no evident deterrent effect and are insufficient by 
        themselves.
 Destroying not only fake goods for sale but also the equipment used 
        to produce and package them. Today, counterfeit enterprises 
        operating entirely outside the law simply go right back into 
        business after a raid on inventory. Nothing changes. This 
        situation will remain the same until the primary assets--the 
        machine tools and production equipment--are also seized and 
        destroyed.
 Training judicial officials in the prosecution of counterfeiters.
 Actively encouraging police and customs officials to enforce anti-
        counterfeiting laws as a national policy.
 Taking action against local officials who abet counterfeiting or who 
        don't enforce anti-counterfeiting laws.
 As part of the JCCT process, establishing a working group that meets 
        regularly and frequently to carry out an agreed anti-
        counterfeiting work program and monitor progress.
    In light of the Vice Premier's responsibility for anti-
counterfeiting efforts, we would urge an in-depth discussion of 
counterfeiting issues that focuses on making progress in these key 
areas.

               MAKING PROGRESS ON INDIRECT SUBSIDIZATION

    We continue to receive reports that Chinese products (e.g. tool-
and-die products, chemicals and other metal products) are being sold in 
the United States at prices that appear to U.S. manufacturers to be 
well below the cost of production. A tool-and-die company, for example, 
reported that a Chinese competitor was selling a product similar to the 
company's for 60 percent less ($40,000 vs. $100,000), barely covering 
the cost of the raw material inputs. U.S. metal products manufacturers 
note that the price of Chinese metal products have not increased 
despite the sharp rise in steel prices in China and globally due in 
large part to China's own increased demand for steel and steel-making 
raw materials.
    WTO rules prohibit the use of explicit export subsidies but they 
are less clear on other kinds of financial incentives and non-market-
based financial transactions that indirectly affect exports. For 
example, Chinese banks continue to lend to state-owned manufacturing 
enterprises that are financially insolvent and export their products. 
Such loans, since they are on a non-market basis, could be viewed as 
indirect subsidies. If value-added tax rebates are not applied 
uniformly and on a nondiscriminatory basis on all foreign and Chinese 
companies, these could have the same impact as an indirect subsidy. So 
also could electricity and other energy supplies sold to Chinese 
manufacturers at below-market costs.
    China's manufacturing sector is now so large that it can affect 
global markets for both industrial raw materials and final products. 
The United States needs to be sure that China's manufacturing base is 
developing on a market basis, and indeed it is in China's own long-term 
economic interest that it does so. At the upcoming JCCT meeting, U.S. 
officials need to flag the issue of subsidization and press to 
establish a joint working group to examine how Chinese policies and 
regulations relating to bank lending, energy pricing, VAT rebates and 
other financial incentives for manufacturing investment are affecting 
Chinese manufactured goods exports to the U.S. and third markets.

Ending VAT Discrimination on Semiconductors
    The NAM has strongly objected to China's discriminatory application 
of the VAT on semiconductors and, therefore, welcomed the 
Administration's recent decision to file a dispute settlement petition 
with the WTO. The levy of a different VAT rate on semiconductors 
designed and manufactured in China compared to those either designed or 
produced and designed abroad is a blatant violation of WTO rules on 
national treatment of ``like products.'' We urge that U.S. officials 
continue to press hard for prompt Chinese action to end the 
discriminatory treatment.

Accepting International Standards on Wireless Technology and Other 
        Products
    Technical standards are becoming increasingly important for market 
access in China as in other foreign markets. The JCCT, therefore, needs 
to give continuing attention to standards issues, working to resolve 
problems quickly and anticipating issues that will arise in the future. 
Two particular standards concerns merit in-depth discussion at the JCCT 
because of their broad-ranging impact.
    The first relates to the Chinese announcement that later this year 
China will establish a unique technical standard for wireless local 
area networks (WAPI) that will be different from the international 
standard. The only way U.S. and other foreign companies can gain access 
to the encryption elements contained in the standard is by partnering 
with a Chinese manufacturers. This would require the affected U.S. 
companies to provide free access to their intellectual property and 
design specifications and expose them to the loss of proprietary 
information. Such a requirement is a clear violation of the national 
treatment rules of the WTO and should be dealt with firmly.
    China offers a huge potential market for U.S. suppliers of wireless 
products. The satisfactory resolution of this dispute, therefore, has 
major commercial implications. While U.S. officials have already raised 
industry concerns at senior levels, they should use the JCCT to press 
the Chinese further with the knowledge that they have the firm backing 
of the broader U.S. manufacturing community.
    The second issue relates to the China's definition of 
``international'' technical standards in the internal market. China is 
requiring that certain products (e.g., electrical products) be 
manufactured only to ``international standards'' as determined in the 
Organization for International Standardization (ISO) or International 
Electrotechnical Commission (IEC). Other ``international standards,'' 
notably those developed in the United States and widely used in the 
global marketplace, are not allowed. This does not conform with the 
interpretation of the WTO Technical Barriers to Trade (TBT) Committee 
that ``international standards'' need not be limited to ISO or IEC 
standards.
    The National Electrical Manufacturers Association (NEMA) is 
establishing an office in Beijing to coordinate standards on electrical 
products in China. Chinese standards officials should be encouraged to 
work with NEMA to find a solution to this problem.

Reforming the CCC Mark System to Lower Cost and Allow Foreign 
        Participation
    The NAM has received numerous complaints, particularly from small 
companies, about the China Compulsory Certification (CCC) quality mark 
system. China now requires that a wide range of products (e.g., 
electrical products, air conditioning and refrigeration equipment) bear 
the CCC mark as an indication that all relevant technical standards 
have been met. Implementation of the CCC mark system, however, has 
raised additional market access barriers because of the high cost of 
obtaining the mark, the lack of clarity in the regulations and delays 
in the certification process.
    One of the reasons for the high cost and delays is that U.S. 
factories making the products must be inspected, and only Chinese 
testing bodies are permitted to do this. Well known U.S. standards 
testing and certifying organizations, such as Underwriters 
Laboratories, are not able to provide their services in China or 
certify in the United States that U.S. products or factories meet 
Chinese standards.
    The United States should press firmly at the JCCT for improvements 
in the CCC mark system that would lower costs for small companies and 
enable U.S. testing and certifying bodies to provide their services in 
China at an early date. With the trade deficit so large and growing 
rapidly, the United States must insist that China take these standards-
related concerns seriously and work to reduce barriers to market 
access.

Allowing Unrestricted Export of Industrial Raw Materials
    Under GATT Article XI, WTO members are not supposed to restrict 
exports except for narrowly prescribed reasons. Just recently, however, 
it has come to our attention that China placed further restrictions on 
the exports of coke that are having a direct impact on U.S. steel 
production and exacerbating current steel shortages. China is currently 
the largest exporter of industrial coke to the United States. According 
to press and industry reports, China plans to reduce its exports 
substantially in 2004, apparently to limit supplies for its own rapidly 
expanding steel industry. While China is limiting its coke exports 
abroad, China is buying record volumes of scrap steel and other metals 
(e.g., copper) from the United States and other foreign suppliers for 
its own industry. Largely as a result of Chinese actions in the 
marketplace, U.S. steel prices have risen sharply and disruptions in 
supplies are expected later in the spring as demand outstrips 
production here in the United States.
    The JCCT provides a timely opportunity to raise recent Chinese 
restrictions on coke exports and discuss more generally the impact of 
Chinese industrial development on global markets. The current shortages 
in industrial raw materials, driven in large part by China's 
unprecedented industrial expansion, also underscores the urgency of 
examining possible subsidization of Chinese industry via easy bank 
credit, below-market energy prices and other means. U.S. industry feels 
the pernicious effects of these indirect subsidies not only through 
increased import competition but also raw materials shortages.

Noting Currency Undervaluation as a Key Concern
    China's undervalued currency continues to be a major factor 
distorting bilateral trade and inflating the U.S. trade deficit. By 
preventing the market from determining the dollar-yuan exchange rate, 
economists estimate that the yuan could be undervalued by 40 percent or 
more, giving Chinese products an unfair advantage over U.S. products in 
our domestic market. As of January 2004, China had accumulated $416 
billion in foreign exchange reserves, a multiple of what the IMF 
recommends as a cushion against fluctuations in trade and investment 
flows.
    Continued pegging of the yuan to the dollar at a fixed rate of 8.28 
appears to be part of a deliberate strategy to stimulate Chinese 
industry and boost the export of manufactured goods. The NAM and other 
members of the Fair Currency Alliance believe that this kind of 
currency undervaluation for commercial gain goes against the intent of 
GATT Article XV, which states that ``Contracting Parties shall not, by 
exchange action, frustrate the intent of the provisions of the 
Agreement [GATT].''
    The Fair Currency Alliance will be submitting shortly to the U.S. 
Trade Representative a Section 301 complaint against China for currency 
manipulation. While the JCCT is not the appropriate forum to negotiate 
exchange rate issues, we hope that the U.S. delegation will note the 
distorting impact on bilateral trade of the currency undervaluation and 
reiterate President Bush's statement that the Chinese ``have got to 
deal with their currency.''

Conclusion
    In concluding, Mr. Chairman, let me reiterate that the NAM wants a 
strong economic relationship with China that provides mutual benefits. 
We supported Permanent Normal Trade Relations for China and its WTO 
membership to advance that goal, and we believe that it is achievable. 
Yet while China has made progress in opening its market and adhering to 
international trade rules, the economic benefits of the relationship 
still remain heavily one-sided in China's favor. Manufacturers continue 
to face an unlevel playing field that works to limit U.S. exports to 
China and gives Chinese products unfair advantages in the United 
States. The JCCT should deal firmly and frankly with these concerns and 
lay out a plan of action that will result in concrete progress during 
the year ahead.

    Mr. Stearns. Thank you, Mr. Primosch.
    Mr. Tonelson.

                   STATEMENT OF ALAN TONELSON

    Mr. Tonelson. Thank you very much, Congressman Whitfield 
and members of the subcommittee for inviting my organization to 
testify today. This is a critically important subject to the 
hundreds of mainly small and medium size manufacturing 
companies comprising the U.S. Business And Industry Council, 
companies that I should stress are firmly committed and this is 
rather unusual in the Washington business lobbying community, 
firmly committed to net new job creations in the United States, 
not overseas.
    But China is also critically important for the entire 
Nation. It is becoming such a big force in the world economy 
that if the United States doesn't get China right, it will not 
get globalization right. And recent U.S. policy toward China 
has been a major failure, could not be more wrong headed and I 
hate to say it, it's been a major bipartisan policy failure as 
well.
    But I'd like to emphasize in my remarks this morning are 
two areas in the U.S.-China trade policy that I don't think 
have received adequately attention. First concerns the national 
security threats that are presented by U.S. trade and economic 
policy toward China and second, the unbearable structural 
strains being imposed on the entire world economy by China's 
breakneck integration into that global economy, a breakneck 
integration that's been spearheaded by American policy 
decisions.
    It's become commonplace, but it can't be said often enough 
national economic and technological strength are foundations of 
national security and global technological leadership has been 
essential to America's global super power status and the 
manifold benefits that this status brings. Yet, it is only the 
slightest exaggeration to say that U.S. trade policy toward 
China has been working overtime to transfer as much as possible 
in the way of resources and militarily useful technology to a 
country whose recent history has been highly volatile and whose 
future geopolitical intentions are just as uncertain.
    One sign of this danger can be seen in our own high tech 
trade balance with China and I'd refer you to page 5 of my 
written testimony. In 1990, the U.S. ran a $470 million high 
tech trade surplus with China; in 2003, a $23.5 billion 
deficit. And this is in the overall context of a rapidly 
deteriorating U.S. global high tech trade to deficit.
    The best way to understand international trade theory is 
recognizing that when a country trades most successfully, will 
be eventually what it makes most successfully and these trade 
figures tell us that high tech industry, high tech production 
is not the future of the U.S. economy and the implications for 
national security are frightening.
    A most disturbing feature of U.S. trade policy toward China 
has been the near breakdown of export controls presided over by 
the last two Administrations, including this one, I mean. And 
this has largely been at the behest at relentless lobbying by 
the multinational business community in Washington. I would 
call the entire committee's attention to the 2002 GAO report on 
the development of the Chinese microelectronics industry which 
not only attributes its rapid development in this militarily 
crucial field almost entirely to U.S. and other foreign 
investment, but notes that U.S. export control officials only 
rarely even ask the right questions when they review U.S. 
export applications.
    Economically, the U.S. has made any number of specific 
mistakes in its China trade policy, but I would want to 
emphasize that these mistakes are best understood as the 
inevitable consequences of a larger and utterly misconceived 
global trade strategy. The past decade and a half had seen U.S. 
global policy marked by the almost indiscriminate opening of 
the U.S. market to the series of large Third World or former, 
excuse me, or former communist countries with enormous rapidly 
growing populations, rock bottom wages and incomes and towering 
unemployment rates. These countries have either been too poor, 
too broke or too protectionist to consume many U.S. exports and 
as a result calling them emerging markets as we got into the 
very sloppy habit in the 1990's is a complete travesty.
    And again, since my time is running short, I would 
emphasize the figures in my prepared testimony, page 10, 
China's unemployment rate, the real unemployment rate today has 
been identified by Charles Wolf of the RAND Corporation and 
many other experts who I've spoken to in this country and also 
China at 22 percent. Can you imagine a 22 percent unemployment 
rate in this Nation? We would have armed guards around this 
building because Americans would be rioting to get in.
    So we see that China--it's not that China has no 
consumption potential. It's not that China is not consuming and 
importing a great deal now. The problem is that China's import 
and consumption potential will always be much, much lower or 
certainly for the foreseeable future, much, much lower than its 
production and export potential that has been contributing to 
major structural growing dangerous U.S. global trade imbalances 
that are threatening the entire world economy with a dollar 
crash and a long and deep recession because and this is my 
final point, after more than a decade of the breakneck reckless 
globalization policies pushed so hard by the multinational 
business community in Washington, almost no other country in 
the world has figured out a way to grow viably other than mass 
exporting to the United States.
    Thank you for your time. I welcome any questions or 
comments.
    [The prepared statement of Alan Tonelson follows:]

Prepared Statement of Alan Tonelson, Research Fellow, U.S. Business and 
                Industry Council Educational Foundation

    Good morning, Chairman Stearns, Congresswoman Schakowsky, and 
Members of the Subcommittee. On behalf of the U.S. Business and 
Industry Council and its research and educational arm, the U.S. 
Business and Industry Council Educational Foundation, thank you for the 
opportunity to testify today on U.S.-China trade relations.
    This subject is of great concern to the roughly 1,000 member 
companies of the U.S. Business and Industry Council, which themselves 
are predominantly small and medium-sized manufacturers. Since 1933, the 
Council has championed the cause of strengthening the domestic 
technology and manufacturing bases, and we are very gratified by the 
Subcommittee's focus on this critical issue.
    But U.S.-China trade relations should be of urgent concern to all 
Americans. America's entire domestic manufacturing sector continues to 
struggle, and small and medium-sized industrial companies in general 
remain stuck in a downturn that has reached historic proportions. There 
can be no doubt that much of this distress--which threatens our 
national security; our future productivity, innovative capacity, and 
prosperity; and future as a healthy, middle-class-based society and 
democracy--stems from ill-conceived trade and globalization policies. 
And a series of failed China trade policies are a big part of this 
picture.
    Yet America's mishandling of China trade issues has created a 
series of special problems. Breakneck U.S. transfers of advanced, 
militarily useful technology to China are tremendously increasing the 
military-industrial potential of a nation whose geopolitical intentions 
are highly uncertain at best, while China's enormous and growing net 
export earnings from its trade with the United States have 
exponentially increased Beijing's ability to finance a large, modern 
military. In addition, America's indiscriminate opening of its market 
to Chinese imports has greatly aggravated the imbalances that are 
endangering global financial stability and rapidly bringing the entire 
world closer to a brutal, long-term correction. My testimony will focus 
on these two issues, which my organization strongly believes have been 
sorely neglected not only in U.S. China policy, but in the national 
debate that policy has generated.
    These policy failures span Democratic and Republican 
administrations, and Democratic and Republic-controlled Congresses 
alike. The problem is not one of politics, but of perception--mainly, 
an inability of Executive Branch officials and legislators to identify 
and support the most important American economic interests. Without a 
thoroughgoing transformation of these trade and globalization policies, 
the domestic manufacturing and technology base will continue to 
deteriorate, and the aforementioned security, economic, and social 
costs will rise ever higher. Yet Subcommittee members--and the rest of 
the government--must understand that some of the most important changes 
needed in America's China trade policies may be inconsistent with 
America's obligations under current international trade regimes.
    The U.S. Business and Industry Council believes that many 
fundamental changes in American policy are needed to repair the damage 
being done to key national security and economic interests by 
Washington's recent China trade policy, and to prevent future security 
and economic threats from arising. These changes will be discussed in 
more detail below, and unavoidably involve a series of better controls 
over technology transfers, trade restrictions, and better procedures 
for formulating U.S. trade policy.

                      NATIONAL SECURITY CHALLENGES

    Wealth and technological prowess are closely related cornerstones 
of any country's national security. World technological leadership in 
particular is largely responsible for America's superpower status and 
all the strategic, political, and economic advantages hat flow 
therefrom. China is a country that has undergone stunning change in 
recent decades. Its material progress has been impressive. Its economic 
reforms are opening its economy. Its prominence in international 
commercial and business affairs has risen rapidly. And its blanket 
early hostility toward the United States is clearly a thing of the 
past.
    Yet despite the recent explosion of economic ties and expanding 
cooperation on a variety of security issues, the United States and 
China are not allies or even friends. Moreover, the volatility of late 
20th century Chinese history strongly suggests that the gains achieved 
in bilateral relations beginning in the 1970s may be ephemeral. 
Finally, China's vast military-industrial potential alone makes it an 
object of inherent concern for the United States. In short, 's great 
uncertainties surround China's political and strategic future, and 
China is one of the few countries whose future matters greatly to the 
United States.
    Consequently, the security implications of U.S. economic policies 
toward China should trouble all Americans. Although China's future 
posture is highly uncertain, it is only a slight exaggeration to say 
that U.S. policy towards China has been to transfer money and 
militarily useful technology to the People's Republic as fast as 
possible. The enormous and rapidly growing trade surpluses China has 
run in recent years with the United States have sent more than $600 
billion in hard currency earnings to China since 1996 alone. That 
figure is equivalent to 6 percent of total current annual U.S. economic 
output. This mountain of money can only greatly expand the resources 
available to the Chinese military. As long as this vast U.S. subsidy to 
the entire Chinese economy continues, moreover, China will be able to 
avoid many hard choices between guns and butter.
    U.S. technology transfers to China potentially are more worrisome, 
as they could well enable China to take charge of its own technological 
development. Not only could China's military development proceed free 
of all external constraints. China's capacity to export weapons of mass 
destruction and their associated technologies would be liberated as 
well.
    The conventional wisdom today holds that most of China's industrial 
production and exports to the United States consists of goods too 
primitive for Americans to bother making anymore--e.g., shoes, 
clothing, toys, and low-end consumer electronics. This picture, 
however, has been changing so quickly that it is already hopelessly out 
of date. Today, most of America's leading high tech companies not only 
manufacture a wide range of sophisticated products in China. They are 
conducting more research and development in the People's Republic as 
well.
    One indication of the impact of this work comes from the remarkable 
turnabout of the U.S.-China high tech trade balance. In 1990, the 
United States ran a $471 million high tech trade surplus with China. In 
2003, China ran a $23.5 billion high tech trade surplus with the United 
States. International trade theory teaches that what countries trade 
most successfully, they will wind up producing most successfully. 
America's soaring high tech trade deficit with China (and the 
comparable deterioration of the U.S. global high tech trade balance) 
strongly indicate that high tech production will not be the future of 
the U.S. economy. Indeed, anyone looking at the trends in U.S.-China 
high tech trade would already be entitled to wonder which of the two is 
the third world country.
    At the same time, these trade flows may represent only the tip of a 
rapidly expanding iceberg. The U.S. government gathers and publishes 
reasonably solid information on U.S. high tech manufacturing in China. 
But comparable information on technology transfer is nowhere to be 
found. Worse, clear signs have emerged that America's system of export 
controls, designed to monitor and regulate the flow of militarily 
relevant technology to countries like China, has all but broken down 
under the relentless pressure of lobbying by multinational 
corporations. In particular, a 2002 GAO report detailed how U.S. and 
other foreign technology transfers have enabled the Chinese to move to 
within one generation of current U.S. semiconductor manufacturing 
capabilities in only 15 years, and how U.S. export control authorities 
ignore some of the most common-sensical relevant considerations when 
evaluating export license applications--e.g., assessing only the 
potential military impact of the product in question, rather than 
reviewing the broader pattern of Chinese technology imports in a given 
field and anticipating the cumulative impact of such 
purchases.1 U.S. government sources tell me that this 
situation has only modestly improved since the report's publication.
---------------------------------------------------------------------------
    \1\ See Export Controls: Rapid Advances in China's Semiconductor 
Industry Underscore Need for Fundamental Policy Review (Washington, 
D.C.: U.S. General Accounting Office), GAO-02-260, April 19, 2002
---------------------------------------------------------------------------
    Moreover, the United States has never effectively used its 
considerable leverage with its military allies to convince them to 
limit potentially dangerous technology transfers to China. A 
multilateral export control list is indeed maintained by the so-called 
Wassenaar arrangement, but compliance is purely voluntary. Indeed, the 
European Union seems likely in the near future to lift its post-
Tiananmen Square arms embargo on China.
    Finally, on a 10-week research visit to China during the winter of 
2002-03, I personally saw alarming evidence of America's lax technology 
transfer policy toward China. During a visit to the software research 
laboratory operated by IBM at Beijing's Qinghua University, I asked the 
lab manager whether the facility had ever been visited by a U.S. 
government official during his tenure there of several years. His 
response: ``No.'' I then asked him whether he had any way of 
ascertaining whether employees he hired were either Chinese government 
employees, or spies. His answers to both questions was also ``No.'' 
When I mentioned this incident to U.S. officials in China, they noted 
that the resources at their disposal for monitoring the tech transfer 
situation in the People's Republic were hopelessly inadequate.
    In sum, the determination of official Washington and multinational 
corporations to shower China with resources and advanced technology is 
the height of irresponsibility. Tighter and smarter controls on U.S. 
trade policy are urgently needed.

                        GLOBAL ECONOMIC STRAINS

    The other issue I would like to focus on entails the global 
economic implications of China's integration into the world economy. 
The view that China presents special problems for the world trading 
system is hardly unique to U.S. workers and companies critical of 
current globalization policies. Its implications were widely discussed 
by virtually the entire World Trade Organization membership and were 
directly responsible for the large numbers of special conditions 
attached to China's WTO entry.
    In retrospect, however, even these concerns and measures 
underestimated the China challenge. By awarding the People's Republic 
virtually all the rights and privileges of WTO membership--especially 
including near immunity from the authority of U.S. trade laws aimed at 
combating predatory trade practices--Washington spearheaded a worldwide 
decision that has put the global economy on an unsustainable and 
possibly disastrous path.
    China's sudden entry into the global economy can only greatly 
exacerbate a situation in which the world's producing populations and 
the world's consuming populations are splitting into two separate 
camps--a type of global specialization never envisaged by economic 
theorists and surely doomed to collapse. More specifically, the 
populations that the world increasingly relies on to produce goods and 
services lack the income to absorb a reasonable share of their output. 
Meanwhile, the populations the world increasingly relies on to consume 
are steadily being stripped of their capacity to pay for their 
consumption in a responsible way.
    The last decade of the 20th century witnessed an epochal change in 
the global economy. Due largely to the fall of communism and the 
development of advanced communications technologies, record numbers of 
new countries and their gigantic, often rapidly growing populations 
were brought into the integrated world economy and made available to 
international businesses in an unprecedentedly short period of time.
    China has clearly not been the only such country, but none other 
has proved to be simultaneously so populous and economically dynamic. 
In addition, improvements in education globally and business management 
techniques have enabled multinational companies to employ the vast 
populations of these third world and former Soviet bloc countries not 
only in the raw materials and light, labor-intensive manufacturing 
industries that had traditionally fueled their growth, but in much more 
sophisticated, capital-intensive and technologically sophisticated 
industries as well. These trends were given decisive impetus by the 
trade agreements of the 1990s, which overwhelmingly concentrated not on 
opening export markets in these new global economic entrants (often 
misleadingly called ``emerging markets'') but on helping multinational 
companies supply rich countries like the United States from the new 
low-wage international actors. In fact, trade agreements such as NAFTA 
and the ``normalization'' of trade with China have actively encouraged 
such outsourcing arrangements by guaranteeing substantial market access 
from low-wage production sites.
    Supporters of such globalization policies predicted that this trade 
expansion would quickly raise incomes in the third world and former 
Soviet bloc countries and thus create new markets in these countries 
that could be supplied by workers in rich countries. Unfortunately, 
policies that keyed rapid economic development in small countries, like 
the Asian export tigers, have been much slower to work in much larger 
countries. As I have emphasized in my recent book, The Race to the 
Bottom, the major reasons are (1) the very size of the populations of 
these global newcomers, along with their towering rates of 
unemployment, have created a vast oversupply of labor around the world 
that is exerting powerful downward pressure on wages in all countries; 
and (2) the decision of most global newcomers to pursue some form of 
export-led growth strategy has actively promoted domestic savings and 
discourage domestic consumption.2
---------------------------------------------------------------------------
    \2\ Alan Tonelson, The Race to the Bottom: Why a Worldwide Worker 
Surplus and Uncontrolled Free Trade are Sinking American Living 
Standards (New York: Westview Press), 2000
---------------------------------------------------------------------------
    China embodies all of these troubling trends, but its sheer size 
gives it special importance. Not only does it boast a population of 
some 1.3 billion that is increasing at an ostensibly moderate rate of 
one percent annually. Specialists such as Dr. Charles Wolf Jr. of the 
RAND Corporation estimate its real unemployment rate to be an 
astonishing 23 percent. Nor is the jobless problem likely to abate as 
China's robust economic growth continues. Indeed, partly because of the 
existing labor surplus, and partly because of the continuing 
privatization of inefficient state enterprises, Prof. Dorothy Solinger 
of the University of California, Irvine, expects that 40 million 
Chinese workers will have lost their jobs from 2001-2006, and that net 
new job creation during this period will range only from 1.75 to 2.5 
million.3
---------------------------------------------------------------------------
    \3\ ``Fault Lines in China's Economic Terrain,'' by Charles Wolf 
Jr., in China's Economy: Will the Bubble Burst?, Asia Program Special 
Report No. 111, Asia Program, Woodrow Wilson International Center for 
Scholars, Washington, D.C., June 2003, p. 4; ``WTO and China's 
Workers,'' by Dorothy J. Solinger, in China Enters the WTO: The Death 
Knell for State-Owned Enterprises?, Asia Program Special Report No. 
103, Asia Program, Woodrow Wilson International Center for Scholars, 
Washington, D.C., June, 2002, pp. 3-4
---------------------------------------------------------------------------
    From these figures, it is easy to see not only that wages and 
purchasing power for the vast majority of Chinese will be going nowhere 
anytime soon, but that even keeping the unemployment trends from 
spinning out of control and endangering the regime's survival will 
require even more Chinese reliance on export-led growth and less on 
domestic-led growth.
    This strategy is already creating major, growing strains in the 
world economy. China has recently garnered praise for running balanced 
global trade accounts--ostensible proof that it is generally conducting 
reasonable and responsible trade policies despite its huge surpluses 
with the United States. Yet a developing country growing as strongly as 
China (even if GDP figures have been exaggerated, as some scholars 
claim) should be running sizeable trade deficits if its economy is 
truly being shaped predominantly by market forces.
    Research by economist Stephen Roach of Morgan Stanley further 
underscores the pronounced export orientation of China's economy. Not 
only did China alone generate an astonishing 29 percent of total growth 
in world manufactured exports in 2002, but exports represented fully 26 
percent of China's economy that year and nearly three-fourths of all 
the growth that economy achieved. For good measure, the Bank of China 
estimated that, in 2002, 86 percent of the categories of manufactures 
produced by China were in oversupply.4
---------------------------------------------------------------------------
    \4\ ``Global Economic Forum: China's Global Status,'' by Stephen 
Roach, February 14, 2003, http://www.morganstanley.com/GEFdata/digests/
20030214-fri.html ``Cut throat competitors,'' by James Kynge and Dan 
Roberts, Financial Times, February 4, 2003
---------------------------------------------------------------------------
    This data, and a plethora of additional evidence, add up to a 
critically important message for the entire global economy. China has 
been determined to fuel its growth and maintain its employment levels 
by subsidizing massive overinvestment in a wide range of industries and 
then exporting the surplus worldwide. Only slightly less important is 
the equally clear truth that, however China's domestic consumption 
increases in absolute terms, as a significant middle class emerges, its 
output is guaranteed to increase that much faster.
    The size and uniqueness of America's trade deficit with China 
reminds us that the United States today is bearing an outsized share of 
the costs of China's government-driven export-led. development 
strategy. But China's singleminded determination to grow regardless of 
the problems it exports threatens most other countries as well. Other 
developing countries are already being crowded out of export markets 
they desperately need for their own development--including countries to 
which the Bush administration says it is determined to grant trade 
preferences to prevent them from producing or harboring global 
terrorists. The U.S. International Trade Commission has recently 
predicted that this problem will greatly worsen once the scheduled 
abolition of the Multi-Fiber Arrangement in January, 2005 significantly 
liberalizes world trade in textiles and apparel.5
---------------------------------------------------------------------------
    \5\ Textiles and Apparel: Assessment of the Competitiveness of 
Certain Foreign Suppliers to the U.S. Market, Investigation No. 332-
448, sent to USTR in June 2003, publication 3671, U.S. International 
Trade Commission, January, 2004
---------------------------------------------------------------------------
    Developed countries, for their part, will not only continue to see 
ever more sophisticated and high-paid jobs become victims of these 
mercantilist Chinese policies--abetted to be sure by U.S. and other 
foreign multinational companies. But the law of marginal effects 
indicates that China will increasingly be able to force down world 
price levels in a growing number of industries, depriving businesses of 
the margins needed to pay workers first-world wages, pay first-world 
levels of taxes to finance first-world social services responsibly, and 
continue investing in new products and processes.
    Certainly, numerous member companies of the U.S. Business and 
Industry Council have been told by the multinationals either to meet a 
Chinese price (frequently a price less than even the cost of the 
product's raw materials), or lose the contract to a Chinese competitor. 
One member company has even been forced to transfer his proprietary 
technology to a Chinese competitor--in exchange for a final renewal of 
his contract.
    In the end, however, the greatest economic danger posed by 
Washington's mismanagement of U.S.-China trade relations stems from the 
enormous contribution it has enabled China to make to the gargantuan 
U.S. current account deficit. Fueled increasingly by the mounting 
imbalances in U.S.-China trade, America's relentlessly increasing 
global deficit will inevitably produce a dollar crash--if conventional 
macroeconomic theory has anything to teach us.
    The damage, moreover, would reverberate far beyond America's 
borders , especially since after more than a decade of breakneck 
globalization, few countries have found a viable growth formula other 
than major net exporting to the United States. What is good for the 
United States genuinely and ultimately is good for the world economy. 
But if dramatically better-balanced growth patterns do not appear soon 
globally, America's troubles will become the world's in spades. 
Imposing more discipline on Chinese economic policies is essential to 
restoring balanced global growth. And this discipline will in all 
likelihood need to be imposed unilaterally by the United States, using 
the great leverage it still enjoys by virtue of being China's dominant 
export market.

                         POLICY RECOMMENDATIONS

    Some of the policies that the United States needs to adopt are 
mainly substantive in nature. For example, the United States should 
impose an emergency across-the-board tariff on all Chinese products 
that increases until China's trade surplus with the United States falls 
below a certain percentage of the total value of two-way merchandise 
trade--and stays at that level for several years. A target of between 5 
and 10 percent strikes us as being reasonable. Given the wide variety 
of subsidies permeating the Chinese economy, this tariff should not 
depend on reforms in China's exchange-rate policy. The United States 
should also respond with tariffs in response to specific Chinese 
mercantilist practices such as dumping, imposing civilian and military 
offsets, intellectual property theft, and product-specific abuses such 
as the semiconductor preferences currently being challenged by the 
Office of the U.S. Trade Representative.
    Some of the new policies are more procedural in nature. For 
example, the United States should declare a moratorium on compliance 
with all WTO decisions pending fundamental reform of that organization 
to reflect America's predominant role in the world economy. This 
measure would free up the U.S. government to use the full authority of 
its trade laws to combat Chinese mercantilism. Accordingly, Washington 
should make it easier for individual domestic companies and other 
domestic economic interests to file and win trade law complaints. In 
addition, American policymakers and the public desperately need 
timelier and more detailed information from U.S. multinational 
companies about their outsourcing and exporting activities in China. 
And the United States should reform its trade policy advisory apparatus 
to ensure that domestic, not multinational, interests are the dominant 
voices. More China-relevant recommendations can be found in To Save 
American Manufacturing, which is posted on USBIC's 
www.americaneconomicalert.org website.
    China has every right to promote its economic and security 
interests, but the U.S. government has a paramount responsibility to 
its people to ensure that China's gains do not needlessly come at the 
expense of America's domestic companies and workforce, and the nation's 
security/ Washington must fundamentally reform its China trade policies 
to regulate more carefully the flow of militarily relevant resources 
and technology to the People's Republic, and to bring under control the 
economic imbalances that threaten the entire world's prospects for 
sound and durable growth.
    It is most unfortunate that recent dangerous trends have been 
allowed to grow and intensify as long as they have, and that emergency 
trade restrictions have become indispensable for solving the problem. 
If anyone can offer alternatives that have not already been proven 
failures, the U.S. Business and Industry Council would be delighted to 
hear them. But we would also insist on asking, ``What have you been 
waiting for?''
    Thank you again for the opportunity to testify, and I welcome any 
questions and comments.

    Mr. Stearns. Thank you, Mr. Tonelson.
    Mr. Papovich.

                  STATEMENT OF JOSEPH PAPOVICH

    Mr. Papovich. Thank you, Mr. Chairman. On behalf of the 
Recording Industry Association of America,I appreciate the 
opportunity to testify today. Exports and foreign sales account 
for over 50 percent of our members' revenues. However, 9 out of 
10 recordings sold in China today are pirated. Why is this so? 
First, the Chinese government has chosen to rely upon the use 
of seizures and small fines as the principal remedy against 
sound recording piracy. They annually run thousands of raids 
and seize millions of CDs with almost no effect. Piracy remains 
at 90 percent for us because pirates making huge profits on 
each CD sold view such sanctions as just the cost of doing 
business.
    Second, market access and investment barriers prevent our 
members from serving China in a timely manner which only 
increases the demand for pirated product.
    Third, internet piracy is growing rapidly in China. Certain 
Chinese websites have become virtual CD warehouses for pirate 
syndicates. The upcoming mid-April meeting of the U.S.-China 
Joint Commission on Commerce and Trade could be a pivotal 
moment in our trade relationship. China must undertake a series 
of commitments to be fully implemented by the end of the year 
at the latest that significantly reduce piracy in China.
    We recommend the following. A coordinated nationwide 
initiative mandated as a Chinese national priority that is 
different from previous campaigns with a powerful national 
figure leading the campaign so that unlike previous campaigns, 
China's enforcers, nationally, provincially and locally, take 
it seriously. Today, combatting piracy is not coordinated in 
China and it is not a national priority at the national, 
provincial or with really one exception, at the local level.
    We understood that China committed to do this last fall to 
USTR and to the Commerce Department with a famous senior 
official leading the way, but so far we have seen absolutely no 
evidence of this. But even if this kind of campaign does occur, 
China must also do more than impose minimal administrative 
sanctions and in our view this means they must criminally 
prosecute major pirate producers, traders, distributors and 
internet pirates.
    Today, China does not, in part, because they choose not to 
and in part, because their law authorizes criminal prosecutions 
for copyright piracy only if the pirate has documented revenues 
or profits that exceed specified levels. However, revenue is 
defined as goods already sold, a warehouse full of unsold 
pirated goods is excluded. Pirates keep no records, so the 
revenue or profits can't be determined.
    Finally, China's regulatory procedures make it difficult 
for our companies to establish and operate in China so that the 
market is ceded to the pirates. Here's two examples. First, 
Chinese government censors are required to approve the content 
of foreign produced recordings, but not domestically made China 
recordings. China should terminate this discriminatory 
practice. In the meantime, since we don't expect that to happen 
over night, they must significantly accelerate the approval 
process. The process is now very time consuming during which 
pirates, which of course, face no censorship have the market to 
themselves.
    Second, China requires an artificial division of labor 
separating who can record, who can publish, who can distribute 
and who can market music that slows to a crawl the process of 
getting new records to the market further benefiting the near 
monopoly of the pirates.
    In conclusion, sound recording piracy in China remains 
rampant. Much more must be done by China to meet its bilateral 
and multilateral obligations. In addition, it is time for the 
Chinese government to acknowledge the nexus between market 
access and fighting piracy. The vacuum caused by China's market 
access restrictions will always be filled by pirates who adhere 
to no rules.
    We urge the United States and the rest of the international 
trading community to increase pressure on China bilaterally and 
through the WTO to more effectively combat rampant piracy and 
to open the Chinese market to our products. Specific measurable 
commitments by China should be established at this JCCT 
meeting. Failure to do so should lead to prompt, firm and 
appropriate action by the U.S. Government. Thank you very much.
    [The prepared statement of Joseph Papovich follows:]

     Prepared Statement of Joseph Papovich, Senior Vice President 
        International, Recording Industry Association of America

    Mr. Chairman and Members of the Sub-Committee, my name is Joseph 
Papovich and I am the Senior Vice President for International at the 
Recording Industry Association of America. On behalf of the RIAA, I 
appreciate the opportunity to testify about U.S.-China economic 
relations and China's role in the global economy at this time when 
well-deserved special attention is being given to this bilateral 
relationship.
    The Recording Industry Association of America is the trade group 
that represents the U.S. recording industry. Its mission is to foster a 
business and legal climate that supports and promotes our members' 
creative and financial vitality. Its members are the record companies 
that comprise the most vibrant national music industry in the world. 
RIAA members  create, 
manufacture and/or distribute approximately 90 percent of all 
legitimate sound recordings produced and sold in the United States.
    International markets are vital to our companies and our creative 
talent. Exports and other foreign sales account for over fifty percent 
of the revenues of the US record industry. This strong export base 
sustains American jobs.
    However, America's creative industries are under attack. The impact 
of piracy has grown in recent years with the advance of digital 
technology. High levels of piracy, in conjunction with market access 
barriers, particularly in China, plague our industry.
    The upcoming April 21 meeting of the U.S.-China Joint Commission on 
Commerce and Trade could be a pivotal moment in our trade relationship. 
It is imperative that China agree to a series of commitments, to be 
implemented over a specified period of time, that lead to a significant 
reduction by the end of the year of the rampant piracy plaguing China. 
Meaningful reductions have been achieved in one city-Shanghai. If it 
can be done there, it can be done everywhere else. It is a matter of 
political will that does not exist at this time elsewhere in China. The 
remainder of my testimony sets out the specific problems we face and 
steps that China should take to address these problems.
Our Problems in China
    RIAA has a long history of active involvement in intellectual 
property negotiations between the United States and China. We 
participated in negotiations led by the Office of the U.S. Trade 
Representative in 1995 and 1996 undertaken pursuant to Section 301 
investigations, resulting in exchanges of letters obligating China to 
close factories producing and exporting pirate CDs that were causing 
catastrophic disruption of our global markets. While the Chinese 
government did indeed successfully disrupt the exportation of pirate 
products, it has not yet seriously tackled the problem of piracy within 
its borders, an obligation that was undertaken in these bilateral 
agreements, as well as in their World Trade Organization (WTO) 
commitments.
    We have waited patiently for China to implement the various 
commitments it has made bilaterally and as part of its accession to the 
WTO. Initially, immediately after China's WTO accession, China made 
serious efforts to implement the obligations relating to our industry 
by undertaking reform of its copyright laws and regulations.
    However, with rare exceptions, the sky-high piracy of sound 
recordings continues unabated in China. The new laws generated by the 
WTO accession process were not implemented in a manner that had any 
meaningful impact on copyright piracy. Our hopes that China's self 
interest in being a significant player in world trade and the 
information society would lead to a significant reduction of piracy 
have been unfulfilled.
    Last year, despite China's various bilateral and multilateral 
commitments to the United States, the record industry lost $286 million 
to pirate sales, and suffered a 90% piracy rate in China.
    We continue to face three significant and related problems in 
China.

    1. The Chinese internal market remains heavily pirated (at over 
90%). This high piracy rate continues despite many raids, seizures and 
administrative fines that have been clearly inadequate to deter 
continued piracy. Mass quantities of pirated recordings are produced in 
China or imported from Taiwan, Hong Kong or elsewhere. Pirated music 
sales in China exceed half a billion dollars a year.

    2. A series of market access and investment barriers prevent our 
members from serving the Chinese market in a timely manner, which only 
increases consumer demand for pirated product. A solution to piracy 
requires much greater progress on market access as well. One small 
example is that it can takes weeks for us to obtain censorship approval 
for the release of our recordings, giving pirates exclusive rights to 
the Chinese territory for weeks while we await regulatory approval. 
This must end.

    3. Internet piracy is growing rapidly in China. Many websites offer 
downloading of pirated music files, some for a financial charge, others 
for free. Certain China-based ISPs have become online ``warehouses'' 
for international pirate syndicates. Many of the same shortcomings that 
enable physical piracy to flourish in China plague the on-line 
environment as well.
    China is currently the world's largest consumer of pirated 
products. Unless action is taken promptly, China may once again become 
the world's foremost producer of pirated materials as well.
The Solutions
    We call upon China at the JCCT to make specific commitments that 
will, within a very short period of time, significantly reduce piracy. 
The following is what we believe must be done to accomplish this 
result.

    1. Anti-piracy: China MUST criminally prosecute pirate producers, 
importers and distributors, as well as internet pirates and infringing 
ISPs. Commercial piracy is very rarely criminally prosecuted in China. 
One problem has been legal ``thresholds'' that have made it virtually 
impossible to prosecute copyright infringement. But these high legal 
thresholds are not the only problem. Another is that the Chinese 
authorities have not had the political will to criminally prosecute 
commercial piracy. Instead officials prefer weak administrative 
sanctions with no prison terms despite rampant piracy. As we have 
learned from experience elsewhere, without criminal sanctions, there is 
little likelihood that China will significantly reduce piracy rates.
    China committed bilaterally to the United States in 1995 to provide 
criminal remedies against more serious infringing activity, both 
internally and at the border. And, when China joined the WTO, it 
committed to do so again, through its adherence to the TRIPS Agreement. 
Despite these two sets of commitments, China still is not criminally 
prosecuting larger scale commercial piracy. This is a serious problem 
and explains why a 90% piracy rate continues unabated in China.
    Specifically we recommend:

 China's administrative enforcement authorities must begin 
        transferring for criminal prosecution those responsible for 
        willful piracy on a commercial scale, including such infringers 
        on the internet.
 Criminally prosecuting pirates will require legal and administrative 
        changes in China's current laws and regulations. For example, 
        contrary to the practice in the U.S. and most countries, China 
        does not permit private organizations like ours to conduct 
        investigations in China to gather evidence.
 China's Public Security Bureau-their police-must begin to investigate 
        the criminal element of sound recording piracy either. To date, 
        China's police have not been inclined to do so, leaving anti-
        piracy enforcement solely in the hands of administrative 
        agencies, which have authority only to seize product and impose 
        small, ineffective monetary fines.
 China should either permit private organizations to gather evidence 
        or undertake criminal investigations on their own initiative.
 The current law sets thresholds for initiating criminal 
        investigations for copyright piracy only if the pirate has 
        revenues or profits in excess of very high levels. ``Revenue'' 
        is defined as the goods already sold, valued at pirate prices. 
        Unsold seized pirate inventory is excluded. But revenues or 
        profits are rarely possible to determine as pirates avoid 
        record-keeping, and we are not permitted to undertake 
        investigations that would assist the authorities. These 
        thresholds must be eliminated or substantially reduced and/or 
        redefined, for example, to permit unsold inventory to be 
        counted and to establish whatever threshold is set by reference 
        to the retail, not the pirate price. Such reform could be 
        modeled after another provision in China's Criminal Code 
        stipulating criminal prosecution for dealing in more than 500 
        units in infringing product.
 Another problem is that recently amended Chinese Customs regulations 
        do not require the destruction of seized infringing 
        merchandize, in direct violation of the WTO TRIPS Agreement. 
        Such merchandise may be, for example, auctioned off.
 A nationwide initiative must be mandated as a Chinese national 
        priority; with someone like Vice-Premier Wu Yi leading the 
        campaign so that China's enforcers-nationally, provincially and 
        locally-take it seriously. Today, China's copyright enforcement 
        efforts are not coordinated among China's various national 
        enforcement agencies as well as among national enforcers and 
        those at the provincial and local level.
 The Chinese Supreme Court and State Council must issue new 
        interpretations, guidelines and instructions to judges, 
        prosecutors and the Public Security Bureau to permit private 
        investigations, to lower the current onerous thresholds and to 
        direct enforcement authorities to actively investigate and 
        criminally prosecute copyright piracy, including certain 
        Customs seizures.
    China committed in its 1995 bilateral agreement with the United 
States to address many of these problems. China did so again in its WTO 
Protocol of Accession, in part by agreeing to reduce significantly the 
existing onerous thresholds for initiating criminal prosecutions. 
Despite these commitments, China has not done so. At the JCCT, China 
should agree to do so by a fixed timetable-the end of 2004.

2. Market Access
  Censorship:
    (A) Chinese government censors are required to review the content 
of only legitimate foreign-produced sound recordings before their 
release. Domestically-produced Chinese recordings are NOT censored. Of 
course, pirated product is not censored either. China should terminate 
this discriminatory practice.
    (B) Censorship offices are woefully understaffed, causing long 
delays in approving new recordings. The best result would be for 
censorship to be industry-administered, as in other countries. If this 
is not possible, steps must be taken to expedite the process so that 
legitimate music and motion pictures can be promptly marketed, 
preventing pirates from getting there first.
    In the near-term, China should be pressed for a commitment to (1) 
end discrimination in censorship and (2) complete the approval process 
within a reasonable period (e.g. a few days). In the long-term, 
censorship should abolished.
  Producing and publishing sound recordings in China:
    U.S. record companies are skilled at and desirous of developing, 
creating, producing, distributing and promoting sound recordings by 
Chinese artists, for the Chinese market and for export from China. 
However, onerous Chinese restrictions prevent this from occurring. For 
example, for a sound recording to be brought to market, it must be 
released through an approved ``publishing'' company. Currently only 
state-owned firms are approved to publish sound recordings. China 
should end this discrimination and approve foreign-owned production 
companies.
    Further, production companies (even wholly-owned Chinese ones) may 
not engage in replicating, distributing or retailing sound recordings. 
This needlessly cripples the process of producing and marketing 
legitimate product in an integrated manner. China should permit the 
integrated production and marketing of sound recordings.
    U.S. record companies may market non-Chinese sound recordings only 
by (1) licensing a Chinese company to produce the recordings in China 
or (2) importing finished sound recording carriers (CDs) through the 
China National Publications Import and Export Control (CNPIEC). China 
should permit U.S. companies to produce their own recordings in China 
and to import directly finished products.
  Distributing sound recordings:
    Foreign sound recording companies may own no more than 49% of a 
joint venture with a Chinese company. However, the recently concluded 
Closer Economic Partnership Agreement (CEPA) between China and Hong 
Kong permits Hong Kong companies to own up to 70% of joint ventures 
with Chinese companies engaged in distributing audiovisual products. 
China should grant at least MFN status to U.S. record producers per the 
terms of the CEPA.

Conclusion
    Sound recording piracy in China remains rampant. Much more needs to 
be done by China in order for it to meet its bilateral and multilateral 
obligations to enforce against piracy. In addition, it is time for the 
Chinese government to acknowledge the nexus between meaningful market 
access and the ability to effectively fight piracy. Piracy cannot be 
defeated or effectively deterred by enforcement alone - it must be 
accompanied by market-opening measures. The continuous vacuum left by 
China's closed market will always be promptly filled by pirates who, by 
the very nature of their illegal activities, do not adhere to 
legitimate market rules. We urge the United States-and the rest of the 
international trading community-to keep pressure on China through the 
WTO and other processes to much more effectively combat the rampant 
piracy in China and to open the Chinese market to our legitimate 
products. The JCCT meeting should be viewed as a watershed event. 
Specific, measurable commitments by China should be undertaken at this 
event. Failure to do so should lead to prompt, firm and appropriate 
action by the U.S. government.

    Mr. Stearns. Mr. Levinson. Thank you.

                   STATEMENT OF MARK LEVINSON

    Mr. Levinson. Mr. Chairman and members of the subcommittee, 
I want to thank you for the opportunity to testify today. I 
especially appreciate, Mr. Chairman, your opening statement 
where you stress the importance of linking trade to labor 
rights and Bruce Raynor, the President of UNITE asked me to be 
sure and tell Congresswoman Schakowsky that all UNITE members 
are especially proud that one of our own members such as the 
distinguished member of this committee and of Congress and we 
look to you all the time for your important leadership.
    We are in the midst of an incredible crisis for 
manufacturing workers in this country. Every month since this 
administration has been in office, manufacturing jobs have 
declined, 2.8 million manufacturing jobs have been lost since 
this administration has been in office. One of the reasons is 
our trade relationship with China.
    On March 16, UNITE participated with the AFL-CIO in filing 
a petition with the U.S. Trade Representative under Section 301 
of the Trade Act of 1974 asking the Trade Representative to 
take action to promote the human rights of China's factory 
workers. This is the first time in the history of Section 301 
that a petition has invoked the violation of workers' rights as 
an unfair trade practice, although it is quite common for 
corporations to use Section 301 to challenge other unfair trade 
practices such as violations of intellectual property rights.
    In Section 301, Congress said that it is an unreasonable 
trade practice if one of our trading partners persistently 
denies workers' freedom of association, rights to organize and 
rights of collective bargaining, freedom from all forms of 
compulsory labor, freedom from child labor, standards for 
minimum wages, maximum hours and safety and health. Even before 
the enormous loss of jobs to China in the last 3 years, 
Congress recognized that the denial of basic worker rights 
overseas was the cause of capital flight and the loss of U.S. 
jobs and Congress directed the President to act to stop it.
    The AFL-CIO petition shows overwhelming that the two 
preconditions for Presidential action under 301 are met. First, 
China persistently denies the basic rights of its workers. And 
second, the denial of those rights adversely affects U.S. 
workers. The President has 45 days to decide whether to accept 
the petition and launch an investigation. If he denies the 
petition, he must publicly state his reasons. He must publicly 
declare either that China doesn't persistently violates its 
workers rights or that China persistently violates its worker 
rights, but that this has no effect on U.S. jobs. Either 
declaration would contradict the overwhelming evidence 
presented in the AFL-CIO petition. Indeed, Section 301 
authorizes the President to take action on his own initiative, 
even before the AFL-CIO filed this petition, but he hasn't 
enforced Congress' will.
    The AFL-CIO petition shows that China's violations of 
worker rights gives manufacturers a cost advantage range 
between 10 and 43 percent of overall production costs. That 
illegitimate cost advantage displaces approximately 720,000 
jobs in the United States. I want to stress these are very 
conservative estimates. They're calculated from the trade model 
used by the International Trade Commission and they use the 
most conservative assumptions at every step in the calculation. 
China's illegitimate cost advantages probably displaces many 
more than 727,000 jobs.
    The AFL-CIO petition doesn't challenge China's comparative 
advantage as defined by classical trade theory. China has a 
number of competitive advantages apart from its all out denial 
of worker rights, but China's all out denial of worker rights 
gives China an additional increment of cost advantage in its 
manufacturing sector and that increment is an illegitimate 
advantage. It's illegitimate under universal norms of human 
rights. It's illegitimate under congressional legislation.
    Section 301 authorizes the President to take any actions 
within its constitutional powers to enforce fair competition 
and worker rights overseas. The AFL-CIO petition demands that 
the President take three actions to remedy China's persistent 
denial of worker rights. First, the President should impose 
trade measures against China that are sufficiently large to 
induce China to enforce worker rights and to stop the unfair 
competition.
    Second, the AFL-CIO demands that the President negotiate an 
agreement with China to phaseout the trade measures in 
incremental steps as China complies with bench marks on 
compliance with worker rights, bench marks that are specific 
and verifiable by the international labor organization.
    Third, the AFL-CIO demand that the President enter into no 
new trade agreements until all members of the WTO are required 
to comply with core worker rights as a precondition of enjoying 
the benefits and privileges of WTO membership.
    Global trade rules should fairly enforce basic worker 
rights and end the race to the bottom. Thank you so much.
    [The prepared statement of Mark Levinson follows:]

      Prepared Statement of Mark Levinson, Chief Economist, UNITE

    Mr. Chairman and members of the subcommittee, I want to thank you 
for the opportunity to testify today regarding preparations for the 
upcoming U.S.-China discussions on trade and commercial ties.
    On March 16 UNITE participated with the AFL-CIO in filing a 
petition with the United States Trade Representative under Section 301 
of the Trade Act of 1974, asking the Trade Representative to take 
action to promote the human rights of China's factory workers.
    It is the first time in the history of Section 301 that a petition 
has invoked the violation of workers' rights as an unfair trade 
practice, although it is quite common for corporations to use Section 
301 to challenge other unfair trade practices such as violations of 
intellectual property rights.
    The petition shows, first, that China persistently denies the 
fundamental rights of its factory workers. And, second, that China's 
violation of worker rights lowers wages and production costs in China 
and, as a result, displaces hundreds of thousands of manufacturing jobs 
in the United States.
    China's brutal repression of worker rights is I believe the most 
important issue in the U.S.-China trade relationship. Yet it appears to 
be nowhere on the Administration's trade agenda with China. The 301 
petition filed by the AFL-CIO seeks to change that. The trade 
legislation enacted by Congress requires the President to take action.

                      CHINA DENIES WORKERS' RIGHTS

    There is overwhelming evidence that China denies the workers' 
rights enumerated in Section 301. The petition amasses evidence from 
academics, the State Department, the ILO, labor unions, and human 
rights groups. The evidence clearly shows that:
    China Denies Freedom of Association and Rights of Collective 
Bargaining. China prohibits strikes, and relentlessly represses 
attempts to organize unions that are independent of the All-China 
Federation of Trade Unions (ACFTU). The ACFTU is controlled by the 
Chinese government. It is officially and legally subservient to the 
policies of the Party leadership and to local officials who profit from 
export enterprises. Workers who attempt to strike or organize 
independent unions are arrested, imprisoned, beaten, and tortured.
    China Encourages Forced Labor. Most of the workers in China's 
export sector are temporary migrants from the countryside. They work 
under bonded labor, a form of forced labor. China enforces a system of 
internal passports that is similar to the pass system in apartheid-era 
South Africa. Factory workers are permanently registered to live in 
their rural villages, and have no civil or political rights when they 
work temporarily in factory towns and cities. Upon arrival to the 
factories, migrant workers become heavily indebted in order to pay 
large ``deposits'' and other fees to their employers. They lose the 
deposit if they quit without the employer's consent. They are thereby 
turned into bonded laborers.
    China Does Not Enforce Standards of Wages, Hours, and Occupational 
Safety and Health. Most manufacturers in China pay their workers much 
less than the minimum wage standards set by the central and provincial 
governments. Most manufacturers fail to implement standards of 
workplace safety and health. Government officials do not enforce 
standards of wages, hours, and safety and health.
    The AFL-CIO's petition doesn't challenge China's comparative 
advantage as defined by classical trade theory. China has a number of 
competitive advantages apart from its denial of worker rights. Even if 
China fully enforced worker rights, wages would be low. But they 
wouldn't be nearly as low as they are now.
    But China's brutal denial of worker rights gives China an 
additional increment of cost advantage in its manufacturing sector. And 
that increment is an illegitimate advantage. It's illegitimate under 
universal norms of human rights. And it's illegitimate under 
Congressional legislation.

                      THE BURDEN ON U.S. COMMERCE

    U.S. workers today have to compete with factory workers who are 
forced to work under lawless working conditions. And it is taking a 
toll. The manufacturing sector in the U.S. has lost jobs for 43 
straight months. The U.S. has lost a staggering 2.8 million 
manufacturing jobs since the President Bush took office.
    The data on job loss by manufacturing sector is staggering. 
Employment in textile mills fell from 480,400 to 241,300 between 1994 
and 2004. Jobs in apparel fell from 853,800 to 295,700 during the same 
period. In the textile and apparel sectors combined, employment fell by 
54.4%, with a total job loss of 846,700 during the nine years since 
December, 1994. In the last three years, employment in the computer and 
electronic products sector has dropped by 538,000 workers or 28.8%; 
employment in electrical equipment and appliances has fallen by 133,000 
or 22.8%; in machinery 312,000 or 21.6%; in fabricated metal products 
282,000 or 16%; in primary metals 146,000 or 24%, in transportation 
equipment 212,000 or 10.7%, in furniture products 103,000 or 15.2%, in 
textile mills 124,000 or 34.1%; in apparel 175,000 or 37.3%; in leather 
products 89,000 or 14.9%, in printing 128,000 or 16.1%, in paper 
products 89,000 or 14.9%, in plastics and rubber products 13.8% the 
electrical equipment and appliances sector has lost 133,000. In the 
furniture sector, in just two years (from 2000 to 2002) U.S. 
manufacturers lost 11.5% of market share to China
    The AFL-CIO petition shows that China's violations of worker rights 
gives Chinese manufacturers a cost advantage ranging between 10 percent 
and 43 percent of overall production costs. That illegitimate cost 
advantage displaces approximately 727,000 jobs in the United States.
    These are very conservative estimates. They're calculated from the 
trade model used by the International Trade Commission, and they use 
the most conservative assumptions at every step of the calculation. 
China's illegitimate cost advantage probably displaces many more than 
727,000 jobs.
    And the burden on U.S. workers goes far beyond the number of jobs 
lost. Twenty-five percent of displaced workers in the U.S. don't find 
new ones within six months after losing their jobs. Those who are 
fortunate enough to find new jobs suffer big losses of income. Two-
thirds earn less on their new jobs. And these figures on lost wages are 
from the years before the bottom fell out of the labor market for U.S. 
manufacturing workers in the last three years, when it's become even 
more difficult to transition into decent-paying jobs.
    And beyond lost jobs and wages, workers displaced by China's 
violation of worker rights lose their homes because they can't keep up 
with mortgage payments, they lose their health insurance, they lose 
their pensions. They suffer increased rates of heart disease, of 
divorce, depression, and suicide.

                     CHINA'S MANUFACTURING CAPACITY

    While U.S. manufacturing workers have faced catastrophic losses, 
China's manufacturing output, exports, and productive capacity have 
grown at unprecedented, accelerating rates--and are poised to grow even 
more explosively in the next five years. According to Richard D'Amato, 
the vice chairman of the U.S.-China Economic and Security Review 
Commission, we are witnessing ``the actual transfer of U.S. national 
manufacturing capacity [to China] and the export back of the goods.'' 
In light of China's currently escalating capital spending, the transfer 
of U.S. manufacturing capacity to China will accelerate in the next 
decade. The USTR should act now to prevent the imminent, irreversible 
loss of U.S. jobs due to China's illegitimate exploitation of its 
factory workers.
    Even though China is still in a relatively early stage of 
industrialization, it is already the second leading exporter to the 
United States, surpassed only by Canada. China's exports to the United 
States now exceed the exports of such industrial powerhouses as Japan, 
Germany, and the United Kingdom, and will soon surpass even Canada's 
China's exports to the United States also exceed those of Mexico, the 
low-wage export platform immediately across our border.
    Unlike Mexico and other emerging export platforms, China has made 
``the crucial leap'' to producing not just electronic and other 
consumer goods for global and domestic markets, but also manufacturing 
the components for those goods, including the fabrication of computer 
chips. Guangdong Province encompasses the largest such production base 
for electronics in the world.
    China now leads the world in the production of televisions, 
refrigerators, cameras, bicycles, motorbikes, desktop computers, 
computer cables and other components, microwave ovens, DVD players, 
cell phones, cigarette lighters, cotton textiles, and countless other 
manufactured products--and China's lead is growing at an accelerating 
pace.
    China's exports of textile and apparel goods have increased 320 
percent in the last two years, while U.S. employment in those sectors 
has fallen by 323,000. In the first eleven months of 2003, China's 
production of computers grew by 105.5%. Its production of micro-
computers grew by 84.9%, power-generating equipment by 72.5%, optical 
communication equipment by 54.3%, air conditioners by 43.2%, 
semiconductor integrated circuits by 38.6%, metal-cutting machine tools 
by 34.1%, motor vehicles by 33%, chemical equipment by 30.5%, fax 
machines by 30.2%, household refrigerators by 27.3%, household washing 
machines by 27%, cell phones by 24.5%, electric motors by 26.8% 
electric-driven tools by 26.2%, steel products by 21.5%, and plastic 
products by 17%. China's output of many manufactured products showed 
accelerating growth in the later months of 2003. China has now become 
an export powerhouse in high-tech computers and electronics and machine 
parts, not just low-tech toys and garments.
    But even while productivity rose rapidly in China in the last 
decade, the real wages of China's factory workers stagnated. The 
manufacturing boom in China has not been a train carrying China's 
workers into the middle class. China's workers can't bargain for higher 
wages because they lack basic worker rights.
    The United States trade deficit with China is now the largest trade 
deficit the United States has ever had with any country. Last year, 
China's exports of goods to the United States grew not only at an 
historically high rate (nearly 22 percent) but at an accelerating rate. 
China's explosive growth in manufacturing exports is far greater than 
even the industrial powerhouses of Germany and Japan, and it's even 
greater than the export growth of our two neighbors, Canada and Mexico, 
who historically had dominated U.S. trade.

                           THE U.S. MUST ACT

    The AFL-CIO Section 301 petition shows overwhelmingly that the two 
preconditions for Presidential action under Section 301 are met: First, 
China persistently denies the basic rights of its workers. And, second, 
the denial of those rights adversely affects U.S. workers.
    The President has 45 days to decide whether to accept the petition 
and launch an investigation. If he denies the petition, he must 
publicly state his reasons. He must publicly declare either that China 
doesn't persistently violate its workers' rights, or that China 
persistently violates its workers' rights but that this has no effect 
on U.S. jobs. Either declaration would contradict the overwhelming 
evidence presented in the AFL-CIO petition. Indeed, Section 301 
authorized the President to take action on his own initiative even 
before the AFL-CIO filed its petition, but he hasn't enforced 
Congress's will.
    Section 301 authorizes the President to take any actions within his 
Constitutional powers to enforce fair competition and worker rights 
overseas. The AFL-CIO petition demands that the President take three 
actions to remedy China's persistent denial of worker rights:
    First, the President should impose trade measures against China 
that are sufficiently large to induce China to enforce worker rights 
and to stop the unfair competition caused by China's violations. The 
AFL-CIO is not asking for protectionist barriers. If China enforces the 
basic worker rights announced by the international community, then it 
can enjoy normal access to U.S. markets, and it can create jobs that 
don't assault human dignity.
    Second, in that non-protectionist spirit, the AFL-CIO demands that 
the President negotiate an agreement with China, to phase out the trade 
measures in incremental steps, as China complies with benchmarks of 
compliance with worker rights--benchmarks that are specific, and 
verifiable by the International Labor Organization, the United Nations 
agency responsible for promulgating and supervising international labor 
rights.
    Third, the AFL-CIO demands that the President enter into no new 
trade agreements until all members of the WTO are required to comply 
with core worker rights, as a precondition to enjoying the benefits and 
privileges of WTO membership. If China alone is forced to comply with 
labor rights, it will complain that its producers are put at a 
competitive disadvantage against other countries. If China is not 
forced to comply, other countries will complain that enforcing labor 
rights will put them at a disadvantage.
    Global rules should fairly enforce basic worker rights--to end the 
race to the bottom.

    Mr. Stearns. I thank you and I'll start with the first set 
of questions. Here we are, it's a little after noon and we've 
heard your opening statements and some of the complaints you 
have made are very valid and we've heard from Mr. Tonelson who 
indicated 23 percent unemployment.
    Mr. Tonelson. Once again, that's the estimate of Charles 
Wolf of the RAND Corporation. Again, I----
    Mr. Stearns. I know, but I think most people would say that 
there are 200 million people who are unemployed in China.
    Mr. Tonelson. A good way to look at it is there are more 
unemployed workers in China than there are workers in the 
United States.
    Mr. Stearns. That's a good way to put it. You can put it in 
perspective. So obviously the incentives are there for the 
people in China to work at a very low wage and when you hear 
Mr. Levinson what he would like to see it's a whole litany of 
things that he would like to see.
    Mr. Attaway, I think I'll start out with you and ask you 
what would you like to see the U.S.-China Joint Commission on 
Trade accomplish for your industry? Can you just give me two or 
three points that would just again reiterate what you would 
like to see done?
    Mr. Attaway. Mr. Chairman, I outlined a number of specific 
steps we would like the Chinese government to take, but the one 
thing that covers everything is simply to set a timetable to 
reduce piracy to more acceptable levels. We would like to see 
the Chinese government set a goal----
    Mr. Stearns. You say in your testimony from 95 percent to 
less than 50 percent by the year 2004.
    Mr. Attaway. That's correct.
    Mr. Stearns. I mean do you think China can do that in that 
short amount of time?
    Mr. Attaway. Yes.
    Mr. Stearns. How would they do it?
    Mr. Attaway. They can do it----
    Mr. Stearns. Because it's a totalitarian state, so to 
speak, they should be able to do it better than most.
    Mr. Attaway. That's exactly right. They should be able to 
energize their law enforcement authorities.
    Mr. Stearns. You mentioned in Singapore and Taiwan they 
brought it down, so certainly Singapore is a free democracy and 
so is Taiwan. If they're able to bring it down you would think 
China then should be able to bring it down.
    Mr. Attaway. Throughout the region, when I first came to 
MPAA almost all of Asia was 100 percent pirate. Now most of the 
Asian markets are vibrant markets, not only for U.S. films, but 
domestic films and Korea, in particular. China can do the same 
thing, if it has the will to do it.
    Mr. Stearns. You heard me talk to the U.S. Trade 
Representative about have we lost jobs to China and he sort of 
indicated he could not speak on it because he was not an 
economist.
    You said in your opening statement that the industry 
directly employees 500,000 U.S. workers. Can you tell me, has 
there been any fluctuation in this number due to privacy and if 
so, what quantitative analysis or statistics can you give me?
    Mr. Attaway. I can't give you any kind of quantitative 
analysis of how many more people in the United States would be 
employed but for the high piracy rate in China. However, it 
certainly--the more revenue the industry can achieve from China 
and elsewhere, the more money we can put into making films.
    Mr. Stearns. Let me ask Mr. Lowenstein, what in your 
opinion is the dollar value estimate of sales lost because of 
piracy and counterfeiting in China?
    Mr. Levinson. We estimate the value of pirated software 
available in China is around $500 million and that's an annual 
figure.
    Mr. Stearns. Five hundred million?
    Mr. Levinson. Million. With an M.
    Mr. Stearns. Okay, and what do you think it's doing in 
terms of jobs in the United States? Is there any quantitative 
statistics that you have? Mr. Attaway said he does not have 
any.
    Mr. Levinson. No, we don't have quantitative statistics 
vis-a-vis China, but I can tell you the typical American game 
software company is generating about 50 percent of its revenue 
by exporting games to foreign markets. Just the mere fact--and 
this has been a very high growth industry in the United States. 
So just the very fact that this huge market is effectively shut 
off, I would guess that a vibrant market in China could only 
have a salutary effect on employment in the United States.
    Mr. Stearns. Mr. Papovich, you mentioned in your testimony 
that the Chinese government has significantly curbed piracy in 
Shanghai, so now we have an example contrary to what we're 
hearing that the China have actually done something to curb 
piracy. What have they done and why is it just isolated to 
Shanghai?
    Mr. Papovich. I have no idea why it's just isolated to 
Shanghai, but we have gotten reports in the last few months and 
this is very recent, that the authorities in Shanghai have put 
together a coordinated program, run by the city government, not 
by one agency competing with another agency, competing----
    Mr. Stearns. It's not a State, but it's a city government.
    Mr. Papovich. It's a city, but it's the biggest city in 
China. It's huge.
    Mr. Stearns. Sure.
    Mr. Papovich. They made it clear, I think this is the best 
way to put it, that people who are in charge, the mayor and the 
people around the mayor of Shanghai made it clear to all of 
those various people in the Shanghai government who are 
responsible for law enforcement that significantly reducing 
piracy is a city-wide priority. And we have seen the results. 
And the message--thank you for asking me the question because 
the message that I have then to the rest of the Chinese 
government is that this is what needs to be done. Until all of 
the various law enforcers around China who are responsible for 
all kinds of, the enforcement of all kinds of laws are 
instructed by someone who has that central authority like in 
the case of Shanghai, the mayor, that this needs to be done, it 
won't be done. But if someone says it must be done, it will be 
done.
    It's not a matter of it being a totalitarian country, 
frankly. It's a matter of we do law enforcement. We do law 
enforcement here. They can do law enforcement there. For the 
time being, aside from Shanghai, the rest of the country from 
the national and the provincial and the local level has chosen 
not to do so with respect to our product.
    Mr. Stearns. My time has expired, but can you give specific 
how this has been curbed, like Mr. Attaway talked about 95 
percent. He wants to bring it down to 50. Do you have 
statistics like that to say because what happened in Shanghai 
it went from 95 to 50 or something?
    Mr. Papovich. Coincidentally, that's exactly how much it 
dropped.
    Mr. Stearns. It dropped in a very short amount of time.
    Mr. Papovich. From 90 to 95 to 50.
    Mr. Stearns. In what kind of period of time?
    Mr. Papovich. I'm not certain, but I would say over 6 
months.
    Mr. Stearns. Okay, my time is expired.
    Ms. Schakowsky?
    Ms. Schakowsky. Thank you, Mr. Chairman. Mr. Levinson, as 
UNITE members, you and I share a particular concern over the 
welfare of textile workers in the United States and in your 
written testimony the numbers you presented are just 
staggering.
    China's exports of textiles and apparel are up 320 percent 
during just the last 2 years of President Bush's Administration 
while U.S. employment in the same sector has declined by 
323,000.
    If the President were to take action on the AFL's 301 
petition, would that help the situation? Do we have hope of 
reclaiming those jobs?
    Mr. Levinson. The situation in textile is a little 
different and in fact, we're on the verge of something much 
worse in textiles. The end of this year the global quota system 
that has regulated the apparel and textile industry for 40 
years expires. That means there will be no quotas on any 
apparel and textile goods coming from China.
    It is expected that China's share of imports in the U.S. 
will increase from its current level of about 13 percent to 
about 70 percent. That means our calculations are within 2 
years of the expiration of quotas, about half a millon U.S. 
apparel and textile workers will lose their jobs. That is why 
we are calling and others are calling for an extension of the 
quota system to head off what is really a catastrophe. This is 
a--and not enough people are aware of this--this is an issue 
really a little separate and apart from what we addressed in 
the 301 petition. But it's very important, nonetheless.
    If what we're asking--if the administration did what we're 
asking for in the petition, it would definitely help and it 
would help not just the U.S., it would help developing 
countries around the world, millions of apparel workers in 
Africa, the Caribbean, Mexico, Asia are on the verge of losing 
their jobs when all quotas come off China. So for developing 
countries around the world, they're also facing a catastrophe 
here. And they simply cannot compete in an unregulated way 
against China with the kind of labor repression that exists 
there.
    Ms. Schakowsky. I appreciate your getting on the record the 
fact of the expiration or potential expiration of these quotas 
and hopefully that's something that we're going to be able to 
address, perhaps at near future time as well.
    If China enforced workers' rights, what would wages look 
like in China compared to the United States and wouldn't China 
still enjoy a significant advantage over the United States' 
labor force even at that level? How do we think about that?
    Mr. Levinson. It would. And it's important to understand 
this distinction. China is a poor country. Even if labor rights 
were enforced, wages would be low. But they would not be as low 
as they are now. And wages would rise in China and that's good 
for Chinese workers. It's good for American workers. It would 
help China develop its domestic market. And what we point to in 
the petition, the job loss figures we point to are not all jobs 
lost to China. It's only the jobs lost due specifically to the 
artificial repression of wages.
    So wages in China are extremely low, 15 to 30 cents an hour 
in some places.
    Ms. Schakowsky. So when you calculate that job loss due to 
excessively low wages, you're not saying compared to the 
minimum wage or the average wage of that industry here in the 
United States.
    Mr. Levinson. That's right. The figures that we point to 
are the job loss due to the artificial suppression of wages 
caused by the denial of worker rights in China and so if worker 
rights existed in China and wages, say tripled or even 
quadrupled, they would still be well, well below the levels in 
the U.S. and that I would argue is China's legitimate 
competitive advantage. What's illegitimate, you know, it's 
suppressing wages even below that level which is what, in fact, 
exists.
    Ms. Schakowsky. And on which you based you recalculation?
    Mr. Levinson. Yes.
    Ms. Schakowsky. Thank you.
    Mr. Stearns. I thank the gentlelady. You're welcome to 
stay. I think we're going to have another round, but I 
understand if you have another commitment.
    I think I'll go to Mr. Primosch. You mentioned the need to 
halt production of counterfeited U.S. branded products. What is 
the impact? Do you have specific statistics or something on 
U.S. businesses? Most of your recommendations to address 
counterfeiting require changes to China's enforcement regime 
and what can the United States do? Can we help our own cause 
with better domestic enforcement or are there other 
alternatives to prevent this counterfeiting?
    Mr. Primosch. First on the question of statistics, we don't 
have statistics, but just to give you an idea of kind of a 
global range of what the magnitude may be, there are estimates 
that global counterfeiting is about $300 to $350 billion and 
that China is the leading counterfeiter. In fact, in seizures 
worldwide by the Customs Service, I think it's between 46 and 
50 percent of all the goods sold originated in China. So that's 
not a statistic, but it is, it gives you a sense of the scale 
of counterfeiting and also of China's participation in the 
counterfeiting.
    On the question of what we can do and what the Chinese can 
do, certainly the Chinese can do a lot more. We've discussed 
here on the Panel a number of different things. I have some 
suggestions in my written statement. One of the most important 
things they can do and they have agreed to do it in a 1992 
agreement with the United States is to stop counterfeit goods 
from leaving China at the Chinese border. And the Customs 
officials frequently get information on the export of 
counterfeit products. They are not taking action. Part of it is 
due apparently the result of lack of coordination, in part, 
it's also apparently because of the lack of clear legal 
authority. So we have made some suggestions on how to clarify 
the legal authority.
    We would also like to see our U.S. Customs Service devote 
more time to examining imports for counterfeit products. We 
recognize that homeland security has to be its absolutely top 
priority, but we do think that more effort could be expended 
and that would help.
    Mr. Stearns. Mr. Tonelson, you painted a pretty bleak 
picture earlier for the future of the U.S. standard of living. 
I think you used such word as--also, you talked about possibly 
a deep depression, double crash, that was in China?
    Worldwide.
    Mr. Tonelson. If we take macro economics theory seriously, 
I hope that we do. We know that current U.S. tarde deficits are 
running at entirely unsustainable levels. We know that the 
China deficit is an enormous and growing component of the 
overall total, so it's quite obvious that no one can predict 
the day of reckoning with any certainty, but what we do know 
for sure is that the farther we go down the road of the trade 
strategy that's been followed by this administration and the 
previous administration.
    Mr. Stearns. The Clinton Administration.
    Mr. Tonelson. Absolutely, equally at fault, the farther and 
faster down this road we go, again, locking ourselves into 
structural deficits with enormous and extremely populous 
portions of the world that cannot possibly in any policy 
relevant future consume anything proportionate to what they can 
produce, the closer we get to that day of reckoning and it 
seems to me and to my organization that the height of 
responsible policy is trying to move us away from that day of 
reckoning, not ever closer to it.
    Mr. Stearns. So you would advocate tariffs.
    Mr. Tonelson. Absolutely.
    Mr. Stearns. And tariffs across the board or in sector 
industries?
    Mr. Tonelson. I think we need a very substantial across the 
board tariff on Chinese products. In fact, we are in such 
desperate shape with the American manufacturing sector and with 
our entire economy which is currently being propped up by short 
term financial, gimmicky low interest rates, heavy, heavy 
deficit spending. If we're going to put ourselves back on the 
path of healthy and sustainable growth, unfortunately, we're 
going to have to resort to substantial tariffs. Now I wish that 
this were not the case, but unfortunately we've gone down this 
road so far and so fast we have no choice. If there are any 
alternatives to this that are not already proven failures, I'd 
love to hear them.
    Mr. Stearns. You heard when I asked Mr. Freeman earlier 
about Mr. Samuelson's article in which he pointed out that the 
adverse labor conditions in China have really no effect on the 
United States. He said less than 1 percent. And he said 
protectionism will not generate job growth and so he went on to 
say the AFL-CIO's demand for tariffs would like invite Chinese 
retaliation which would have an immediate negative impact on 
job growth in the United States.
    Most people respect him as an economist. He's been writing 
for many years. And so it's quite dramatic what he says 
compared to what you're saying.
    Mr. Tonelson. It certainly is.
    Mr. Stearns. So you discount everything--you probably 
haven't read----
    Mr. Tonelson. I haven't read it yet, but I certainly know 
his larger body of writing. And I was struck by this trade war 
point because Representative Shimkus made that also and we are 
talking about a U.S. market that consumes roughly 40 percent of 
China's exports and we're talking about a Chinese economy that 
at least as of 2002, according to Stephen Roach of Morgan 
Stanley, a very respected economist himself, with probably 
considerably more credentials in the field than Mr. Samuelson 
saying that China relied on exports for three quarters of its 
growth, again, an economy 23 percent unemployment rate, 
extremely low wages, relying for this robust growth 
overwhelming on exports. So the notion that there will be a 
trade war that we might possibly lose, I mean I don't play 
poker, but if I did, I would love to play it with Mr. Samuelson 
and in fact, with Representative Shimkus also because I think I 
would win a lot of money.
    Mr. Stearns. We should really have had a third panel and 
had the Chinese government here to talk about this too. But 
we're talking about some really fundamental issues. But I think 
we all would agree relative to the recording industry and the 
DVDs that have been pirated that this is something that the 
Chinese government can solve. I see in some of my notes in 
Singapore they had a policy there that was very effective and 
so that type of policy, Mr. Attaway, could be done in China. 
We've seen in Shanghai what they've done to bring it down from 
95 to 50 percent, so the original purpose of the hearing was to 
explore what should be done and what the administration should 
relative to this Commission and the negotiations so I think 
we've laid out some of the things that should be done. But I 
think we're also trying to see in this committee what is the 
long term effect, not just in your particular industries, but 
what is the long-term effect in our present trade policy? 
Obviously, Mr. Samuelson has one particular view and you people 
have another and Mr. Levinson, is there anything you'd want to 
add what he mentions in terms of he paints a pretty bleak and 
dire picture? Do you sort of agree with him here?
    Mr. Levinson. Yes, and I would just reiterate the point 
that China needs the U.S. market and as you said in your 
opening statement we should use the access to that market to 
achieve ends that we all believe in.
    Mr. Stearns. When you talk about a lot of the information 
you provide, is that true in the State-owned as well as the 
public industries? Does that apply to both of them, is it 
applicable?
    Mr. Levinson. The petition that we submitted focuses on the 
migrant workers in China which for the most part work in the 
vast export sector.
    Mr. Stearns. I'm going to ask a few more questions and I 
think we've heard that one member would like to come down and 
ask some questions, so I'm going to continue before I close 
here.
    Mr. Attaway, the administration has said they prefer to 
resolve trade concerns through a collaborative method like the 
JCCT. Now what happens if it's not successful? I'd like to ask, 
just go down here and tell me if it's not successful, what 
would you think should be done, what should be necessary to 
curb the privacy and put on the record some of your suggestions 
in the event nothing happens here.
    Mr. Attaway. In the unhappy event that negotiations are not 
successful, then the only alternative is for the U.S. 
Government to exercise its rights under international 
agreements, including the WTO. Now I am hopeful----
    Mr. Stearns. Take the court to the WTO and then fine China?
    Mr. Attaway. That's correct. I'm hopeful that won't happen, 
but that's the alternative if negotiations don't work.
    I'd also like to point out one of the fellow panelists was 
talking about erecting barriers to imports into the United 
States. Well, I represent an industry that does what it does 
better- Mr. Stearns. You have a surplus.
    Mr. Attaway. Than any other country in the world.
    Mr. Stearns. One of the few.
    Mr. Attaway. And when you start erecting barriers, we're 
the first American industry to be harmed because then other 
countries erect barriers to our exports.
    Mr. Stearns. Mr. Lowenstein, also what would you suggest?
    Mr. Lowenstein. I would echo Fritz' comment and hope that 
the JCCT process and the voluntary cooperative process is 
successful and we're certainly hopeful it will be. If it's not, 
then I think every remedy and option available to the American 
government has to be on the table and evaluated forcefully and 
used aggressively.
    I'd also like to add one other point on the broader 
question here because I think on the one hand enforcement we've 
all talked about is the touchstone of progress in China right 
now and I think we all agree and the example in Shanghai is a 
rather visit testimony to how quickly the situation can improve 
with enforcement and the will to enforce.
    It is a mistake to think it's only about enforcement 
though. There are, as we've outlined in our testimony, very 
clear deficiencies still in specific areas of the law in China. 
We talked about, I talked about the organized crime statute. I 
talked about the NET Act type laws that we have here that they 
don't have there.
    Mr. Stearns. The whole judiciary side.
    Mr. Lowenstein. Well, not judiciary, but the legal side. 
There is still deficiencies in the policy framework. There are 
no laws to criminalize trafficking and circumvention devices 
that I showed you earlier. So we need to keep our eye on both 
sides of the equation.
    Mr. Stearns. So actually we probably need to somehow ask 
them to put in place the legal remedies at the same time we're 
asking for the enforcement?
    Mr. Lowenstein. Absolutely.
    Mr. Stearns. And Mr. Primosch, my question is in the event 
that the Commission does not adequately solve this problem, 
what would you suggest? I mean Mr. Attaway, each of them are 
giving, so I'm just going to go down.
    Mr. Primosch. A slightly different amplification. We 
believe that we should use our rights under our U.S. law, but 
also and under international treaties and the WTO rules, but we 
feel very strongly that whatever action we take should be 
within the WTO rules because we can also be hurt if we violates 
those rules an that's what concerns us about the AFL-CIO 
petition is that there's no allegation that the international 
trade rules have been violated and that we would have to take 
unilateral action which would violate our obligations and it's 
very difficult for us to tell the Chinese, you're not living up 
to your WTO obligations when we are not doing it ourselves.
    And you know, exports are so important. We tend to forget 
when we think about job losses, we tend to think of oh, it's 
imports that are causing so many job losses. We estimate that 
we have lost 900,000 jobs over the past 3 years because our 
exports have declined and actually imports have been relatively 
level. So we need to keep both parts of the equation in mind. 
Exports are very important for the U.S. economy and for U.S. 
manufacturers. The United States is the largest manufacturer in 
the world. We're also the largest exporter of manufactured 
goods. We have to keep that in mind.
    Mr. Stearns. My time has expired and Mr. Stupak is here, so 
I'll let my colleague, I recognize him.
    Mr. Stupak. Well, thank you, Mr. Chairman. I'm sorry, I've 
been bouncing around all day, but it's just one of those days.
    When I was asking Mr. Freeman questions about intellectual 
property rights, and I mentioned back in the 1990's we sort of 
had the same problems there and I was really, Mr. Lowenstein 
and Mr. Attaway, your statements and some of the visuals you 
had were quite revealing. Now back in the 1990's, we did crack 
down with China on the piracy and the counterfeiting things. 
Why can't we use that same mechanism to go to the film industry 
or to the games or why can't we use that same kind of scheme 
that we used back then to crack down on the illegal CDs that 
were going on?
    Mr. Attaway. We can. In the late 1990's the export market 
from China was growing tremendously and USTR negotiated actions 
by the Chinese government that pretty much shut it down. 
Unfortunately, now it's coming back again. But they can do it. 
It can be done, it just is a matter of the will to do it and 
that's what we hope will come out of this joint committee 
meeting.
    Mr. Lowenstein. I would echo that. I think it's sort of the 
Yogi Berra deja-vu all over again. We see this with the Chinese 
government. There is a pattern. You reach the brink. He 
negotiate agreements. Progress is made. Then several years 
later you seem to be arguing the same issues all over again.
    I don't think there's any question as Fritz said that one, 
there's a question of will and as I was saying earlier there's 
also a question of changes still in some of the fundamental 
legal areas, but I think that the fundamental point is that 
it's absolutely crystal clear progress can be made where the 
will is there to make the progress.
    Mr. Shimkus. I was really amazed at the pictures that you 
showed of the factory producing counterfeit cartridge products. 
I mean obviously you know where they are and where they're 
doing them. I just can't for the love of me can't figure out 
why the administration is being so slow because if you take a 
look at it, it's $18 billion or a couple percentage points of 
the gross domestic product and your video sales there went from 
$20 million, you started off, to nothing, but yet the number of 
DVD players and VCRs have gone up in the country. It just 
defies logic that we would just sit back and do nothing about 
it when we have a pattern we can follow.
    In the enforcement of time certain, I think, one of my 
colleagues asked that, have you suggested that to the 
administration, like the end of the year 2004 was one of your 
testimony to cut back like 50 percent and go from there? Have 
you suggested that to the administration and if so, what's been 
their response?
    Mr. Attaway, it might have been your testimony, I guess.
    Mr. Attaway. Absolutely, we have suggested it and I believe 
that that is one of USTR's negotiating objectives. They haven't 
succeeded as yet, but as I stated earlier, I'm hopeful that 
they will.
    Mr. Stupak. This JCCT negotiation that's supposed to happen 
in April, is that going to be one of the issues you're going to 
bring up? Are you reasonably confident you're going to bring it 
up and push it?
    Mr. Attaway. That is my understanding and expectation, yes 
sir.
    Mr. Stupak. Mr. Primosch, on manufacturing, I've always 
said in order to have a strong economy any nation has to have a 
certain percentage of manufacturing as part of its base 
economy. Could you give me some estimation of what you think 
that base economy should be? I mean is it 18 percent, 20 
percent?
    Mr. Primosch. I can't give you that kind of estimate. I can 
tell you though that the manufacturing as a percentage of our 
gross national product has remained relatively stable over the 
past 5 years.
    Mr. Stupak. What percentage is that?
    Mr. Primosch. I think it is around 18 percent, 15 to 18 
percent.
    The employment has gone down steadily. A lot of that is due 
to probably most of it is due to productivity gains. U.S. 
industry is very productive and in a broad sense it is very 
strong and very dynamic and in many areas extremely competitive 
in the global marketplace, but it is challenged as never before 
and there's no question that China is part of that challenge, a 
big part of that challenge.
    Mr. Stupak. I've been here for a number of years, along 
with the Chairman. We started with NAFTA and a number of these 
trade agreements and I don't think it's just trade agreements, 
it's our tax laws that give incentives. We don't tax on foreign 
profits, things like that. There are numerous things we should 
do. But I guess my question I sort of alluded to with Mr. 
Freeman was back when NAFTA was going through this, okay, 
you're going from manufacturing to the computer age and from 
computers where do we go next? Some say it's the knowledge age.
    Where do we go as a country and can we maintain an economy 
where manufacturing jobs stay on the average of about 44,000; 
service industry is about 23,000; and retail is about 19,000. 
So what's the next movement? What do I tell my people in 
northern Michigan, you lost your manufacturing job, they went 
back and got trained in computers and all that's been 
outsourced. Where do they go next?
    Anyone care to comment on that?
    Mr. Primosch. Can I just make one comment? I mean I 
certainly cannot predict where U.S. industry is going. We have 
a very strong industrial base, but I think one of the things 
that we need to be more focused on in this country is how do we 
continue to make the United States an attractive place to 
invest in manufacturing. I think that's very important for your 
State. And I think what we've found, we published a study in 
December of last year. You may have seen it. It's a study on 
relative cost of manufacturing around the world. We compared 
the United States with those of other countries and we found, I 
think, a very disturbing result that the nonproduction costs 
for manufacturers in the United States are about 22 percent 
higher than they are compared to our major competitors in 
Europe and Japan. And that this is a factor that is driving 
manufacturing out of the United States and I think we have to 
face up to this, legal liability costs, the high cost of 
energy, regulatory burdens, a variety of--the rising cost of 
health care, a variety of costs that are really putting our 
manufacturers at a disadvantage.
    Mr. Stupak. Yes sir.
    Mr. Attaway. If I can make just three quick points about 
the high cost of doing business in this Nation. First of all, 
we're a First World country. We should be happy about that. 
We've got First World incomes. We've got First World levels of 
social services and they require First World levels of 
taxation. Three years ago, I published a book on globalization 
titled The Race to the Bottom. I hear a lot of talk again from 
the multinational business community that the only way the 
United States can remain competitive in its manufacturing is to 
start reducing cost levels toward Third World levels. I don't 
think most Americans want that. I don't think that Congress 
would possibly approve that and I don't think that would be 
good for our Nation as a whole.
    The second point is that many of the multinational 
companies that are sending so many jobs overseas, whatever 
their effective tax rate is don't actually pay taxes. They're 
very good at avoiding taxes. So I'm not quite sure how much of 
a real issue this is as opposed to again what the rates look, 
what the rates look like on paper.
    And the third point would be that if we continue to see our 
best paying jobs go overseas which are not only now 
manufacturing jobs which pay the highest wages on average in 
the whole economy, but the higher paying service jobs, IT jobs, 
professional jobs, we're not going to have a tax base. Unless 
we retain lots of high income jobs and unless they are the 
types of jobs that ordinary Americans most of whom still, the 
great majority of whom, three fourths, roughly, do not finish 4 
years of college, can realistically hope to assume and that 
situation no matter what we do with our educational system will 
be with us for decades, I'm sorry to say, but it will be, and 
we have to face facts.
    Unless ordinary Americans can hope to hold high wage jobs, 
we will have no tax base.
    Mr. Stupak. Mr. Levinson, did you want to say something. 
You're the one economist, the chief economist.
    Mr. Levinson. Yes, I just want to reiterate the point that 
what's happening in manufacturing in the United States today is 
not business as usual. This is a crisis. Forty-three 
consecutive months of employment declines; 2.8 million jobs 
lost since this administration took office. This is a crisis. 
It is lowering the standard of living of the workers I 
represent and it is not sustainable, I believe, if the point is 
to maintain the American standard of living.
    Mr. Stupak. Thank you. With that, Mr. Chairman, than you 
for your courtesies.
    Mr. Stearns. Yes, I thank you. And we have concluded our 
questions for the second panel. I appreciate you staying over 
while we voted and also I thank you for your time, for coming 
here and I think we had a very successful hearing and I think 
my colleagues who did show and the subcommittee is adjourned.
    [Whereupon, at 1:01 p.m., the hearing was concluded.]

                                 
