[Senate Hearing 108-876]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-876

 
                    THE TREASURY DEPARTMENT'S REPORT
                      TO CONGRESS ON INTERNATIONAL
                  ECONOMIC AND EXCHANGE RATE POLICIES

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

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                                   ON

THE TREASURY DEPARTMENT'S REPORT TO CONGRESS ON INTERNATIONAL ECONOMIC 
                        AND EXCHANGE RATE POLICY

                               __________

                            OCTOBER 30, 2003

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire        THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina       DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island      JON S. CORZINE, New Jersey

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

               Peggy R. Kuhn, Senior Financial Economist

             Martin J. Gruenberg, Democratic Senior Counsel

                  Aaron D. Klein, Democratic Economist

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                       THURSDAY, OCTOBER 30, 2003

                                                                   Page

Opening statement of Chairman Shelby.............................     1

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................     2
    Senator Allard...............................................     5
        Prepared statement.......................................    39
    Senator Dodd.................................................     5
    Senator Bunning..............................................     6
    Senator Schumer..............................................     7
        Prepared statement.......................................    39
    Senator Dole.................................................     8
    Senator Bayh.................................................     9
    Senator Carper...............................................    10
    Senator Miller...............................................    11
    Senator Stabenow.............................................    12
        Prepared statement.......................................    40
    Senator Corzine..............................................    13
    Senator Reed.................................................    14

                                WITNESS

John W. Snow, Secretary, U.S. Department of the Treasury.........    15
    Prepared statement...........................................    41
    Response to written questions of:
        Senator Carper...........................................    46
        Senator Miller...........................................    47

              Additional Material Supplied for the Record

Charts submitted to Committee Members by Senator Paul S. Sarbanes    50
Washington Post article dated September 13, 2003, entitled, 
  ``U.S. Debt to Asia Swelling, Japan, China Lead Buyers of 
  Treasurys'' written by Peter S. Goodman, submitted by Senator 
  Paul S. Sarbanes...............................................    58
Various letters submitted for the record by Senator Evan Bayh....    61
Letter by Joyce Williams, Trion, GA, dated September 15, 2003 
  submitted for the record by Senator Zell Miller................    85
Report to Congress on International Economic and Exchange Rate 
  Policies submitted by the U.S. Department of the Treasury......    87

                                 (iii)


                    THE TREASURY DEPARTMENT'S REPORT
                      TO CONGRESS ON INTERNATIONAL
                  ECONOMIC AND EXCHANGE RATE POLICIES

                              ----------                              


                       THURSDAY, OCTOBER 30, 2003

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Committee met at 10:17 a.m., in room SD-106, Dirksen 
Senate Office Building, Senator Richard C. Shelby (Chairman of 
the Committee) presiding.

        OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

    Chairman Shelby. The hearing will come to order.
    Mr. Secretary, we welcome you to the Committee. I am 
pleased that you are here to testify on the Treasury 
Department's Report to the Congress on International Economic 
and Exchange Rate Policies.
    Secretary Snow, your report this morning is of great 
interest not only to us but also to the American people. The 
continued softness in labor markets and the loss of 
manufacturing jobs make the trade and exchange rate policies in 
China and Japan, in particular, a tangible issue to U.S. 
businesses and taxpayers.
    Signs of an economic recovery in the United States are 
emerging, which is good news. Even today, we have heard that 
the GDP grew at a 7.2-percent annual rate. In the third 
quarter, the strongest since 1984, business spending rose 11.1 
percent, we were told. On the labor front, new weekly claims 
were below 400,000 people for the fourth straight week. I hope 
this news is sustainable.
    In today's global economy, it is important that we also 
look at trade and exchange rate policies of other countries. 
The news is more mixed in this area. The current account 
deficit was a record $480.9 billion last year and is currently 
running at 5 percent of gross domestic product. Employment in 
the manufacturing sector has fallen by 2.7 million jobs, 15.6 
percent, since July 2000.
    These trends are certainly cause for great concern to us in 
the Congress as well as you at the Treasury. I believe that we 
need to have a serious discussion, Mr. Secretary, about what 
can be done to reverse these trends. The G-7 nations issued a 
statement calling for more flexible currency policies, but it 
is unclear how China and Japan will proceed and on what 
timetable.
    China's trade deficit with the United States hit a record 
$105 billion last year. The Chinese capital account is expected 
to become increasingly open to short-term flows. Greater 
exchange rate flexibility would allow China to maintain a low-
inflation, pro-growth monetary policy. I believe we need to 
continue the dialogue to ensure that China moves forward on a 
flexible rate path. However, we also need to encourage them to 
strengthen their entire financial and banking system. This will 
be critical to the success of a more open economy.
    Mr. Secretary, I continue to be concerned, as you are, 
about the Japanese economy. Japan's banking sector is still 
struggling to recover from the effects of the stock and real 
estate bubbles of the late 1980's. Even with the recent actions 
on nonperforming loans, Japan's financial sector's troubles are 
far from over. Japan's focus on using exports to drive an 
economic recovery have not been totally successful. In 
continuing its active intervention in the currency markets, 
Japan holds the largest foreign exchange rate reserves in the 
world. We need to encourage, I believe, the Japanese to place 
more emphasis on domestic growth and demand.
    Mr. Secretary, I know that there are no easy answers to the 
issues that I have raised here. At the same time, I believe we 
need to be careful about the message we send to the world 
community. Over the long-term, both the United States and the 
global economy will benefit most, I believe, from the continued 
pursuit of free trade and flexible exchange rate policies. The 
most desirable way to reduce our current account deficit would 
be through stronger growth abroad and more open trading markets 
and policies.
    Mr. Secretary, I know that you and President Bush are 
working diligently on this issue. We look forward to hearing 
your testimony this morning and the discussion which will 
follow. Hopefully, we can all leave this hearing with a 
broadened awareness of the situation and the direction ahead to 
do something about it.
    Senator Sarbanes.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman. I join 
with you in welcoming the Treasury Secretary this morning to 
present the Department's Report on International Economic and 
Exchange Rate Policies.
    Section 3005 of the 1988 Omnibus Trade and Competitiveness 
Act requires the Secretary of the Treasury to submit to the 
Congress on or before October 15 of each year a written report 
on international economic policy, including exchange rate 
policy, and then to update that with a written update 6 months 
after the annual report and testify before the Congress if 
requested.
    I want to commend Chairman Shelby for requesting the 
Secretary to appear on this year's report. It was originally 
scheduled for October 16, and then put off until today. The 
legislation sought to provide Congress with a means to oversee 
the conduct of a critical area of economic policy. Given the 
current international economic position of the United States, 
and the attention that has been given to the value of the 
dollar relative to other currencies, this report and testimony 
could not be more timely.
    Under Section 3004 of the Trade Act of 1988, the Treasury 
Secretary is required to analyze on an annual basis the 
exchange rate policies of foreign countries and consider 
whether countries manipulate the rate of exchange between their 
currency and the dollar for purposes of preventing effective 
balance-of-payments adjustments or gaining unfair competitive 
advantage in international trade. If the Secretary considers 
that such manipulation is occurring with respect to countries 
that have material global account surpluses and significant 
bilateral trade surpluses with the United States, the Secretary 
is required to initiate negotiations with such countries on an 
expedited basis for the purpose of ensuring that such countries 
regularly and promptly adjust the rate of exchange between 
their currencies and the dollar to permit effective balance-of-
payments adjustments and eliminate the unfair advantage.
    The report submitted by the Treasury this morning raises 
concerns about the conduct of exchange rate policy by China, 
but does not make an actual determination of currency 
manipulation. In my view, there is compelling evidence that 
China and Japan, as well as Taiwan and South Korea, are 
engaging in currency manipulation to prevent effective balance-
of-payments adjustments and to gain unfair competitive 
advantage in international trade within the terms of the 1988 
Trade Act.
    Mr. Chairman, I want to take just a moment or two to 
present some evidence to support this view.
    First, China, Japan, Taiwan, and South Korea are all 
running material global current account surpluses and 
significant bilateral trade surpluses with the United States 
within the terms of the 1988 Trade Act. I want to present a few 
charts, and I think Committee Members have a set of those 
charts. The first chart shows the global current account 
surpluses and bilateral trade surpluses each of these countries 
is running with the United States. The size of China's 
bilateral trade surplus with the United States, $117 billion, 
relative to the size of trade between the two countries is 
particularly striking.
    In addition, each of these countries has been engaging in 
sharply increasing accumulation of foreign currency reserves, 
principally dollars. The following charts will illustrate this 
clearly. The first of the following charts shows the growth in 
China's stock of foreign reserves, $111 billion over the past 
12 months. This line is going up almost at a vertical climb. 
The second chart shows the growth in Japan's stock of foreign 
reserves, $103 billion over the past 12 months. And the next 
two charts show the sharp increase in the stock of foreign 
reserves by South Korea and Taiwan, respectively. Now, by way 
of useful contrast, the next chart provides important 
perspective on this issue because it shows the stock of foreign 
reserves held by the European Union, which, of course, 
participates in the regime of flexible exchange rates and is 
abiding by both WTO and IMF requirements. And, of course, what 
this shows is that its stock of foreign reserves has actually 
declined over the past 12 months.
    The next chart shows the consequences of these reserve 
accumulation actions by these respective countries and by the 
EU for the value of the currencies relative to the dollar. The 
euro has experienced a substantial appreciation against the 
dollar over the past year, and that is indicated by the top 
upward-trending line. The currencies of Japan, South Korea, and 
Taiwan have experienced a significantly smaller appreciation, 
although there has been some appreciation, as Members will note 
as they look at the chart. The value of the Chinese currency, 
since it is pegged to the dollar, is represented by the 
horizontal axis of the chart and has not appreciated at all 
against the dollar. You have this incredible trade deficit, 
this huge accumulation of reserves, and no adjustments in the 
value of the currency.
    In my view, there is no ambiguity as to what is taking 
place. Each of these countries is intervening actively in the 
market to purchase dollars in order to depress the value of the 
currency. Each is manipulating its currency within the terms of 
the Trade Act to prevent effective balance-of-payments 
adjustments to gain an unfair, competitive advantage in 
international trade.
    The United States this year is running trade and current 
account deficits of more than $550 billion. The four countries, 
I have discussed here, collectively account for nearly 40 
percent of the U.S. trade deficit, and 60 percent of the U.S. 
manufacturing trade deficit, a sector in which the United 
States has lost 2.5 million jobs since 2001.
    The United States has accumulated an external debt in 
excess of $2 trillion, about 25 percent of GDP. Chairman 
Greenspan has told this Committee that the rate at which the 
United States is running current account deficits and 
accumulating external debt is unsustainable. He said, 
``Countries that have gone down this path invariably have run 
into trouble, and so would we. Eventually, the current account 
deficit will have to be restrained.'' The IMF's latest World 
Economic Outlook reaches the same conclusion. As Warren Buffett 
recently warned, ``Our trade deficit has greatly worsened, to 
the point that our country's `net worth,' so to speak, is now 
being transferred abroad at an alarming rate. A perpetuation of 
this transfer will lead to major trouble.''
    If any progress is to be made addressing this problem, 
currency manipulation being engaged in by these countries must 
be curtailed. Each of these countries is a member of the WTO, 
and all but Taiwan are members of the IMF. A condition of 
membership in both of those organizations is not to engage in 
currency manipulation for competitive trade advantage.
    Mr. Secretary, I have difficulty in the seriousness of the 
Administration on this issue if it fails to make the elementary 
determination, for which I believe there is compelling 
evidence, that these countries are engaged in currency 
manipulation and, therefore, fails to initiate formal 
negotiations as required by the Act. Furthermore, the 
Administration may also want to seek remedies within the WTO 
and the IMF.
    Among the countries--and I close with these observations--
China's intervention has been the most egregious. There is 
reason to believe that the other countries in the region, for 
competitive trade reasons, are hesitant to allow their 
currencies to appreciate unless China appreciates first.
    In addition, as some observers have pointed out, it may be 
more realistic in the short-run for China to undertake a 
substantial upward revaluation of its currency rather than to 
simply allow its currency to float. Many observers think there 
is little expectation that China would be willing in the near-
term to allow its currency to float freely, which is the goal 
being articulated by the Administration.
    Their very weak banking system and the concern about a 
flight of capital if they were to move immediately to flexible 
exchange rates, is certainly a desirable objective. But if they 
were to go there immediately, may well inhibit their ability to 
move on this issue. I would urge the Administration to add to 
its approach prompt--well, to have the flexible rates as the 
ultimate objective, but to seek immediately in the short-run 
the revaluation of the Chinese currency as against dollar; in 
other words, the peg rate.
    We do not want to deal with peg rates in the long-run, but 
we have to get moving. We are hemorrhaging on this trade 
deficit situation. Going to flexible rates right away with a 
very weak banking system and the potential significant outflow 
of capital obviously raises a problem for the Chinese.
    But they could revalue the peg rate. That would, of course, 
enable these other countries that I have mentioned in the 
region to allow their currencies to appreciate as well and 
begin to deal with this issue.
    And this is a matter I will revisit when we get to the 
question period.
    Thank you very much, Mr. Chairman.
    Chairman Shelby. Thank you.
    Senator Allard.

               STATEMENT OF SENATOR WAYNE ALLARD

    Senator Allard. Mr. Chairman, I would encourage you and 
other Members of the Committee to maybe just submit our 
statements for the record so we can go on and hear the 
testimony from Secretary Snow. I think both you and the Ranking 
Member have given pretty good introductory remarks, and so I am 
just going to ask that my statement be made a part of the 
record.
    Chairman Shelby. Without objection, so ordered.
    Chairman Shelby. Senator Dodd.

            STATEMENT OF SENATOR CHRISTOPHER J. DODD

    Senator Dodd. Thank you very much, Mr. Chairman for holding 
this hearing, and thank you, Mr. Secretary, for being here this 
morning.
    Mr. Chairman, I want to address and look at this from the 
net effect of what this policy may be creating. I want to look 
at this from a jobs standpoint. I represent a State whose 
economy historically has been tremendously dependent on foreign 
trade. Connecticut is one of the most dependent States on a per 
capita basis on foreign trade. We generate $13.2 billion in 200 
foreign markets of trade coming out of the State of 
Connecticut. We take a back seat to no one in the importance of 
having a strong trade policy in the United States.
    What concerns many of my constituents, Mr. Secretary, and 
others across the country is the net effect of not recognizing 
what is quite clear to many of us with currency manipulation is 
the job loss. I have lost 26,000 jobs in the last 24 months in 
my State in the manufacturing sector. That pales by comparison 
to the almost 2.5 million jobs that have been lost over the 
last 2 years across the country in this area. You are going to 
announce today that we saw GDP growth of over 7 percent in the 
third quarter of this year. That is great news, except you 
failed to note that we lost 41,000 jobs in that very same 
period of time.
    So while it is going to be important to discuss the subject 
matter of currency manipulation in this hearing, to disregard 
the effect this is having on jobs in this country I think is a 
significant mistake. I am hopeful that we can focus on that.
    In February 2003, the President's economic advisers 
estimated that the economy alone would grow by 4.1 million new 
jobs by the end of 2004. In addition, the Administration claims 
that recently enacted tax cuts signed by the President would 
create 1.4 million new jobs by the end of 2004. However, a 
recent New York Times op-ed piece October 24 related an 
interview you gave last week to the London Times. The interview 
cites that you expected roughly 2 million jobs to be created by 
the end of 2004.
    The question I have to ask you here is what has happened to 
3.5 million jobs here. Something is going on here other than 
just the status quo. And so for this Senator's interest, while 
I am curious to hear what you have to say about currency 
manipulation, particularly as it appears, at least in testimony 
that Alan Greenspan gave before this Committee in July, where 
he seems to indicate that this is a serious problem. The Fed 
apparently is taking a different viewpoint than Treasury is on 
this. I would be curious how you justify this apparent 
contradiction that exists here. I will ask that the article be 
included in the record, but Alan Greenspan, Chairman of the 
Federal Reserve, yesterday warned that Chinese authorities 
could not continue to peg their currency without posing a 
danger to China's economy and obviously one to ours. That is 
the Chairman of the Federal Reserve in July.
    So, I am very interested to know what the Treasury's 
response is to really millions of Americans and their families 
who are losing their jobs despite the claims the economy is 
growing. And so my emphasis will focus on that.
    Mr. Chairman, I thank you.
    Chairman Shelby. Senator Bunning.

                STATEMENT OF SENATOR JIM BUNNING

    Senator Bunning. Thank you, Mr. Chairman, for holding this 
very important hearing, and I would like to thank Secretary 
Snow for testifying today. Don't worry, Mr. Secretary, I won't 
ask you any questions about TVA today.
    I believe our economy, though still growing rapidly, is 
still lagging behind in the creation of new jobs. We have great 
news today with the GDP growth at 7.2 percent for the third 
quarter, and I was heartened by the new job increase last 
month. But I am still very concerned about new job creation, 
especially in the manufacturing sector.
    One of my biggest concerns is the countries keeping their 
currency artificially low. We all know that the People's 
Republic of China has continued to keep the yuan at an 
artificially low level versus the dollar. It is about a 27.5-
percent premium by pegging it to the dollar that we are 
penalized in trading with the Chinese. It has hurt our 
manufacturing base by making their products, while inferior, so 
much cheaper. This makes it very difficult for U.S. 
manufacturers to compete.
    When I played baseball, we called that kind of behavior 
``cheating.'' And when I see someone cheating against my team, 
I always tried to help my team, and I sent a message. Usually 
it was in the form of a high inside fast ball.
    The Chinese are cheating. That is why I am an original 
cosponsor of the Chinese currency bill with Senator Schumer. It 
sends the right message. And like a fast ball hard and inside, 
I think it will get their attention. Given the reports 
yesterday that the Chinese will start increasing their 
purchasing of U.S. goods, it may already have done so.
    I look forward to hearing your report and your testimony, 
Mr. Secretary, and I look forward to engaging you more in the 
question and answer period.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Schumer.

            STATEMENT OF SENATOR CHARLES E. SCHUMER

    Senator Schumer. Thank you, Mr. Chairman. And I want to 
thank you, Mr. Secretary, for being here. Again, many of us who 
feel strongly about this issue--nothing personal. We know you 
are working the best you can on this. But I have to tell you, I 
read the report this morning with deep disappointment. Simply 
put, the report lets China off the hook, and it will do serious 
damage to the United States economy. This report is a 
whitewash. It treats China with kid gloves when it should be 
taking off the gloves and confronting Beijing about the fact 
that it is manipulating the yuan. Pegging the currency to any 
set level flies in the face of free trade.
    The time for diplomatic niceties is past. The 
Administration needs to grow some backbone and take a firm line 
with the Chinese on the currency issue, or American jobs will 
continue to go overseas faster than children leaving the 
classroom on the last day of school. The Chinese want all the 
advantages of being part of the world of nations. Well, how 
about some of the responsibilities? No one says they have to 
let their currency float tomorrow, but they should be making 
some progress instead of telling you not to bother to even 
bring it up before you set foot in China when you negotiate.
    The bottom line is I would like to know what the 
Administration thinks we should do if we do not toe a hard 
line. I am glad that my colleague from Kentucky talked about 
the high inside pitch because we are all exasperated here. We 
see China thumbing its nose at what is fair. We see thousands 
of jobs lost. Some of it, of course, is related to just the way 
capitalism and free enterprise work. But some of them are lost 
unfairly because of the pegging of the currency.
    The evidence is very clear, Mr. Secretary. China is playing 
around with the yuan. This view has been backed by economists, 
including the bipartisan United States-China Trade Commission. 
It is truly baffling that this report would reach its audacious 
conclusion. Something has to change here.
    I would ask that my entire statement, Mr. Chairman, be put 
in the record.
    Chairman Shelby. Without objection, your entire statement 
will be made part of the record.
    Chairman Shelby. Senator Dole.

              STATEMENT OF SENATOR ELIZABETH DOLE

    Senator Dole. Thank you, Mr. Chairman, and thank you, 
Secretary Snow, for joining us here today. It is no surprise to 
anyone here that I and some of my colleagues on this Committee 
are focused on the currency policies of the Chinese Government.
    The loss of American manufacturing jobs in recent years has 
decimated communities across the country, many of which I 
represent in North Carolina. The loss of one in six factory 
jobs cannot occur without great stress to individuals, 
families, neighborhoods, and States. Nearly 3 million 
manufacturing jobs have been lost since 1998. According to the 
Bureau of Labor Statistics, in September 1995, there were 
approximately 818,400 manufacturing jobs in North Carolina. 
According to last month's figures, we have lost more than 
200,000 of these jobs. It is clear that this is a trend that 
many overlooked when economic times were good. But since the 
recovery is slow and times are still hard, this trend has 
lately been given greater emphasis.
    One of the factors that has led to this job loss, in my 
view, is the manipulation of the Chinese currency by the 
Chinese leadership. I am disappointed that this Treasury report 
fails to acknowledge the seriousness of the China currency peg.
    At the same time, I am glad that the President, having 
recognized the problems with the Chinese currency peg, has been 
willing to confront the issue with his Chinese counterparts. I 
also want to thank you, Secretary Snow, for your attention to 
this issue and for making it a major focus of your trip to 
China last month. I was pleased to receive your call from China 
reporting on your efforts. In addition, Commerce Secretary 
Evans should be thanked for his remarks in China on Monday, 
when he stated, ``China is moving far too slowly in its 
transition to an open, market-based economy. Time is running 
out. We need to see results.'' And he continued, ``The U.S. 
Government may take action against China under the WTO rules.'' 
And I am interested in whether that is a policy that Treasury 
supports.
    While the Administration continues to examine possible 
solutions, we must recognize that the Chinese will not be 
easily convinced to remove their exchange rate controls. 
Nevertheless, this is no reason to curtail our efforts. We must 
demonstrate the depth of our convictions. To this end, six 
Members of this Committee and I support legislation to impose a 
27.5-percent tariff on Chinese imports if further negotiations 
with the Chinese fail. Admittedly, this is an extreme measure 
that could not be imposed without some mutual difficulty. 
Nevertheless, it appears that this may be the only way to get 
the attention of the Chinese leaders. We are the largest export 
market for Chinese goods, and this may be the only way to 
convince the Chinese of our seriousness on this issue. They 
must realize the importance of playing by the rules or risk the 
potential loss of American consumers.
    The best result would be for the Chinese to take steps to 
allow their currency to freely float, hopefully then without 
our having to resort to this legislation. I will continue to 
work with the Administration and with my colleagues to achieve 
this goal, and I want to thank you, Chairman Shelby, for 
arranging today's hearing, and Ranking Member Sarbanes, for 
your strong interest. This is a critical issue to the people of 
North Carolina and the United States.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Bayh.

                 STATEMENT OF SENATOR EVAN BAYH

    Senator Bayh. Thank you, Mr. Chairman.
    The Department of Commerce held some Midwest field 
hearings, Mr. Chairman, some time ago and took testimony from a 
variety of individuals, including some prominent business 
leaders in our State. And I would respectfully request that 
their statements be included in the record here today.
    Chairman Shelby. Without objection, so ordered.
    Senator Bayh. Including the head of the Indiana 
Manufacturers Association, Pat Kiley, who is the former head of 
the Ways and Means Committee in the Indiana House of 
Representatives. He is a good card-carrying member of the 
Republican Party, demonstrating that concern over this issue is 
not partisan. It is substantive and is of great importance to 
people across the country.
    Mr. Secretary, thank you for coming today and being with 
us. I want to personally thank you for your courtesy in calling 
me from China when you were over there discussing this issue. I 
am grateful for your efforts in this regard. As you know, I 
have a longstanding interest in this.
    Echoing the comments of my colleagues, our State has lost 
one out of every six manufacturing jobs during the last 3 
years. That is a total of 143,000. So we do have a crisis in 
the manufacturing sector that you are aware of, and I think it 
is undeniable that these currency issues have played a 
significant role in that.
    It is always best, I think you would agree, Mr. Secretary, 
to be candid. Some of my colleagues have been candid. You know, 
what is going on here is the integration of China into the 
global trading system. This is going to involve dislocations 
for them and dislocations for us.
    The subject of these hearings today is how we manage this 
transition, whether it is fair, and how the costs are 
distributed amongst the countries that are involved. And 
exchange rates are going to be a big part of determining the 
outcome of that.
    There are several important questions that we need to 
confront here, all relating to how much leeway China should be 
given to manage some of the challenges that they face. For 
example, how much leeway should we give them to absorb the more 
than 100 million excess workers in the agricultural sector into 
other parts of their economy? How much leeway should they be 
given to strengthen their financial system, which would 
possibly suffer adverse consequences through abrupt change? How 
much weight should be given to other noneconomic issues, such 
as security issues on the Korean peninsula? Most importantly of 
all, what burdens should American workers and businesses be 
expected to bear as we make this transition, as we seek to 
accommodate these other interests?
    Mr. Secretary, I would echo the comments of my colleagues 
in saying that it is undeniable that China and several of our 
other trading partners, as Senator Sarbanes' chart illustrates 
so clearly, are manipulating their currencies. And I use the 
word ``manipulate'' advisedly. I know that is a technical term, 
but we damage our credibility when we deny the obvious because 
of semantic or definitional disputes.
    The report that has been issued today raises the question: 
What would it take to reach a finding of currency manipulation 
if not the current state of facts as we all know them to exist 
today?
    We seriously erode the support for free trade policies in 
the U.S. Congress and across our country, Mr. Secretary, when 
we willfully choose to turn a blind eye to other countries' 
efforts to subvert a system of free and open trade and markets. 
I know of many of my colleagues, indeed many business people in 
my own State, who are seriously revisiting their own previous 
commitments to free trade agreements because of the 
manipulation that is allowed to exist.
    Mr. Secretary, again, let me conclude by saying it is 
undeniable that there is a crisis in the manufacturing sector 
today. We could afford to be more accommodating when times are 
good. But now is the time to insist upon tangible steps and a 
long-term commitment on the part of China to a currency policy 
that accurately reflects economic reality. And now is also the 
time, Mr. Secretary, to send a loud and clear signal that there 
will be tangible steps on our part if such steps are not 
forthcoming on the Chinese part.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Carper.

             STATEMENT OF SENATOR THOMAS R. CARPER

    Senator Carper. Secretary Snow, in your last job, you ran a 
big railroad company, CSX. Today, when I rode the train down 
from Wilmington, we rode by the Daimler-Chrysler plant in 
Newark, Delaware, where the University of Delaware is located. 
A lot of CSX cars were there bringing in parts, engines, metal 
parts, and transmission systems to help assemble cars. And 
there were a lot of CSX cars there to take finished vehicles to 
other parts of the country to be sold.
    That plant was built in 1957--actually, it was built before 
that, in 1951. They built tanks there for 6 years and got out 
of the tank business, and now they build cars. All the Dodge 
Durangos in the world are built in that plant.
    When that plant opened in 1957, over 90 percent of the 
autos sold in the United States--cars, trucks, vans--were made 
by the big four, which included, I think, at the time American 
or Rambler. Today, American car manufacturers are struggling to 
keep a 60-percent market share and continue to see their market 
share erode.
    CSX can carry Japanese-made vehicles on their trains as 
well as cars that are made at the Daimler-Chrysler plant. But 
the erosion of a job market for GM, for Daimler-Chrysler, and 
Ford has implications for other sectors of our employment with 
which you and I think we are all familiar. It is not just the 
people who work in the assembly plants. There used to be 4,500 
people who worked at that plant. Today, there are 2,500. There 
is a GM plant not far away where they make Saturns that used to 
have 4,000 people that worked there. Today, they have about 
1,500. Suppliers who build the components for those cars do not 
have the kind of employment they had in Delaware or other 
places. The plants are still alive. We are grateful for that. 
But the economic hit is, as you know, significant.
    A number of us wrote to you--and I know you get a lot of 
letters. A number of us wrote to you earlier this summer. We 
did not write about the Chinese currency. We wrote about the 
Japanese currency. And we wrote about the encroachment that we 
see occurring with respect to automotive sales. Obviously, I am 
preaching to the choir here with Senator Stabenow sitting next 
to me. It is one thing for us to be concerned about the 
Japanese manipulating their currency. It is one thing for us to 
worry about the Chinese. We know the Japanese are doing it, and 
their interventions in markets this year just in the space of 
the first 9 months of this year. What they have done before 
pales by comparison to what they have done previously to try to 
keep the value of the yuan low.
    So as we focus on our concerns about China and what is 
happening, whether it is the loss of manufacturing jobs or 
other jobs to China, I would just ask us to keep in mind our 
friends in Japan, our allies in Japan, and what they are doing 
and the implications that the manipulation of their currency 
has for whether it is the Daimler-Chrysler plant in Newark, 
Delaware, or plants in New Jersey, Georgia, Indiana, Kentucky, 
North Carolina, or Michigan. They are real and they are severe.
    Thank you.
    Chairman Shelby. Senator Miller.

                STATEMENT OF SENATOR ZELL MILLER

    Senator Miller. Thank you, Mr. Chairman, and thank you, Mr. 
Secretary, for being with us. I will only take a couple of 
minutes.
    I want to read a handwritten letter that I recently 
received from Joyce Williams of Trion, Georgia. I will only 
read part of it, but I would like the entire letter to be 
included in the record.
    Chairman Shelby. The entire letter will be made part of the 
record.
    Senator Miller. Joyce Williams writes,

    I am an employee of Mount Vernon Mills in Trion, GA. My 
employment stretches over 30-plus years. Our textile plants 
consist of 5,500 employees and we have been in operation since 
the 1840's. We have seen tough times in the past, but this is 
different. We need your help!
    Cheap imports from China and other countries are killing 
us. Factories are closing their doors every day. Free trade 
with China has flooded the market with low-priced textile and 
apparel goods and we cannot compete.
    We value our textile jobs and it hurts each time we hear of 
another plant having to close . . . permanently. We wonder if 
our plant will be next. We are desperate. You are our Senator . 
. . We are asking you to do the right thing and help save our 
jobs.

    Mr. Secretary, I am getting many letters like this from 
different manufacturing industries in my State. It is not just 
textiles. I am hearing from the automotive industry, I am 
hearing from the paper industries. I am also hearing from the 
agricultural sector. These industries have complained that the 
dollar is making it difficult for them to export profitably and 
easier for imports to take market share here in the United 
States. Paper company executives tell me of all they have done 
to improve efficiency and that there just is not much left to 
be done. There have been huge consolidations in the industry 
already, so they do not think that they will get there on 
efficiency gains alone.
    Furthermore, they are often competing with products from 
countries that subsidize their industry, either through 
currency policies or direct government support. For example, in 
the paper industry, more than 90 percent of the growth in U.S. 
markets has been captured by imports.
    Mr. Secretary, I know you have a tough job, and I admire 
and respect you greatly, and I am looking forward to your 
remarks, because I want to know what to tell my constituents. I 
want to know how to respond to Joyce Williams. I want to know 
if you think any foreign countries are engaging in currency 
manipulation with the U.S. dollar for purposes of preventing 
effective balance-of-payments adjustments or gaining an unfair 
competitive advantage in international trade.
    Thank you for helping me come up with some answers.
    Chairman Shelby. Senator Stabenow.

              STATEMENT OF SENATOR DEBBIE STABENOW

    Senator Stabenow. Thank you, Mr. Chairman and Ranking 
Member. I would ask that my full statement be placed in the 
record.
    Chairman Shelby. Without objection, your full statement 
will be made part of the record.
    Senator Stabenow. Secretary Snow, thank you for being here. 
I hope that more than anything else what you will take away 
from this hearing today is a sense of urgency that we all feel 
about the issues of currency manipulation, whether it is China, 
Japan, or any other countries involved in manipulating 
currencies.
    In Michigan, we are feeling it. We have lost 18 percent of 
our manufacturing base, more jobs than any other State. It is 
not just auto suppliers. Our manufacturing sector in terms of 
automobiles, which, of course, is critical to us, but furniture 
makers and a wide variety of those involved in manufacturing 
are feeling this in very serious ways.
    I would join with my colleagues in indicating that Senator 
Schumer's legislation, which a number of us are cosponsoring, 
is an effort to indicate how seriously we feel about this and 
the fact that something needs to be done.
    What we are really talking about here is a tax being placed 
on American goods. It is a tax being placed on American 
businesses, and American employees. When we look at just--there 
are so many different numbers to look at, but the Automotive 
Trade Policy Council, in speaking about Japan, gave us some 
information that indicated--and I will just read a portion of 
it: ``Nowhere is this trade advantage more damaging to the U.S. 
economy than the U.S. automotive sector. In fact, the windfall 
cost advantage to Japanese automakers from the weak yen has 
been between $2,500 and $12,000 per vehicle.'' That is a tax. I 
cannot imagine if someone was proposing such a tax on our 
manufacturers in this country that the Administration would be 
supportive of that.
    I would urge you to think of it in those terms because that 
is exactly what is happening to our manufacturers and to our 
employees. And from my perspective, it is not a question of 
time running out. Time has run out. And if not now, when will 
we act on this?
    I would urge your leadership.
    Chairman Shelby. Senator Corzine.

              STATEMENT OF SENATOR JON S. CORZINE

    Senator Corzine. Thank you, Mr. Chairman and Ranking 
Member, and I welcome the Secretary. I, too, can relate stories 
about the decline of manufacturing in my home State. We are 
actually in the process of closing the last two auto plants. We 
no longer have any textile manufacturing in the State of New 
Jersey, and the loss of these most important middle-class jobs 
is a very, very dangerous concept and I think is reflected at a 
really troubled regime with regard to our international 
economic relationships and certainly our exchange rate policy. 
And to that extent, I am joining some of my other colleagues 
with my concern that the sense of urgency and the depth of 
understanding of that problem is not reflected at least in some 
of the written testimony I have seen.
    I also think, aside from the loss of jobs--and, by the way, 
manufacturing has gone from, I do not know, 25 years ago about 
30 percent of the economy down to about 12 percent, some of 
that due to comparative advantage and free trade and all those 
good things that maybe lift the standard of living, but 
sometimes a good thing goes too far, and I think we have 
certainly found that.
    I think we also have a terrifically unsustainable reality 
having to borrow $2 billion a day, business day, to balance out 
our current accounts, the analysis that the Ranking Member said 
I think is unsustainable and will lead to a deterioration of 
America's ownership of its own assets, and I do not think this 
is something that can be ignored unless we are willing to take 
the risk that we are going to have a shock one day, a one-time 
adjustment that we have seen happen periodically through 
economic history.
    And I think one of the greatest problems in not dealing 
with this is something that you hear even in the intonation of 
my colleagues around the table: Protectionism is going to gain 
root in this country. The risks of that being called for as a 
result of what we are seeing and what I think is a limited 
response on the part of the Administration is a very real risk 
and one that will undermine everyone's long-run economic 
security. And we know from history that protectionism can lead 
to strategic risks as well.
    I believe it is time for a clear and full, comprehensive 
review of both international economic policies and exchange 
policies among nations. I remember a period in time, another 
Republican Administration did an extraordinary job of pulling 
together the international community in September 1985--what 
was it called? The Plaza Accord--to set right, to find a new 
way that was done on a multilateral approach to these issues. 
And I think it is time for those efforts to go forward today.
    I have serious problems with the valuation of the RMB, but 
it is not just China. It is all the other currencies that are 
tied to it and lead to a multiplicity of deficits in East Asia. 
And the problems that we face are also faced by other trading 
partners in Europe and other places.
    I think the urgency is real and needs to be addressed. I 
have much sympathy for the program that I think the Ranking 
Member was outlining that a number of academics and others are 
talking about refixing the Chinese peg, acknowledging that 
their system is not mature enough to take the shock of freely 
floating exchange rates at this point. But I think it is time 
for a coordinated international approach to resolving some of 
these international economic issues and exchange rate issues, 
which I believe really run long term into risks that we have in 
the strategic level.
    I have a full statement that I would put in the record.
    Chairman Shelby. Your full statement will be made part of 
the record.
    [The prepared statement of Senator Corzine follows:]
    Senator Corzine. I also would, for the benefit of the 
Committee, recommend that they read the announcement the 
Ministers of Finance and Central Bank Governors of France, 
Germany, Japan, United Kingdom, and United States--``Plaza 
Accord''--released on September 22, 1985. I think people will 
find that if you just substitute ``Japan'' with the name 
``China,'' you will find that much of the analysis and the 
conclusions are very much the same.
    Chairman Shelby. Senator Corzine, could you make a copy of 
that, have it made for the record?
    Senator Corzine. Yes, and I will make sure that--if you 
would put it in the record, I would appreciate it.
    Chairman Shelby. Without objection.
    [The announcement follows:]
    Senator Sarbanes. Could I add to what Senator Corzine said? 
When they read the Plaza Accord statement, they should read it 
and contrast it with the recent statement in Dubai. It is 
nowhere near the same thing. And I think there is a very sharp 
difference in the strength of what the international community 
had been brought together to do in terms of what then-Secretary 
Baker did with the Plaza Accord.
    Chairman Shelby. Thank you.
    Secretary Snow, we appreciate your patience this morning. 
This is a very important hearing. We do have a vote on the 
floor. We are going to recess the Committee, and we will come 
back and hopefully get into your testimony.
    We will stand in recess.
    [Recess.]
    Chairman Shelby. The hearing Committee will come back to 
order.
    Senator Reed.

                 STATEMENT OF SENATOR JACK REED

    Senator Reed. Thank you, Mr. Chairman, and thank you, Mr. 
Secretary, and I think you have already realized this is a 
hearing not about currency but about jobs, particularly 
manufacturing jobs. And like every one of my colleagues, I have 
seen a tremendous deterioration in the manufacturing employment 
sector in my State of Rhode Island, and, frankly, Rhode Island 
many, many years ago was the beginning of the industrial 
revolution and manufacturing revolution in this country.
    One of the reasons--not the only reason but a very 
significant reason--is the behavior of China. When China was 
admitted to the World Trade Organization, it made commitments 
that it would eliminate trade barriers, open its market to U.S. 
exporters, but, frankly, they have not lived up entirely to 
these promises. And one of the major issues, of course, is 
their continuing policy of pegging the yuan to the dollar, but 
also in terms of enforcement of intellectual property rights, 
industrial quotas, export performance conditions, requirements 
that businesses use local content. All of these are inimicable 
to a free trade regime, which all of us would like to see, but 
we cannot close our eyes to the reality in the relationship.
    We should not scapegoat China, but we should not give them 
a pass, either. And I think we have to take steps, and, 
unfortunately, the report today does little to point in the 
direction of a policy. It might be a diagnosis, but it is 
certainly not a prescription for what we should do.
    We have lost these jobs, and these jobs go right to the 
heart of our communities, not just economically but socially. 
Although the Chinese have announced that they are going to buy 
billions of dollars in anticipation of the visit of their 
leadership, a one-time shopping spree cannot take the place of 
a systematic, continuous policy that recognizes the reality on 
both sides of the relationship.
    So, I hope that as we go forward the Administration will 
craft a policy and not simply give us a diagnosis.
    Thank you.
    Chairman Shelby. Mr. Secretary, thank you for your 
patience. As I said, this is deemed a very important hearing. 
Your written testimony will be made part of the record in its 
entire. You proceed as you wish.

                   STATEMENT OF JOHN W. SNOW

           SECRETARY, U.S. DEPARTMENT OF THE TREASURY

    Secretary Snow. Thank you very much, Mr. Chairman and 
Members of the Senate Banking Committee, for this opportunity 
to appear before you and present the report as required by the 
Omnibus Trade Act of 1988.
    The report reviews economic developments in the United 
States and examines, in documents, the wide variety of exchange 
rate policies that are employed throughout the world, and they 
vary quite a bit. A notable trend has been the move by many 
countries to adopt flexible exchange rates, and I was pleased 
to hear so many of the Members of the panel voice their 
support, including you, Mr. Chairman, for flexible exchange 
rates, which really do stand in marked contrast to the accords 
that were mentioned earlier.
    The report concludes that no major trading partners of the 
United States meet the requirements set forth in the statute. 
But let me be clear, the Bush Administration believes strongly 
that an international trading system works best that relies on 
free trade, the free flow of capital, and market-based exchange 
rates. That is a message we have taken around the world, to 
Japan, to China, to Taiwan, to Korea, to all the Nations of the 
world, and a statement that is reflected in the G-7 communique 
that was released from Dubai recently. We believe that an 
efficient system of trade and finance, with fair rules and 
enforced rules, is essential for the United States and all 
nations to maximize the benefits of trade and to do what needs 
most importantly to be done, generate the highest levels of 
economic growth and jobs. And I heard all of you loud and clear 
on the jobs point. Senator Reed, you made that point very 
clearly. Other have, the Chairman has. And jobs are the 
ultimate objective of good economic activity, and well-paying 
jobs, jobs that reward people for their efforts.
    The report finds that a number of countries continue to use 
pegged rates, fixed rates, and/or intervene in the foreign 
exchange markets. But it is important to note that a currency 
peg or an intervention in and of itself does not satisfy the 
statutory test. After all, for many, many years, the United 
States was part of a pegged system following the Bretton Woods 
agreements. So the peg in and of itself does not satisfy the 
statute.
    In rendering our decision here, as required by the 
statute--and this is important--Treasury has consulted with the 
IMF, the expert international agency on currency matters. And 
I, myself, spoke with both the Managing Director of the IMF and 
the Deputy Managing Director of the IMF, and I am pleased that 
the IMF management offered us their thoughts, offered us their 
consultation, and concurred in the findings of this report.
    But let me make it clear that the Bush Administration is 
aggressively encouraging our major trading partners to adopt 
policies that promote flexible market-based exchange rates 
combined with clear price stability goals and a transparent 
system for adjusting their policy instruments. In my testimony 
today, I would like to discuss this with you in some more 
detail.
    There was talk earlier, and, Mr. Chairman, you focused on 
it in your opening statement about the need for domestic-led 
growth. One of the problems with the world economy--and it is 
reflected in the U.S. economy--is the absence of more domestic-
led growth, in Europe, Germany, France and Japan. I would like 
to take a moment to discuss the Administration's international 
economic strategy as it relates particularly to the issue of 
growth.
    A stronger world economy is vital to sustaining U.S. 
economic growth and job creation. It is the absence of more 
growth in Japan, Germany, China, and in the EU which has hurt 
our manufacturing sector. So we have made domestic-led growth 
in those countries a priority.
    We depend on Europe and Japan just as they depend on us. It 
starts, though, this issue of jobs and how to create jobs, with 
a strong domestic economy, and that is why the Administration 
came forward with the President's jobs and growth bill.
    I am glad to see the really very good numbers that were 
reported at 8:30 this morning, numbers that show that the 
American economy is really getting back on path, numbers that 
show growth at 7.2, but in some ways even more importantly, 
that we are finally seeing some very sizable capital 
expenditures in this economy, expansion of plants and 
investment in manufacturing equipment, software, and PC's. As 
that happens, of course, jobs follow because somebody has to be 
there to operate that machinery and that software and those 
PC's.
    Mr. Chairman, the other encouraging thing about today's 
numbers is the fact that we did not rob Peter to pay Paul. 
Inventories came down very significantly during the quarter. We 
now need to go through an inventory replenishment period in the 
United States, and that is going to lead to continuing strong 
economic activity, and with it, we should see a nice pick-up in 
jobs, which is what, Senator Reed, you said ultimately this is 
all about. We should see a nice increase in jobs, and 
particularly in manufacturing jobs, which, as we all know 
painfully, have lagged so far behind.
    At the core of our strategy for jobs and growth is having 
good economic policies in place. But it is also important here 
to encourage pro-growth and pro-stability policies in other 
countries. I want to underline that: Good economic policies in 
the rest of the world help the United States, and we have a 
stake in seeing those countries adopt good policies.
    An important issue that has been mentioned by many of the 
Members and by the Chairman is the U.S. international accounts. 
There is a great appreciation worldwide that the United States 
is a force for strong growth. In fact, many people now talk 
about the United States, regrettably, as the only engine of 
growth in the world economy, and that is not adequate. That is 
not sustainable. We need more engines of growth. As somebody 
said, you may be able to take off on one engine, but it is hard 
to land on one wheel. We need more engines of growth in this 
world economy.
    This strong performance is also reflected in the pattern of 
our external trade and current account balances, and if you 
will let me for a minute just talk about the essence of the 
current account.
    The current account is best understood in terms of the 
relationship between investment and savings. As a matter of 
accounting, the current account deficit is equal to the gap 
between a country's savings and its investments. Thus, in a 
country like the United States where investment is considerably 
higher than domestic savings, we turn to foreign investors to 
make up the difference. And that difference is what is called 
the current account deficit.
    Now, in Japan, they are on the other side of that. In 
Japan, by contrast, savings rates exceed investment, and, 
therefore, they have a sizable current account surplus.
    Our current account surplus largely reflects the attractive 
investment environment and high productivity growth in the 
United States which attracts capital here. Increased savings, 
though, in the United States, along with stronger growth 
abroad--both, the combination of more growth abroad and higher 
savings rates in the United States--offer the long-term answer 
to this large current account deficit that many of you called 
attention to.
    Let me talk for a minute about exchange rate policies, 
which is really the subject of the report.
    Our report shows that countries around the world continue 
to follow a wide variety, really, of exchange rate policies, 
ranging, on the one hand, from flexible exchange rate regimes--
this would be the EU--with no or little intervention, to 
currency unions and full dollarization. While the choice of 
what kind of a currency regime you employ is clearly a 
sovereign decision, it is up to each country, we have been 
pretty vocal in encouraging countries to use flexible exchange 
rates. And why? Well, basically because flexible exchange rates 
ease the adjustment to changing economic conditions in the 
international financial system. They lead to the best 
international allocation of resources, and, thus, they have an 
inherent element of fairness to them.
    Of course, while flexible exchange rates have a lot to 
recommend them, they won't work unless a country also follows 
good economic policies. A good flexible exchange regime 
requires monetary policy that focuses on the goal of price 
stability and has transparent procedures for setting the policy 
instruments.
    And while we strongly recommend the use of flexible 
exchange rates with our major trading partners, a message I 
have taken around the world, we recognize that for smaller 
country there are benefits from hard exchange, pegs, 
dollarization, joining a currency union or a currency board, 
particularly, as I say, for small open economies.
    These ideas were reflected in the G-7 statement that was 
adopted in Dubai. We think that statement was real progress. I 
called it a milestone because it focused on domestic-led 
growth, focused on the need for economies of the world to take 
the steps with their own economies to make them more flexible 
and resilient and deal with the problems that slowed growth and 
hurt domestic growth. And the statement also reflected broad-
based support among the G-7 for flexible exchange rates, for 
letting markets set currency values.
    Everything that came out of Dubai and everything that I 
have said today is entirely consistent in every way with our 
strong dollar policy, which I have reiterated consistently. As 
I have said often, a country cannot devalue its way to 
prosperity, and a strong dollar is very much in the U.S. 
national interest.
    I think we are making progress with the world community in 
pushing this idea of greater flexibility. We have engaged China 
on it. We have engaged Japan on it. I will talk to you later 
about clear progress I think we are making, Mr. Chairman, on 
China. And let me conclude simply by saying that strengthening 
the economic recovery in the United States, jobs in the United 
States, is our key objective. High disposable income levels in 
the United States is our key objective.
    The way the rest of the world manages their economic 
conditions, the currency regimes they have affects us, and 
where we see other countries throughout the world not adopting 
policies that make good economic sense, that allow jobs and 
growth in the United States, we will be vigilant and we will 
intervene. And as I say, I am in discussions with any number of 
countries on that subject today.
    I thank you very much and look forward to your questions.
    Chairman Shelby. Mr. Secretary, you stated that a peg or 
intervention does not meet the definition of what we call 
currency manipulation and that the IMF concurs in this 
assessment.
    Secretary Snow. Yes.
    Chairman Shelby. If what the Japanese are doing and what 
others are doing in Asia, especially the Chinese, if they are 
not manipulating their currency, what are they doing? In other 
words, could you tell us what conditions, in your opinion, 
would meet the technical definition of manipulation, at least 
your definition?
    Secretary Snow. Well, yes, Mr. Chairman.
    Chairman Shelby. That is troubling. You know, I think most 
people and a lot of economists are saying, Mr. Secretary, the 
opposite of what you are saying.
    Secretary Snow. Let me try and address that. That is an 
issue that I am sure is on the minds of many of the Members of 
the panel.
    The end product of this statute, that is, the objective of 
this statute is negotiations, is discussions. It is engagement 
with countries with whom we want to advance some currency 
objective. That end product, that engagement is going on. I can 
assure you of that. We are fully engaged with the Chinese.
    Chairman Shelby. We know that, but are they listening?
    Secretary Snow. I think they are, Mr. Chairman. I think we 
have really got their attention. I think the President got 
their attention. I think I helped to get their attention. They 
have now committed to going to market-based flexible rates. 
They have indicated that they will be and are taking a number 
of steps to get ready for it, because, as was mentioned by 
various Members, they are probably not ready right now to go to 
it.
    Chairman Shelby. What kind of timetable did they tell you?
    Secretary Snow. They said as soon as possible.
    Chairman Shelby. What does that mean?
    Secretary Snow. Mr. Chairman, that means as soon as they 
get these interim steps put in place, and they are moving on 
the interim steps.
    Chairman Shelby. Could that take years?
    Secretary Snow. I hope it is sooner----
    Chairman Shelby. Not weeks or months?
    Secretary Snow. No, not weeks or months. But hopefully 
weeks or months to see concrete steps. Weeks or months to see 
concrete steps that allow for some of these balance-of-payments 
adjustments that we so much want to see.
    I think we are on a good course. I believe financial 
diplomacy here of the sort that we are engaged in is the surest 
course to get the result we want.
    Chairman Shelby. Mr. Secretary, do you believe that a 
timetable by the end of which the currency peg must be lifted 
or China becomes ineligible for continued IMF assistance and 
WTO membership benefits would make sense? And if not, why not?
    Secretary Snow. Senator, I think we should move them, 
encourage them to move as fast as possible. I would be 
reluctant to set up a fixed timetable because of concern as to 
how currency markets would respond to that timetable. That is, 
you would set up one-way bets for or against the yuan, which 
would not be helpful. But gradual easing, maybe widening the 
band over time, maybe going to a basket of currencies with 
expansion of the capital--liberalization of the capital 
controls, all of that will move in the right direction and help 
with these larger adjustments in their current account.
    Chairman Shelby. Mr. Secretary, I was not satisfied with 
your answer, and maybe you did not answer it, of what you 
thought would be currency manipulation.
    Secretary Snow. The past circumstances it has been found. 
China was designated, I think in the early 1990's. There they 
had a discriminatory dual rate system that precluded the 
adjustments that you would expect and looked manipulative and 
was found to be manipulative. I am not saying there are not 
circumstances where it would be appropriate to find 
manipulation.
    Chairman Shelby. Mr. Secretary, a flexible exchange rate is 
clearly an indicator of a more developed economy. Some 
observers have expressed concerns about the ability of China's 
financial sector to handle an immediate move on their currency. 
How would you assess the ability of the Chinese banking system 
at the moment to make such a transition?
    Secretary Snow. This has been a matter of discussion, Mr. 
Chairman, with the Chinese authorities, their very able 
chairman of their central bank, Chairman Zhou, and other 
leaders there, including Premier Wen.
    I think it takes some time. I think it will take some time 
for the Chinese to put in place the financial architecture to 
sustain a well-functioning system of floating rates or flexible 
rates. Their banking system has a very heavy ratio of bad 
loans, and the asset side is weak. And I would be worried that 
if they moved precipitously to relax capital controls as part 
of movement to freely fluctuating rates, you would see the 
asset side of the banks weakened enormously as yuan left the 
banking system.
    Chairman Shelby. Is this mainly state-owned banks making 
loans to state-owned industries?
    Secretary Snow. Precisely.
    Chairman Shelby. And it is a never-ending cycle, is it not?
    Secretary Snow. It is something they recognize needs to be 
addressed. It was very much the subject of my discussions with 
their economic and political leadership. And they are 
addressing it. They are moving on it. They know they have to 
move on it, and that is the precondition that has to be dealt 
with before you can really go to liberalized capital controls 
and a floating rate.
    Chairman Shelby. I know my time is up, but, last, do you 
agree that basically a continued imbalance in our current 
account is a ticking time bomb?
    Secretary Snow. Senator, we have the best access to capital 
and credit in the world now, and I think, as I said earlier, 
the issue here really is one of getting more growth in the 
world economy so more of our goods get purchased. I think we 
are on a course for that. World growth rates, the numbers I 
have seen, are going to be higher next year, but we should get 
savings rates up in the next year.
    Chairman Shelby. Secretary, but how do we sell more goods 
if people are keeping their currency down in price and ours up 
in price? In other words, manipulating the currency.
    Secretary Snow. That is part of the whole story, and that 
is precisely why I have gone to China and engaged on that 
issue.
    Chairman Shelby. Thank you.
    Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Chairman Shelby.
    I actually want to start off by following up on a couple of 
points that Chairman Shelby made which I thought were right on 
target. The first was his reference to a ticking time bomb. Mr. 
Secretary, this is the U.S. trade deficit. Look at that beauty. 
Look at this. This is over a $500 billion trade deficit. 
Current account, well, over $500 billion. Look at the way this 
thing is going.
    I think we have a disaster waiting to happen. The 
accumulation of these negative figures over these years, 
beginning in about 1980--actually we were in plus figures right 
at the beginning of the 1980's in the current account. This is 
the U.S. net international investment position, $2.5 trillion 
negative. Negative. Claims others have on us. It is no wonder 
Warren Buffett was talking about losing our assets. It is like 
that Blanche DuBois statement in the Tennessee Williams' play, 
you know, ``depending on the kindness of strangers.'' That is 
what has happened to the U.S. economy.
    Now, Senator Shelby asked you about finding currency 
manipulation, what is your definition of it, how do you get 
there, and you said, well, we have in the past found that China 
manipulated its currency. That is quite true. Let me show you 
this chart.
    In 1992, the Treasury under Bush I found that China had 
engaged in currency manipulation. The trade surplus with the 
United States at an annual rate, China-United States, when 
Treasury found that, May 1992, $12.7 billion; December 1992, 
$16.7 billion. Today, October 2003, when you do not find 
currency manipulation, the trade surplus, $116.8 billion. Back 
in 1992, when Treasury found currency manipulation, as a 
percent of GDP, 3.1 percent and 3.5 percent, now, 8.7 percent.
    It is just dramatic. Global current accounts, same 
performance. And then accumulation of reserves, back in 1992, 
$14 billion, $6 billion over the course of 1992. Now, it is 
$111 billion. I mean, it boggles the mind to explain how we 
could find currency manipulation on the basis of these figures 
in 1992, when you can come in this morning and say it is not 
happening.
    Now, I want to quote a statement made recently by Fred 
Bergsten, Director of the Institute of International Economics, 
before the U.S.-China Economic and Security Review Commission. 
He said in terms of criticizing the approach that was being 
taken by the Administration.

    They are proposing that China float the renminbi, and that 
is a worthy long-term goal. But if we put our efforts in that 
direction, it will not happen for 5 years or more. The Chinese 
are correct not to float their currency because to do so, in a 
meaningful way, they would have to eliminate their capital 
controls, and Secretary Snow was consistent in asking them to 
eliminate their capital controls as they go to a floating rate.
    The problem of course is that China has a bankrupt banking 
system, that the vagaries of international capital flows are 
such that no country wants to expose itself to those 
uncertainties when its internal financial system is not sound. 
To put it pragmatically, if China actually floated the currency 
and freed up its capital controls, the renminbi would probably 
go down in value not up.

    And then he discusses why that would happen.
    He says,

    Their comparative position would improve. The situation 
would get worse. So, on both conceptual and pragmatic grounds, 
our Government was asking for the wrong thing. What they should 
be asking for, and what I believe is eminently doable, is for 
the Chinese to keep their fixed exchange rate system, but to 
change the price, revalue the currency by 20 to 25 percent on a 
one-shot basis, tell the Chinese we respect their desire to 
maintain a fixed exchange rate and maintain some restrictions 
on the capital account as long as they have a bankrupt banking 
system, move toward correction and reform of that over the 
long-run.
    But in the short-run, to deal with the problem, we want a 
one-shot revaluation of a substantial amount which would give a 
substantial improvement to our international position and 
convert them into a sustainable position.

    What is your response to that analysis?
    Secretary Snow. Senator, my response to Mr. Bergsten's 
analysis is that it is better to work on the banking system 
now, it is better to fix the problems now, it is better to 
continue to press the Chinese to do that, and I think we will 
get a better result long term proceeding that way.
    With respect to two of your other observations, if I could 
respond, we are not really in the position of Ms. DuBois in A 
Street Car Named Desire. We really are not dependent on the 
kindness of strangers--hardly. These are international 
financial markets, and people invest in the United States, as 
you know, Senator, because of the good returns. The risk-based 
returns in the United States are higher than in other parts of 
the world, and that is because we have a productive economy, 
lower inflation, and we honor capital.
    Senator Sarbanes. Do you think the Japanese are buying in 
the currency market, as heavily as they are doing, unrelated to 
trying to affect the valuation of currency and their trade 
position?
    Secretary Snow. Senator, I was dealing with your concern 
that we depend on the kindness, as you said, of strangers. We 
do not depend on the kindness of strangers to attract capital.
    Finally, I would say that, with respect to your chart, 
there are a lot of differences between today and 1992, 1993, 
and 1994, back in that time frame, when China was cited. China 
had a dual exchange rate system, as you know, with very heavy 
capital controls that interfered with the play of market forces 
and the balance-of-payments adjustments process. It had 
significant restrictions at that time on payments for current 
account transactions that very much limited their ability to 
import. They have relaxed those a lot now.
    The system that was in place in the period when the 
designation was made has disappeared. We have a new system now. 
It has lasted for some 10 years, and I am the fourth Secretary 
in a row who has looked at the question and concluded that no 
designation was called for.
    We are not happy with the way the Chinese deal with their 
currency. We are committed to changing it. We are engaged in 
changing it, and I think we are making real progress.
    Senator Sarbanes. Mr. Secretary, God save us from the new 
system. In the old system in 1992, they were showing about 3.5-
percent trade surplus with the United States as a percent of 
GDP. Now, they are up to 8.7 percent. In 1992, they were 
accumulating reserves at about $10 billion over a 12-month 
period, and now it is $111 billion. The statute actually 
requires that they show a trade surplus with the United States 
and a global current account surplus.
    Secretary Snow. Right.
    Senator Sarbanes. They have both of those, but in dramatic 
numbers.
    Secretary Snow. It says ``material,'' and by most 
economists' estimates, 2.8 is not material on the global 
current account basis. But however we parse that, the fact is 
we are engaged in the very actions that the statute 
contemplates. We are fully engaged with the Chinese, and I 
think the way we are engaged is going to produce results.
    Senator Sarbanes. Well, I will close out and do it in the 
next round, but let me just point out, while the long-run 
objective of flexible rates I think is desirable, and that is 
where we need to go, I do not think you are going to get the 
Chinese there in the short run because they have this concern 
about capital controls and the weakness of their banking 
structure. And for the life of me, I do not understand why the 
Administration is not pressing, does not have another arrow in 
their quiver, that they should revalue, in the short-run, which 
would make a significant difference and, of course, the Chinese 
currency is a linchpin for Asian currency appreciation.
    Frank Vargo, of the NAM, said the other day:

    The Chinese currency is the key not just because of the 
huge bilateral imbalance, but also because other Asian 
countries are all looking over their shoulders at Chinese 
competition and are reluctant to allow their currencies to move 
up against China's. Once China's currency appreciates, though, 
they will be less reluctant to allow theirs to move upward as 
well.

    And we mentioned earlier the figures of Japan, Korea, and 
Taiwan. I think your short-run strategy is to get a revaluation 
of the peg--in the context of a long-run strategy, to go to 
flexible rates.
    Thank you, Mr. Chairman.
    Chairman Shelby. Senator Allard.
    Senator Allard. Thank you, Mr. Chairman.
    I would like to start out with a few comments to let you 
know, Mr. Secretary, where I am coming from. I may be the only 
free trader sitting on this panel today. I do not know. But 
when you talk about manufacturing jobs, those jobs have been 
decreasing for the last 2 decades. Now, it has been a 
combination of things, in my view. Number one, part of it has 
been due to the fact that we are modernizing our factories so 
workers can get more done. We have increased efficiency. We 
have increased production, and I think this has all served our 
country very well.
    Also, you know, our manufacturing sector is being plagued 
more and more with rules and regulations that have a real cost 
to the value of the goods that they are kicking out, and this 
has also had an impact. To be competitive in a world market, 
sometimes we lose jobs to other countries because of the 
regulatory burden in this country.
    I want to pull up this chart here that my colleague had 
pointed out where it talked about the trade deficit. If you 
will notice the lower parts on those charts, do you know what 
was happening at those times? You take this little part right 
here. This is when we had the misery index. Remember double-
digit inflation, double-digit interest rates, double-digit 
unemployment. We go down here to the 1980's, and the economy 
was not doing particularly good there. We go clear back to the 
Depression. Our trade deficits were more favorable, but 
certainly I do not think that is what we want for this country.
    I would hope that we not go too far in criticizing the 
trade deficit. Because when our economy is doing well, 
consumers are doing well, they are purchasing goods, and that 
is a reflection on a prosperous economy that is doing well.
    I would hope that you would counsel the President to let us 
not have any more trade tariffs like we put on lumber and 
steel. There are lumber companies in Colorado who are reporting 
to me today that since those lumber tariffs were imposed, the 
cost of lumber in Colorado has gone up dramatically. That 
impacts the home-building industry. It is a fundamental 
industry, and eventually, if we continue impose tariffs, it is 
going to have, in my opinion, an adverse impact on the economy, 
as well as steel.
    And we have had some Members on this panel say, what they 
want is tariffs, but I hope that we will avoid that. If you 
look at the poorest countries in the world, they are the ones 
that have the most trade restrictions, and they are doing the 
poorest, as far as their economy is concerned.
    Milton Friedman, a Nobel Prize winner is a free-market 
economist, and he was an advocate of free markets, and I happen 
to agree with that. He said that the dollars are pretty much 
like a commodity. He said that if you will treat them like that 
and not overreact, they will adjust.
    Looking at some of these charts put out by the IMF, they 
show that Japan and China both have horded--it looks like $800 
million if you look at these charts here. They are not getting 
any interest on that money. They are not producing. They are 
not doing anything. South Korea and Taiwan, you pull them in, 
and it is over $1.1 million.
    Now, would you agree that there is a point of no return 
where the countries that are trying to hold onto these American 
dollars to help with the exchange rate are going to have to 
release some of these dollars; where they are going to have to 
deal with the market at some point in time? Would you agree 
with that?
    Secretary Snow. Well, there is always an adjustment process 
going on, Senator. I certainly agree with that and with your 
broader statement on the power of free trade. Free trade 
benefits all parties of free trade. It creates jobs, and it 
creates more wealth, and it is critical to the success of the 
world economy to continue to push for free trade. And we think, 
going hand in hand with free trade, as Milton Friedman argued 
years ago, are fluctuating exchange rates. He is one of the 
fathers of the idea of freely fluctuating exchange rates.
    I agree with your views on the need and the importance of 
trade, and the importance of keeping the avenues of trade open, 
that trade benefits us, and that there is a continuing 
adjustment process going on in the world economy.
    Senator Allard. Now, much of today's discussion has 
centered on the effect on the manufacturing center. We have 
seen a depreciation in this particular sector, but the question 
that I wanted to bring up has to do with the parameters in 
which you evaluate whether there is manipulation of the market 
by the country.
    What do you look at to know whether that is happening? Do 
you look at their total dollar reserves that they hold, or is 
it much more complicated than that. I wonder if you would share 
with this Committee what parameters illustrate that a country 
is not complying with our agreements in 1988, and that they are 
not complying with our exchange policies?
    Secretary Snow. Senator, you would look at the things you 
mentioned. Is the country involved in some set of practices, 
currency practices, which frustrate normal balance of payments 
adjustments processes? Are they engaged in a set of practices 
which are motivated, are motivated by a desire to disadvantage 
U.S. exporters and competitors? Those are the sorts of things 
you look at.
    And then you look at the question what is happening to 
their bilateral balance of trade and their multilateral balance 
of trade over time? You try and come to a common-sense 
conclusion on it. And you consult with the IMF, as required by 
the statute. Those are the general factors that we used and 
took into account.
    Senator Allard. Mr. Chairman, I would just raise a word of 
caution. Mr. Secretary, as you know, I am a veterinarian, and 
sometimes you have to look at the disease, and you have got to 
decide is the treatment worse than the cure or is the treatment 
worse than not doing anything?
    I am not saying that we should not do anything in this 
particular case, but I think we have to be awfully careful 
about the treatment that we might apply. We might dig a big 
hole for ourselves, and our economy will not continue to do as 
well as it has been doing.
    I am surprised today to see the gross domestic product 
figures. They are better I think than most economists were 
predicting, and I think this is a sign of recovery that is 
being stimulated by the Bush economic stimulus package. The tax 
cuts played a large part in getting that part of the economy 
going that needed to go in order to create more jobs.
    And if we look at the overall job picture, at least in my 
State, we are beginning to see some things happen there that 
make us think we are very solvent and on the way to growth. So, 
I hope we are very careful about the way we analyze this issue 
and how much importance we put on these exchange rates.
    Secretary Snow. Thank you.
    Thank you, Senator.
    Chairman Shelby. Senator Stabenow.
    Senator Stabenow. Thank you, Mr. Chairman.
    I feel compelled, as someone representing a State with 
great manufacturers, both businesses and employees, to say 
that, given a level playing field, our businesses and our 
employees can compete anywhere, any time. This is really about 
giving them a level playing field.
    I am extremely concerned that they are being placed at a 
disadvantage through currency manipulation as well as a number 
of other factors.
    Mr. Secretary, as I said in my opening comments, this is 
about jobs. This is about real people and real jobs. This is 
about my opening up the paper every morning and seeing another 
auto supplier, tool and dye maker, small furniture maker 
finding themselves in a situation where they may have to go out 
of business or, in fact, are going out of business, not because 
they are not smart, they are not effective or competitive or do 
not work hard, but because of the situations that they face.
    I cannot think of a more important issue for us as a 
country than the question of losing jobs. We have to make 
things and grow things in this country. That is what we do in 
Michigan. We cannot all be in the service business. We have to 
have a manufacturing base on which to build in this country, I 
believe.
    My concern is that, in listening to your comments about how 
you come to a conclusion about manipulation, you have indicated 
you look at whether or not the country was motivated by a 
desire to disadvantage foreign competitors. How could we look 
at that and not say yes? How could we look at this situation 
and not say that is exactly what is happening?
    So one question--I actually have two questions, but the 
first is your report concludes that no major trading partners 
of the United States meet the technical requirements set forth 
in the Omnibus Trade and Competitive Act of 1988--it could be 
1888, I think.
    Secretary Snow. 1988.
    Senator Stabenow. Yes, I know it is 1988, but given the way 
it is being used, I would like to know is it time to change 
that Act? Are the technical requirements of this Act so out of 
touch with what is happening, as it relates to these 
situations, that we need to create different definitions?
    Secretary Snow. Senator, I have to think about that to 
offer you a thoughtful and informed opinion on it. But whether 
that is the case or not, the end objective of this statute, 
which is discussions, engagement, involvement with other 
countries, has occurred. We are deeply engaged, and we are 
engaged for the reason that you raise. We want to make sure 
that other countries are using regimes that are fair and do not 
prejudice opportunities for American jobs and American 
manufacturers.
    I could not believe more strongly, support more strongly, 
your statement about American workers and American 
manufacturers. They can compete with anybody. All they really 
need is a fair set of rules that are fairly and fully enforced. 
That is why Don Evans right now is over in China, and I have 
had any number of discussions with constituents of yours from 
the auto companies and auto supply industry on these subjects.
    If you will just let me offer a personal note on this, I 
take these responsibilities as Treasury Secretary very 
seriously, and I am deeply honored to be here, but I know it is 
heavy responsibilities and none more important than jobs, none 
more important than waking up every morning and saying what you 
have really got to be concerned about here is American workers, 
and jobs for Americans, and rising standard of living for 
Americans.
    I know what it means to not have a job. I have been in that 
position, and I know what it means to have a job and the 
dignity that goes with having a job. I could not agree with you 
more, and we have to make sure that national economic policy at 
home is designed to create job opportunities, with higher 
standards of living, and we have to make sure that the 
international trading and currency arrangements are consistent 
with doing that as well.
    Senator Stabenow. I would just indicate again that time is 
of the essence on this question. Our businesses and workers are 
looking to all of us for action. One other point, we have been 
talking a lot about China, and I agree with the concerns that 
have been raised by my colleagues regarding China, but I do 
also want to speak about Japan for a moment, equally 
concerning.
    For 3 years, Japan has used massive currency interventions 
to intentionally manipulate the value of the yen against the 
dollar and keep it artificially weak. In fact, Japan has spent 
over $200 billion since January 2000 on intervention actions, 
including $120 billion this year alone. They have done this 
with the stated goal of gaining competitive advantages for 
their exports--the standard that we were just talking about, 
particularly the United States.
    By maintaining this weak yen, Japan has been providing a de 
facto subsidy to their automakers. In fact, automotive exports 
represent 60 percent of Japan's exports to the United States, 
which means that U.S. automakers have been competing against a 
substantial export subsidy. In fact, a recent article in 
Automotive News cited a figure of $18,000 per vehicle as the 
level of export subsidy received by Japanese autos this year 
alone.
    Mr. Secretary, does the Administration acknowledge that 
this is having an extremely negative impact on the auto sector 
and how will you specifically address Japan's unfair trade 
advantage in the automotive sector, which was one of the 
largest bilateral trade deficits we have with any nation and 
any product.
    Secretary Snow. Senator, that was a subject that was on my 
agenda for my meeting in September with Mr. Koizumi and his 
finance and economic team. We raised those issues and 
indicated, on the subject of currencies, our strong support for 
fair currency regimes that reflect market forces and that let 
rates adjust to the marketplace.
    We did not designate Japan because I did not think they met 
the specific criteria of the statute. The yen has moved quite a 
bit. It was at 117 or 118 3 months ago. Today, it is at about 
107, 108. Two years ago, it was at about 135, 137, range. 
Today, it is at 108. So we have seen some movement of it in 
response to market forces. That is what we want to see. We want 
to see market forces driving currencies, and that is a position 
that we have reiterated time and time again. But I understand 
your point, and I have talked with your constituents in the 
auto and auto supply industry and other industries very much 
about that issue.
    Senator Stabenow. Again, we can compete anywhere any time, 
but $18,000 per vehicle difference, in terms of a subsidy, is 
not fair competition.
    Thank you.
    Secretary Snow. Thank you.
    Chairman Shelby. Senator Dole.
    Senator Dole. Secretary Snow, Economist John Makin, of the 
American Enterprise Institute, suggested at an October 15 
conference that the current growth of the Chinese economy is 
not sustainable and warned of a bubble in the Chinese economy. 
What kind of impact would such a bubble have on our economy, 
especially with the Chinese holding more than $357 billion in 
exchange reserves?
    Secretary Snow. We certainly are interested in seeing China 
have stable growth. They are growing at a rapid rate, as you 
know--7.5 to 9 percent. The numbers are a little hard to pin 
down with particularity, but very sizeable growth rates.
    And one reason we are pressing the Chinese, as we are, to 
move to more flexible exchange rates is that we think--and open 
capital controls--that it would deal with pressures that appear 
to be building up inside their economy, inflationary pressures 
that seem to be building up inside their economy, and that was 
a discussion we had with their central bank, and with their 
finance ministers and with the premier because the peg, and the 
whole arrangement they have with the capital controls appears 
to be generating some internal inflationary pressures that need 
to be taken into account. I do not see them as creating 
precipitous problems, but I do see, over time, those problems 
being something they need to deal with, and they have 
acknowledged that. They have acknowledged that.
    Senator Dole. Have these large exchange reserves held by 
the Chinese given us caution in exerting greater pressure for 
reform?
    Secretary Snow. No, not in the least. As I indicated 
earlier, the United States can finance its obligations. We are 
perfectly capable of financing our obligations, but we are not 
happy with the peg. I want to be just as clear as I can. We do 
not like it. We see it as a distortion of the world trading 
system, and we would like to see them eliminated. We would like 
to see them move off of it.
    We recognize that moving too quickly, moving precipitously 
would create the very problems that Mr. Makin of AEI talked 
about. But at the same time we think they are an economy that 
is much different today than the one in 1992, 1993, or 1994. 
They have matured. They have grown. They are now in a position 
they can begin to move in this direction and, in fact, I think, 
Senator, the risks for them of not moving in this direction are 
greater than the risks of doing so.
    It is with that framework in mind that we have urged them 
to move forward with and to move quickly, not to wait on this 
because these pressures inside their economy are very real, and 
there needs to be a safety valve for them.
    Senator Dole. Mr. Secretary, you are doing a fine job 
looking out for the interests of the U.S. Treasury and 
Representative Zoellick, in looking out for our U.S. trade 
interests. My responsibility is to represent 8 million people 
in North Carolina, and many of them feeling very concerned 
about the fact that we have lost more than 200,000 
manufacturing jobs since 1995. Of course, I regularly meet with 
these people when I am in North Carolina. I see the reports 
constantly, day after day, with the plants closing, coming 
across my desk. I am committed to looking at every available 
option to help remedy this situation.
    I recently joined Senator Voinovich in calling on 
Representative Zoellick to initiate an investigation under 
Section 301 of the Trade Act of 1974, and I would be interested 
in your views on that. I would hope that the Administration 
would not oppose a Section 301 investigation.
    Secretary Snow. Senator, I was not aware of that so I have 
not had a chance to examine it. I think that the course we are 
on is one that is promising. I want to make sure that the 
Committee is aware of my strong view that we are making a lot 
of progress here. This is not just talk. This is progress. They 
have reaffirmed their commitment to move to exchange rate 
flexibility. They have taken a number of very important and 
specific steps to do so. I won't take you through all of them, 
but they have allowed greater ownership in their banking and 
financial system. They have allowed Chinese Nationals to take 
more currency out of the country. They have allowed foreigners 
to take more currency in. They have established a whole new 
banking regulatory regime to go at this issue of the banking 
system's problems.
    This is working. We are making real progress. We are going 
to have a financial attache in Beijing. We have established 
technical talks with the Chinese, and to indicate how serious 
they are about this, the Chinese have entered into a memorandum 
of understanding with the Merc, the Mercantile Exchange in 
Chicago, to develop foreign exchange derivatives in China. Now, 
you do not have foreign exchange derivatives unless you have 
some movement in your currency.
    So, I think we are making really positive progress here. I 
wish it could go faster.
    Senator Dole. Let me just ask you very quickly, certainly 
Canada, Europe, and other trading partners are also feeling the 
effects of a loss of their manufacturing base to China, and it 
seems sometimes like we are just a lone voice on this issue. 
Shouldn't our other trading partners be joining us in putting 
pressure on the Chinese to make necessary reforms? Shouldn't we 
be building a coalition in this area? What are we doing in that 
respect?
    Secretary Snow. Well, in that regard, Senator, I was 
extraordinarily pleased by the statement that came out of Dubai 
from the G-7 Ministers meeting, which addressed the issue head 
on and expressed a strong commitment for all the major 
countries of the world to embrace freely floating rates with 
elimination of capital controls. So we have now the G-7--
actually, Russia was part of those meetings--the G-8 embracing 
the idea of open competitive capital markets and open 
competitive currency markets.
    I think there is real movement here. I am encouraged. I 
wish it would go faster, but I am encouraged.
    Chairman Shelby. Senator Corzine.
    Senator Corzine. Thank you, Mr. Chairman.
    Mr. Secretary, with all due respect, I read the Dubai 
communique, and while it certainly embraces the concepts you 
are talking about, in no way does it, in my view, set metrics, 
timetables, or an outline, a specific program for moving to the 
benefits that one might argue would be the case with flexible 
exchange rates and some of the other issues. I believe part of 
the topic of discussion today is timing. I think that the 
reasons that I outlined in my opening statement, both the 
unsustainability of our current account deficit, the growing 
embrace of protectionist ideas that are being both advocated 
and actually, in some instances, followed by the 
Administration, do not seem to me in the context of the job 
losses that we have seen in this country. By the way, I am 
concerned that there may have been some sense that we have 
grown jobs from one of my colleagues' comments earlier, when by 
latest calculations I think we have lost 3 million jobs in the 
last 3 years. And while all of us are pleased with the GDP 
growth, there was a decline in jobs again in the third quarter. 
I hope that the growth we see will lead to the pick-up in job 
growth because that is what we are interested in. I hope your 
numbers that you projected last week actually come to pass.
    But it strikes me that there is an urgency with regard to 
these trade and exchange rate policies that is not reflected in 
either the report or the comments today. I continue to believe 
that we need to--and this actually is why I mentioned the Plaza 
Accord, and I know that Senator Dole mentioned broadening out 
the coalition. We are dealing now with much of the concern in 
the developing Asian economy, which is not just China. It is 
all of those other currencies that are tied very closely to it, 
and it is the competitive position that each of them have with 
it. It strikes me that we need to be sitting down and talking 
about this in a much broader, comprehensive context than we are 
doing it now.
    I happen to be a believer, not unlike the Ranking Member, 
with regard to an intermediate step before we get to flexible 
exchange rates with China, that there needs to be some 
adjustment with respect to the peg. That is not an endorsement 
of the peg concept. It is just saying that before we take off 
exchange controls, before we get all of these revisions in the 
economic system, we should not sit here and continue to lose 
these jobs in manufacturing and other sectors because we are 
not willing to take steps in the interim.
    And I think it is in the interest of the global economy, 
not just in the interest of the United States with regard to 
these issues. This is hurting European expansion, Japanese 
expansion. There needs to be a fundamental understanding that 
there is a linchpin element here to where the RMB works. I 
think the same institute that Senator Sarbanes was talking to 
talks about a 20-, 25-percent revaluation would create 
somewhere between 250,000 and 500,000 jobs here, but that has 
implications around the globe for growth that then feeds back 
in everybody's domestic economy that you are talking about.
    I do not understand why we would not want to try to take 
some interim steps, understanding that China has to move on a 
paced basis to change with regard to where they are with regard 
to the peg. And it would be something that I think we as a 
Nation should be the leaders of bringing about. It is good for 
China in the same way that you responded to Senator Dole's 
question. They have huge buildups of inflationary pressures and 
bubbles in certain parts of their economy because they are 
growing their reserve base. Money supply is exploding with this 
increase in reserve holdings.
    I am concerned that I do not hear the urgency that is 
represented by the current account position in the country 
relative to the jobs, relative to growing protectionism, and 
growing weakness that we see in other parts of the globe, or at 
least sustained weakness in other parts of the globe that are 
being held back because we are not doing something now.
    Senator Sarbanes. Jon, would you yield for just a moment?
    Senator Corzine. Sure.
    Senator Sarbanes. I just wanted to add, this revaluation of 
the Chinese currency many see as a linchpin for Asian currency 
appreciation. It is not plausible that other Asian currencies 
will appreciate without a revaluation of the Chinese currency. 
As the NAM Vice President said, they are all looking over their 
shoulders at Chinese competition and are reluctant to allow 
their currency--so the point that Senator Corzine is making is 
right on target in terms of this wider context in addressing 
this question.
    Senator Corzine. I think that is actually true with the 
Japanese as well, and you know, I can ask for your response to 
the tirade, but I would recommend that the Treasury give very 
serious consideration in their bilateral conversations with the 
Chinese. But I think this is actually a multilateral issue, 
much broader, and I actually think the Dubai communique is too 
general and does not deal with the real specific issue, which 
is, I think, undermining this exchange and currency problem.
    Chairman Shelby. Senator Schumer.
    Senator Schumer. Thank you, Mr. Chairman. I appreciate the 
hearing. I am sorry we had many things going on, so I apologize 
for being a little late.
    As you know, Mr. Secretary, it is not a surprise to you 
that I am very disappointed in the report today, and hearing my 
colleagues--well, I was not here to hear, but it was reported 
to me, just about everybody else seems to be, too, on a 
bipartisan basis. And it leads to a question. We cannot quite 
figure this out. You have said let diplomacy work, but the 
Chinese seem to say do not even bring this up. We do not see 
any progress whatsoever, any progress in this area. The Chinese 
just seem to feel they can get away with whatever they want.
    The question I have is this: Is there some kind of deal? Do 
we tell the Chinese you help us in foreign policy and we won't 
bother you on this issue? Because certainly this report lets 
the Chinese off the hook. Now the Chinese can say to any U.S. 
official, from the President on down, you found we are not 
violating any laws, we are not doing anything wrong.
    All the pressure that you have been trying to build up on 
them, you have pulled the rug out from under yourself with this 
report. And I do not get it.
    So can I ask you this: Before you issue these reports or go 
to China, do you talk to the State Department people? They 
traditionally put economic issues second and diplomatic issues 
first. Many of us are incredulous here about what is going on 
because we, in a different position than you, have to live with 
the exodus of the jobs. And, you know, I am well aware of the 
fact that not every job is going to be saved by a fair 
valuation of the Chinese currency. But it sure means some of 
them would, and it also means that everyone who loses a job 
thinks that this is related. The good economic news today is 
growth. The bad news is jobs. And what we are talking about 
here, is directly related to jobs.
    I guess my question to you is: Has some kind of deal been 
struck either about North Korea, about some other foreign 
policy area, something not related to economics, or even 
related to economics, well, we will leave you alone if you buy 
some planes from us or you do this or you do that? I mean, tell 
me what is going on here.
    Secretary Snow. Senator, we are, in your words, not 
``leaving the Chinese alone.'' We are engaged on a number of 
points with them to get them to open up their economy, to get 
them to relax capital controls, and to get them to move to a 
freely floating rate.
    I have been over there. I have been to Beijing. I have 
talked to the leadership of the country, from the Premier on 
down. I have talked to the Finance Minister and the central 
banker in a meeting of the World Bank, IMF in Phuket, Thailand. 
I just came back from Oralia, Mexico.
    Senator Schumer. Have we made any progress? I know you are 
trying hard.
    Secretary Snow. We are. I heard you say we are not making 
progress. We, I think, are making genuine progress. You were 
not here a few minutes ago when I commented on some of this 
progress. I will not repeat it all.
    Senator Schumer. Okay. I will look at the record.
    Secretary Snow. But one important element of progress that 
is really pretty startling is the interest which the Chinese 
are taking in talking to the Chicago Merc, about derivatives on 
their currency and options on their currency. And I confirmed 
that in a discussion I had with Governor Zhou, the counterpart 
to Alan Greenspan, and Governor Zhou has endorsed this project 
with the Merc in which they have asked the Merc to help develop 
a currency futures market in China.
    Now, Senator, there is no point in having a currency 
futures market unless you let your currency----
    Senator Schumer. Right, but they have not done anything. 
They are talking.
    Secretary Snow. Well, I understand they are entering into 
or have a memorandum of understanding to retain the Merc to do 
this for them.
    Senator Schumer. But they could wait 2 years before they 
did it. They could say we need time, we need time, we need 
time. No one is saying all of this has to be done in 6 months, 
but we do not see one inch of progress other than talking. And 
talking is not going to get us anything done if the basic 
situation is unfair.
    Secretary Snow. Senator, since I started this discussion 
with them, U.S. financial institutions can now own a larger 
share of Japanese financial institutions than had been the case 
before.
    Senator Schumer. Right.
    Secretary Snow. And insurance companies. Non-Chinese, your 
constituents, can take more hard cash into the country. It is 
not as much as we want. They are not moving as fast, you know. 
But we are pressing them, and we will not relent here. We will 
not stop. We are going to keep the pressure on.
    Senator Schumer. Let me ask you just one other thing. I 
know my time has expired. Just one more question with the 
Chair's indulgence, and that is, what is the Administration's 
position on the legislation that the group of us have put in 
about the tariff ? And let me ask you this: Even if you do not 
have a position yet, which I do not think you do, isn't it fair 
to say that if this were to pass the Senate, it would increase 
your leverage and your ability to negotiate with China?
    Secretary Snow. Senator, I think we are making good 
progress, and I would rather continue down the path we are 
going.
    Senator Schumer. You do not think it will help you, it will 
help your leverage?
    Secretary Snow. As I say, I think we are really on a good 
path and are making progress, will continue to make progress. 
If I thought otherwise, I would respond differently to your 
question.
    Senator Schumer. Okay.
    Thank you, Mr. Chairman.
    Chairman Shelby. Mr. Secretary, we have seen such an 
acceleration, it seems to me, in the loss of manufacturing jobs 
in the United States, more so than any time in economic history 
that I am aware of. We understand trade and we understand 
people doing this and doing that better than we are. But if the 
currency is manipulated to help them reach their goal of a 
better economic condition for their people and so forth, stable 
growth, but at whose expense, ultimately? I think on both sides 
up here today you heard concern about the loss of manufacturing 
jobs, not in just my State of Alabama but all over America. And 
you are the Secretary of the Treasury. We know you have a tough 
job to do. But these are real concerns to us as Senators, as 
legislators. And I think that is the message we are sending out 
today.
    I believe that although it is delicate dealing with China, 
Japan, and the other countries in Southeast Asia, they are 
going to have to be dealt with because people, if they are not 
going to play by the rules--and I know the rules are different. 
But if we are going to play by a set of rules and they are not, 
we are going to lose the ball game and we are going to lose it 
in our current account, in the loss of jobs. I wonder where we 
are going to be in 20 years if we continue to hemorrhage 
manufacturing jobs.
    Mr. Secretary, I think there has been a lot of concern here 
about the need for the Chinese to move to a flexible rate 
exchange policy. How you get them to do that is very difficult 
for a lot of reasons. But as an interim measure, would we see a 
measurable effect, a real effect if the Chinese allowed their 
currency to trade in a wider band than it does at present as 
part of a transition to a flexible rate regime? In other words, 
you loosen it up a little bit with a band or a basket or 
anything like that.
    Secretary Snow. Senator, I raised precisely that question 
with the economic and political leadership of the country, and 
I think it is something that they are looking at, the market 
basket idea, widening the band. No commitments were made, but I 
think that is clearly one of the things that is being looked 
at. I urged them to look at that hard and see if they could not 
embrace movements in that direction. It would be in their 
interest as well as our interest to do so. And I agree with you 
100 percent. We have to make sure that our workers, our firms, 
and our companies are not being prejudiced because of policies 
and practices of other countries. We can compete anywhere, but 
it has to be a fair, level playing field where the rules are 
really enforced.
    Chairman Shelby. Well, I think Senator Dole raised the 
question in a very articulate way, and so did Senator Miller 
when he read you part of the letter from the worker there. What 
do we tell our workers at home who have been displaced in 
manufacturing--textiles, steel, automotive-related? Do we say, 
gosh, we are going to stabilize somebody else but at their 
expense? You know, that is a tough thing to say.
    Secretary Snow. I would not say that, Senator.
    Chairman Shelby. I have not said it.
    [Laughter.]
    Secretary Snow. I would not say that. I would say, look, we 
are working hard on this economy. We are committed to seeing 
the economy grow. We are committed to creating more growth and 
income for Americans, and as more growth in income, after-tax 
income, is available, it will play out in a way--and it always 
has--that creates more jobs.
    This recession is different. It really is, by the gap that 
developed in the recovery between the normal recovery and the 
manufacturing sector.
    Chairman Shelby. Why?
    Secretary Snow. In part because of astonishing productivity 
in our manufacturing sector.
    Chairman Shelby. You are talking domestically now. You are 
talking about the gains in our computer manufacturing, design, 
and everything.
    Secretary Snow. The whole manufacturing sector has shown 
tremendous productivity growth over the last 3 or 4 years, and 
what that productivity growth has translated into is the 
ability to do more work, more output, with fewer workers.
    I am encouraged by the number----
    Chairman Shelby. You are not saying that this is going to 
be a recovery without jobs?
    Secretary Snow. No. I am confident we are going to see 
jobs. I think we have already begun to see it.
    Chairman Shelby. Yes, sir.
    Secretary Snow. The 57,000 in the last report.
    Chairman Shelby. The news today.
    Secretary Snow. The news today, and 5 of the last 6 months 
reduction in initial claims, the fact that aggregate hours 
worked are rising. There are some good, positive signs, and all 
the economists I talk to say that the linkage between growth 
and job creation has not been severed. It has been delayed, but 
not severed, and with the growth rates we are seeing, they are 
all projecting a very sizable pick-up in employment next year.
    Chairman Shelby. There is always lag time, but this 
recovery, we have seen more lag time, have we not?
    Secretary Snow. Yes, and the reason I think, Mr. Chairman, 
is the fact that we have had this astonishing productivity 
growth.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. Thank you very much, Mr. Chairman.
    Secretary Snow, I am going to read a series of quotes that 
appeared in major publications between March and October of 
this year, the period about which the Treasury report is 
concerned.

    Financial Times, May 31, 2003.

    The Bank of Japan conducted its largest ever intervention 
in the foreign exchange markets in May, using 3.9 billion 
to weaken the yen against the dollar.
    Japan's foreign exchange reserves soared, providing further 
evidence that the government has stepped up efforts to weaken 
the yen.

    And this shows what is happening to Japan's stock of 
foreign reserves, a very sharp rise. Of course, this is 
happening in all of those Asian countries. That is China. This 
is South Korea. And this is Taiwan.

    New York Times, August 27.

    Japan is spending heavily to pursue a weak yen policy. The 
Japanese Government is defying the logic of the foreign 
exchange market by keeping the yen from rising sharply in value 
against the dollar.

    New York Times, October 1.

    Yen declines after Japan moves to stem its rise. The yen 
fell against the dollar in New York trading yesterday after 
Japan's Ministry of Finance sold yen to stem a gain that had 
pushed the currency to its highest since December 2000.

    How do you justify the conclusion in your report that Japan 
is not manipulating its currency?
    Secretary Snow. Senator, as I tried to respond earlier, the 
yen has fluctuated in both directions. The yen has appreciated 
about 10 percent or so from the beginning of the year. More 
than that, actually. I think the yen is now about 22 percent 
stronger than it was at the beginning of 2002. Over the last 
couple of years, it has fluctuated I think a low of 135 or so 
to yesterday 108-something. Three-year fluctuation, about the 
same, 137 to 108.
    There has been considerable movement of the yen. The 
current account surplus has fluctuated between, 2 and 3 
percent, and as I said earlier, that basically reflects the 
excess of Japanese savings, their high savings rates, versus 
their investment rate. And their investment rate is low because 
they do not have their domestic economy growing faster.
    Senator Sarbanes. But you have no problem with their 
intervention in the markets in order to affect the currency?
    Secretary Snow. I do not want to comment on their 
interventions as such. I will reiterate our policy, which is we 
prefer fluctuating exchange rates, we prefer use of the market.
    Now, when asked about those interventions, their response 
is they intervene to avoid undue fluctuations which take the 
currency away from fundamental values. We prefer a world of 
fluctuating rates, and we continue to reiterate that, and that 
was the statement that came out of Dubai. It is not just us. It 
is all the G-7, including Japan as a signatory to that.
    Senator Sarbanes. Well, Mr. Secretary, I want to address 
the Dubai thing. I am glad you brought that up. In September 
1985, when the U.S. trade and current account deficits reached 
the worrisome level of 3 percent of GDP, the major industrial 
countries' Finance Ministers met at the Plaza Hotel in New York 
to make an explicit commitment to raise the value of foreign 
currencies. The Ministers agreed, and I quote--this is from the 
Plaza Accord, ``Some further orderly appreciation of the main 
non-dollar currencies against the dollar is desirable. They 
stand ready to cooperate more closely to encourage this when to 
do so would be helpful.'' So they came out of there committed 
to some further orderly appreciation of the main non-dollar 
currencies against the dollar.
    Now, 18 years later, our deficits have surpassed 5 percent 
of GDP, even more troubling. The G-7 Finance Ministers met in 
Dubai last month and issued a statement, ``We emphasize that 
more flexibility in exchange rates is desirable for major 
countries or economic areas to promote smooth and widespread 
adjustments in the international financial system based on 
market mechanisms.''
    Afterwards, the U.S. sought to claim that this ambiguous 
language signaled a major change. Other Finance Ministers 
claimed otherwise. Since Dubai, the Japanese have continued to 
intervene to prevent appreciation of the yen. Should we not be 
seeking a Plaza Accord type of the statement rather than this 
Dubai type of statement?
    Secretary Snow. Senator Sarbanes, the circumstances today 
and then I think are quite different. There was an effort to 
weaken the dollar, consciously weaken the dollar, as I recall 
the Plaza Accord. I think we have made the better commitment, 
and that is the commitment to let market forces rather than 
central banks and ministers of finance set currency values.
    Senator Sarbanes. If you sit and say, we are going to let 
market forces work and others are intervening in the market 
forces in order to gain advantage, apparently with considerable 
success, then are we not a patsy in all of this? It is one 
thing to say that the rules should apply, we have these 
international trading rules and people should abide by them. 
But if you have major actors who do not abide by them and 
depart from them in a calculated way in order to gain 
substantial advantage, if we just sit there and tolerate that, 
we are a patsy in this situation or so it seems to me.
    Secretary Snow. Senator, as you know we are continuously 
engaging the world on this issue and pressing forward our view 
that true flexibility reflecting market forces works best for 
the world trading system, for the country in question, and for 
the United States. You cannot devalue yourself to prosperity.
    Senator Sarbanes. Do you think it is fair to American 
manufacturers and workers to be competing against products 
produced in other countries where they have anywhere from a 25 
to a 40 percent trade advantage because of currency 
manipulation?
    Secretary Snow. Senator, we oppose currency manipulation. 
We think that would be unfair, and we assert as strongly as we 
can the need for a world trading community based on open 
capital flows and fluctuating exchange rates.
    Senator Sarbanes. One final. Is a general appreciation of 
Asian currencies plausible without a revaluation of the Chinese 
currency?
    Secretary Snow. Senator, one of the things that I have 
learned the Treasury Secretary should not do is comment on the 
specifics of relative exchange rates, so I had better avoid 
making a comment there, if you will permit me.
    Senator Sarbanes. Thank you.
    Chairman Shelby. Mr. Secretary, I know you do not want to 
move a market in any direction and you are wise to do this.
    With reference to Japan here, is there not a lot of 
difference, Mr. Secretary, between a country intervening in the 
market, that is buying or selling our currency in order to keep 
theirs at a desired exchange rate, as opposed to a nation that 
lets the market actually work and they do not try to intervene 
or manipulate, or as Senator Bunning used the term, cheat in 
the market? What we are trying to do is promote a situation in 
the world, as far as monetary policy, where the market sets the 
rate of exchange, short of nations trying to manipulate or 
actually manipulating the rate.
    Secretary Snow. Absolutely. That is our view entirely.
    Chairman Shelby. Now how do we get there?
    Secretary Snow. We get there by engaging in the dialogue we 
had in Dubai and getting the finance ministers of the world and 
the central bankers of the world to embrace this idea. That is 
what came out of Dubai was a strong statement embracing a point 
of view, a philosophy, one that we are in the forefront of.
    Chairman Shelby. But Mr. Secretary, how do we really get 
countries to change their ways when it is to their economic 
advantage at home to intervene in the currency market, to peg 
the market, peg the currency, or to intervene in the market 
buying and selling like the Japanese do?
    Secretary Snow. We have the types of discussions and 
engagement that we are having right now, and we bring the full 
force of our arguments to bear on them.
    Chairman Shelby. But will not these countries continue, by 
nature, to do what is in their best interest as they see it for 
their own economy and their own people even at our expense?
    Secretary Snow. Mr. Chairman, as Alan Greenspan I think 
testified before your Committee sometime recently, it is not in 
China's interest to pursue this policy. It is not in their 
interest because it is creating these adjustment processes 
within their own economy. That was not the main message I took 
to them.
    Chairman Shelby. But it is creating some distortions 
elsewhere, is it not?
    Secretary Snow. Yes, exactly.
    Chairman Shelby. Senator Sarbanes.
    Senator Sarbanes. Mr. Chairman, I would like to include in 
the record an article from the Washington Post, ``U.S. Debt to 
Asia Swelling. Japan, China Lead Buyers of Treasuries,'' in the 
course of which it is commented, this has caused some analysts 
to even envision the day when China could use threats of 
selling Treasuries to try to influence U.S. economic or foreign 
policy. `` `The U.S. dollar is now at the mercy of Asian 
governments ' said Joan Zheng, a former official at the 
People's Bank of China, the country's central bank and now an 
economist at J.P. Morgan Chase & Co. in Hong Kong. `If China 
wants to influence the market it can. Its financial power is 
just so strong.' '' They go on and on with a detailed statement 
of holdings.

    The Japanese Government also has massive amounts of dollars 
because of its efforts to hold down the value of its currency, 
the yen, against the dollar, to boost exports to the United 
States. To do so, Japan's central bank used yen to buy billions 
of dollars this summer but then it had to invest the dollars in 
U.S. assets.
    China has pegged its currency . . . to the dollar for 
nearly a decade. Manufacturers and labor groups in the United 
States have complained bitterly about what they say are 
undervalued currencies in Japan and China that effectively make 
those countries' goods unfairly cheap overseas. Some economists 
estimate the yuan is undervalued by as much as 40 percent, 
causing some U.S. business groups to blame China for the loss 
of millions of manufacturing jobs at home.

    I think this is right on the mark. There are lots of 
tensions that come from a free trading environment. There are 
also benefits that come from it. But there is no way, at least 
that I know of, under any free trade regime, that justifies 
currency manipulation to the extent that some estimate the yuan 
is undervalued by as much as 40 percent. Even if it is 20, 25, 
or 30 percent, what do we say to our people? It is one thing to 
say to them, you have to compete on a level playing field, and 
we get pluses and minuses out of that. What do you say to them 
when they are losing their jobs, the manufacturers are going 
under, the workers are getting laid off and they come and--by 
general agreement I think these currencies are not where the 
market value ``would put them'' and people are losing jobs. It 
is happening every day.
    Secretary Snow. Senator, what we are doing is I think what 
you as one of the authors of this statute wanted done. We are 
engaging the Chinese in a very direct and forceful way. We are 
letting them know that we think a manipulated currency is 
unfair. We want a currency that reflects the realities of the 
marketplace, not one that is manipulated. The only way to test 
that though is to get to the market. That is why we are pushing 
the marketplace.
    Senator Sarbanes. Mr. Secretary, under the statute there is 
a 6-month follow-up to this report. We look forward to 
receiving that. Presumably we will have a future hearing. But 
in the meantime, I am sure you are going to continue to hear 
more about this and you are going to have to deal with these 
various legislative proposals that are now coming forward which 
are a reaction or a response to this situation.
    Secretary Snow. Senator, let me assure you that in this 
interim 6 months I am going to be deeply engaged in pressing 
forward on this agenda that I have talked to you about today to 
make sure we have fair currency regimes across the world.
    Chairman Shelby. Mr. Secretary, we appreciate your 
appearance and your ability to go through the tortuous process.
    The hearing is adjourned.
    [Whereupon, at 1 p.m., the hearing was adjourned.]
    [Prepared statements, response to written questions, and 
additional material supplied for the record follow:]
               PREPARED STATEMENT OF SENATOR WAYNE ALLARD
    I would like to thank Secretary Snow for appearing before the 
Committee today to discuss international economic and exchange rate 
policy and its impact on our economy. The issue of exchange rates and, 
in particular, the use of anticompetitive tools, has become an issue of 
increasing concern in recent years. While promoting fair and free 
trade, it is important that the United States be firm against certain 
practices that occur in the global marketplace that can ultimately hurt 
our industries.
    The United States is committed to promoting and encouraging free 
and open markets, providing the ability for capital to find its most 
productive home. This flexibility implies that markets in goods and 
services will see growth beyond national boundaries. However, 
commitment to encouraging free markets means a commitment to 
eliminating unfair practices, such as the use of market restrictions 
and capital controls, that inhibit the free exchange of capital and 
goods through economies of the world. Tight control of either goods or 
capital can create imbalances in the economy and inhibit fair 
competition in the marketplace.
    I look forward to hearing about the interactions of national 
economies and the impact of those interactions on the U.S. economy. The 
health of Colorado's economy depends a good amount on the success of 
its agriculture industry, so I am particularly interested to hear about 
how it might be impacted by international economic and exchange rate 
policies. I also anticipate hearing ways in which the United States can 
both promote free markets, and ensure that those markets provide the 
appropriate forum for free and fair trade. Secretary Snow, thank you 
again for appearing before the Committee. I look forward to your 
testimony.

                               ----------

            PREPARED STATEMENT OF SENATOR CHARLES E. SCHUMER

    Thank you Mr. Chairman and Ranking Member Sarbanes. This is an 
extraordinarily important hearing. As you know, I have more than a 
passing interest in Treasury's views on China's currency, as well as 
the policies of other Asian nations.
     My concern about China's policies is not simply about jobs, or our 
manufacturing sector, or even, currency. Those are critical issues--we 
hear about them every day in our States. But even more is at stake.
     This is now about the strength of our international systems and 
U.S. laws. It is about whether we stand up for the rules or turn a 
blind eye. It is about whether the trade agreements we spend so much 
time negotiating are worth the paper they are written on. And it is 
about whether our Government will have the courage to stand by its 
convictions.
     Some try to frame this debate as ``free trade vs. protectionism'' 
that those who think China should change its currency practices risk a 
global trade war. In fact, the reverse is true.
     As we know, free trade is a delicate balance. It rests on certain 
conditions--multiple nations both weak and strong abiding by a common 
set of rules and responsibilities. When those conditions are violated, 
the system must respond or else the actions of one nation will upset 
the whole global balance. So it is in the interests of free trade--in 
defense of free trade--that I am urging action. We cannot turn our 
backs and allow one major nation to engage in mercantilist policies.
     It is the view of many economists, and many here, that the Chinese 
Government, as well as other nations, manipulates its currency to gain 
an illegal and unfair trade advantage. Let me briefly review that case. 
I think it is one that has been amply covered in hearings and testimony 
before Congress.
     IMF Article IV, Section 1, states that members of the IMF should 
``avoid manipulating exchange rates . . . in order . . . to gain an 
unfair competitive advantage over other members.''
     The IMF definition of currency manipulation is very explicitly 
defined in Article IV. It refers to currency manipulation as 
``protracted large-scale intervention in one direction in the exchange 
market.'' That is the standard. Let us look at the data.
     The monthly foreign exchange purchases by the Chinese Government 
have been huge. They have gone from an average of $3.8 billion a month 
in 2001 to over $10 billion a month in 2003. A sharp upward trend. 
During that period of time, total Chinese foreign exchange holdings 
have more than doubled from $166 billion to now $357 billion. These are 
staggering levels of intervention. In fact, this amount of 
intervention, according to some economists, is far beyond the levels 
ever seen by the IMF.
     Putting it all together, let me read a statement that came out 2 
weeks ago from the United States-China Security Review Commission, a 
bipartisan group established by Congress to look into these very 
matters. They state:

        China, in violation of both its IMF and WTO obligations, is in 
        fact manipulating its currency for trade advantage, and we 
        recommend that the Treasury Department immediately enter into 
        formal negotiations with the Chinese Government over its 
        undervalued currency.

     That is an unequivocal statement.
     But, frankly, none of this really matters. The Treasury Department 
is the key voice on these issues. Treasury has the responsibility under 
our laws.
     Under Section 3004 of the United States' Omnibus Trade and 
Competitiveness Act of 1988, the Treasury Department is obligated to 
consider whether any countries manipulate the rate of exchange between 
their currency and the dollar for the purpose of preventing effective 
balance of payments adjustments or gaining unfair advantage in 
international trade. If such violations are found, the Secretary of the 
Treasury is required to undertake negotiations with the manipulating 
countries that are running significant trade surpluses.
     The Nation looks to Treasury for leadership on these issues. And 
that is why we are here today.
     Many of us have supported the Administration's efforts in using 
diplomatic channels to encourage China to freely float its currency. 
Secretary Snow has gone over to China. The President has gone over to 
China. Secretary Evans is in China right now. The G-7 even endorsed a 
policy of market based exchange rates.
     Well, I think it is clear that diplomacy is not working. China is 
not listening or they do not care. The Chinese Government has made it 
crystal clear that they have no intention of allowing the yuan to trade 
at market levels anytime soon.
     China is now a major player in the global economy. If China enjoys 
the benefits of membership in the international community, as they 
clearly have, shouldn't they abide by the community's rules and 
responsibilities?
     The Chinese Government wants stability and continued growth--don't 
we all. But China's interests do not trump those of its neighbors or 
its international partners. Their desire for the status quo cannot put 
the long-term health of the international economy at risk.
     I hear from some very smart people in the financial community that 
the real risk with China is in doing nothing. China's continued and 
massive government intervention is helping drive enormous export lead 
growth which is overheating their economy which will eventually cause a 
global economic train wreck. Unfortunately, the Chinese Government's 
intransigence on this issue leaves us no choice but to consider more 
forceful measures.
     The lack of real action undermines support for free trade in this 
country. When we do not hold a country accountable for violating the 
rules of free trade, and good U.S. jobs are lost, people start to 
question whether the free trade system itself works.
     The Administration has taken made bold moves in the interests of 
our economy in other areas. I hope we will see some boldness again. If 
we really care about jobs and U.S. businesses--if it is not just 
rhetoric--and if we are really concerned about the problems in this 
country--not all the problems over in China--there can be few other 
actions that would have a more immediate and beneficial economic impact 
than eliminating China's and other nations' unfair currency advantages 
and currency manipulation.
     And, I can tell you this, if the Administration does not act, we, 
the Congress, will.

                               ----------

             PREPARED STATEMENT OF SENATOR DEBBIE STABENOW

    Thank you, Mr. Chairman. I appreciate your calling this hearing 
today. While the purpose of today's hearing is to look at the Treasury 
Department's Report to Congress on International Economic and Exchange 
Rate Policy, what this hearing really boils down to is a discussion of 
the future of American jobs and the crisis we are facing in our 
domestic manufacturing sector. Whether it is furniture makers in West 
Michigan or auto suppliers throughout Michigan, it is a challenging 
time.
     Indeed, our economy has lost 3.3 million private sector jobs since 
January 2001--2.5 million or 75 percent of those jobs in manufacturing. 
More specifically, 162,300 Michiganians have lost their jobs in the 
manufacturing sector. That is a mind-boggling 18 percent of the State's 
manufacturing base. One out of six jobs.
     This loss of U.S. jobs, in large part due to illegal trade 
practices, should be the number one priority of the Congress and the 
Bush Administration. We must demand that foreign countries play by the 
rules of international trade agreements.
     In particular, I am concerned about foreign currency manipulation 
and the lack of action from the Administration on this front. I hope 
that Secretary Snow, in his testimony today will be able to tell us 
what new steps the Administration is going to take, given its current 
inability to get China, Japan, and other countries to stop manipulating 
their currencies.
     Mr. Chairman, there is no question that China and Japan, in 
particular are actively and aggressively intervening in the currency 
markets to--illegally--protect their domestic businesses.
     By manipulating the markets, they artificially depress the prices 
of their exports and raise the prices of their imports. And what does 
this mean in simple terms? It is the functional equivalent of a tax on 
American goods.
     A ``currency manipulation tax'' imposed on our American companies 
by China and Japan. And, a tax that is forcing our U.S. companies to 
lay off good hardworking employees.
     These employees are now struggling to find new jobs, to provide 
for their families, to ensure that their loved ones have health care 
and that their basic needs are covered. We need the President and his 
Administration speaking out forcefully.
     The Administration has said that the United States has a strong 
dollar policy, but I want to see them using all of their resources to 
put it into effect.
     I want Administration officials to be able to tell laid-off 
workers in Michigan and around the country that China is finally going 
to allow its currency to rise the 15 to 50 percent it is undervalued 
relative to the dollar. And, that the 12 percent undervaluation of the 
Japanese yen will stop right away. Not at some vague point down the 
road. But, right away.
     These percentages are really startling when we think about them, 
Mr. Chairman. Let me put them into more concrete terms. I will use the 
example of a car which is a product that we in Michigan certainly know 
a lot about. We are very proud of our Michigan-made cars.
     A 2003 Ford Taurus SEL has a manufactured suggested retail price 
of $23,965. This car, when exported to Japan, faces an estimated tax of 
$2,876 solely due to currency manipulation.
     Conversely, a similar car made in Japan by Nissan would have the 
same estimated artificial price advantage over U.S. cars. Should we 
give a Japanese car a $2,876 price advantage over the exact same car 
made in America?
     Who is paying for these special advantages that the Chinese and 
Japanese governments are creating for their people? U.S. companies are 
paying for this tax. Our workers are paying for it. And, it has to 
stop.
     I wonder if my colleagues can imagine what the response would be 
if the Administration proposed raising taxes on all of our goods an 
additional 12 percent or more and gave all the revenue away to people 
in other countries? By failing to end this currency manipulation tax, 
this is the practical effect.
     Mr. Chairman, there is a lot of interest in the Senate and in this 
Committee in putting a halt to these illegal trade practices. Recently, 
as Senator Schumer has mentioned, I teamed up with him and others on a 
bipartisan bill to stop Chinese currency manipulation. Cosponsors on 
this Committee include Senators Bayh, Bunning, Dodd, Dole, and Enzi.
     China's policies violate the IMF and WTO agreements, and it is 
within our rights to take action. In fact, we are creating a bad 
precedent if we do not demand that our rights within these agreements 
are fully respected. America should not allow other countries to cheat 
us out of our full international rights.
     I hope that all of my other colleagues will work with me, Senator 
Schumer, and other advocates to resolve this problem. We should be 
doing everything within our power to protect our American manufacturing 
jobs.
     Thank you again, Mr. Chairman for calling this hearing. Thank you 
Mr. Secretary for agreeing to appear before us. I look forward to your 
testimony.

                               ----------

                   PREPARED STATEMENT OF JOHN W. SNOW

               Secretary, U.S. Department of the Treasury
                            October 30, 2003

    Chairman Shelby, Ranking Member Sarbanes, Members of the Banking 
Committee, thank you for the opportunity to appear before you this 
morning to discuss Treasury's Report on International Economic and 
Exchange Rate Policies as well as related economic issues. The Report 
reviews developments in the United States and examines exchange rate 
policies in major countries across five regions--the Americas, Europe 
and Eurasia, Africa, the Middle East and South Asia, and East Asia. The 
Report documents the wide variety of exchange rate policies that are 
used around the world. A notable trend has been the move by many 
countries to adopt flexible exchange rates.
    The Report concludes that no major trading partners of the United 
States meet the technical requirements set forth in the Omnibus Trade 
and Competitiveness Act of 1988. But let me be clear, the Bush 
Administration believes that the international trading system works 
best with free trade, the free flow of capital, and with market-based 
exchange rates. An efficient system of trade and finance, with fair and 
enforced rules, is essential for the United States and all nations to 
maximize the benefits of trade and generate the highest levels of 
economic growth.
    The Report finds that a number of countries continue to use pegged 
exchange rates and/or intervene in the foreign exchange market. It 
should be noted that a currency peg or intervention does not in and of 
itself satisfy the statutory test. Treasury has consulted with the IMF 
management and staff as required by the statute, and they concur with 
the findings of the Report.
    The Bush Administration is aggressively encouraging our major 
trading partners to adopt policies that promote flexible market-based 
exchange rates combined with a clear price stability goal and a 
transparent system for adjusting the policy instruments. In my 
testimony today, I would like to discuss this work with you and the 
progress we are achieving.

Policies to Raise Economic Growth in the United States and the World
    The Administration's international economic strategy aims for 
higher economic growth throughout the world. A stronger world economy 
is vital to sustaining U.S. economic growth and job creation. This is a 
reality of our increasingly interdependent world.
    At the core of this strategy are the good economic policies we are 
implementing in the United States. But also at the core is our 
diplomatic work to encourage pro-growth and pro-stability policies in 
other countries. Good economic policies in other countries benefit the 
United States and the whole world. It is widely recognized throughout 
the world that free markets and market-determined prices are best able 
to allocate scarce resources to their most productive use. This is as 
true for domestic markets as it is for international markets. We 
strongly believe that the goals of raising growth and increasing 
stability can best be accomplished in an international financial system 
that relies on the principles of free trade, free capital flows, and 
market-based exchange rates among the major economies.
    Free trade, in particular, improves the standard of living across 
countries. Thus, the Administration will continue to promote free trade 
through bilateral, regional, and global trade agreements. In this 
respect, the outcome at Cancun was a missed opportunity. The United 
States stands ready to work with others who seek liberalization. Our 
free trade initiatives, including the U.S. proposal to cut tariffs to 
zero for manufactures, will continue.
    Implementing this broad international strategy is an ambitious 
endeavor, but it is an agenda that the Bush Administration is 
determined to pursue. Convincing others to contribute to further 
improvement in global growth prospects is a top priority for the 
President. In furtherance of this agenda I traveled to Europe, China, 
and Japan this summer to deliver this very message. Growth was also the 
key focus of my discussions with Asian financial leaders in Thailand. 
Change has already begun among several major economies. For example, 
Germany is pursuing critical labor market, tax and pension reforms 
under its Agenda 2010, and France is also moving forward through its 
Agenda 2006.
    With President Bush's leadership, the Administration has made 
reform and economic growth a priority goal throughout the world. In 
addition to my own travel, Commerce Secretary Don Evans, U.S. Trade 
Representative Robert Zoellick and other senior Administration 
officials all continue to press nations to put in place pro-growth 
policies that will result in higher rates of productivity and growth 
both here and abroad
    The Administration has urged Japan to implement comprehensive 
reforms to bring about lasting recovery. These reforms involve ending 
deflation, strengthening the banking system, and undertaking structural 
reforms that promote flexibility. Indeed, the Bank of Japan has 
aggressively increased the money supply to counter deflation, and the 
Koizumi Government has made important headway on improving the health 
of the banking system.
    Treasury is actively engaged with the Japanese on monetary, fiscal, 
and exchange rate policies both bilaterally and through meetings of the 
G-7 finance ministers and central bank governors.
    At the recent G-7 meeting in Dubai, we made progress, gaining 
agreement on a new ``G-7 Agenda for Growth.'' Under this milestone 
agreement, G-7 countries have committed to concrete structural reform 
actions to increase productivity, spur growth, and create jobs. And for 
the first time they have agreed to a process for benchmarking and 
reporting on their performance.
    Each country will identify its own policy plan under the Agenda. 
For example, the United States will work to lower health care costs, 
reduce frivolous lawsuits, and streamline regulations and needless 
paperwork through the President's Six Point Plan to promote economic 
growth. Other G-7 countries will implement policies appropriate to 
their situations. Countries in the European Union will be looking at 
further ways to revitalize investment and create jobs. Japan has 
reiterated its commitment to reform.
    The Agenda for Growth must be about action and results, not just 
plans and platitudes. When we met in Dubai, my G-7 colleagues agreed to 
be ambitious in embarking on reforms and pursuing growth. In coming 
months, we will be working to evaluate proposals and assess the results 
of our efforts. As the United States assumes chairmanship of the G-7 in 
2004 that focus will be maintained.
    The Administration is also engaging in other initiatives, both 
bilateral and multilateral, to advance growth and stability in emerging 
markets and developing countries. For example, Treasury is working with 
Brazil through a new ``Group for Growth'' to identify steps to expand 
economic potential; the Millennium Challenge Account targets assistance 
to countries that perform on pro-growth policies and delivering results 
for people; and in the international financial institutions, Treasury 
is advocating a sharper focus on measurable results, economic policy 
performance, and promoting private sector development.

Recent Economic Developments
    The world economy has strengthened during the course of this year, 
and the United States is leading the way. Thanks to timely fiscal and 
monetary policy responses, economic growth in the United States is 
picking up now after the severe shocks of the terrorist attacks, 
corporate accounting scandals, and stock market decline of 2000. Growth 
accelerated to 3.3 percent in the second quarter, with fixed investment 
as well as personal consumption posting large gains. The President's 
Jobs and Growth plan, along with low interest rates, put the U.S. 
economy in an excellent position to achieve sustained, robust growth. 
The President's Six Point plan to enhance growth and job creation will 
further boost our performance. We will not be satisfied until we see 
strong and sustained job growth.
    Looking beyond the United States, global growth is also improving. 
There are signs of stronger growth in Japan, as well as in the United 
Kingdom, Canada, and several emerging market countries. Much of Europe, 
however, is still falling short of a strong economic recovery. While we 
can be pleased with the progress made, growth in the major economies 
around the world, as a whole, has been too slow for too long.

The U.S. International Accounts
    From my discussions with my counterparts in other countries, there 
is a great appreciation worldwide that the United States is a force for 
strong growth. This strong performance is also reflected in the pattern 
of our external trade and current account balances.
    Developments in the current account are best understood in terms of 
developments in investment and saving. As a matter of accounting, the 
current account deficit is equal to the gap between national investment 
and national saving. Thus, when investment in the United States is 
higher than domestic saving, foreign investors make up the difference, 
and the United States has a current account deficit.
    Our current account deficit in large part reflects the attractive 
investment environment and high growth of productivity in the United 
States. Increased saving in the United States along with stronger 
growth abroad will reduce the deficit in the current account.

Exchange Rate Policies
    The Report shows that countries around the world continue to follow 
a variety of exchange rate policies ranging from a flexible exchange 
rate regime with no or little intervention to currency unions and full 
dollarization. While the choice of an exchange rate regime is up to 
each country, we have been encouraging countries to use flexible 
exchange rates. Flexible exchange rates ease the adjustment to changing 
economic conditions in the international financial system. Of course, a 
flexible exchange rate will not prevent the economic damage that is 
caused by a bad economic policy. For example, even with a flexible 
exchange rate, an inflationary monetary policy would lead to a weak, 
constantly depreciating currency with negative effects on economic 
growth. A good flexible exchange rate regime requires a monetary policy 
with a focus on the goal of price stability, and has a transparent 
procedure for setting the policy instruments.
    We are encouraging the use of flexible exchange rates with our 
major trading partners, we recognize that, especially in the case of 
small open economies, there are benefits from a ``hard'' exchange rate 
peg, such as dollarization, joining a currency union, or using a 
credible currency board. Of course, just as in the case of flexible 
exchange rates, a ``hard'' peg will not prevent the economic damage 
caused by a bad economic policy.
    The G-7 statement from Dubai, which I mentioned earlier in the 
context of the 
``G-7 Agenda for Growth,'' also addresses exchange rate policy. Here is 
what that statement said:

        We reaffirm that exchange rates should reflect economic 
        fundamentals. We continue to monitor exchange markets closely 
        and cooperate as appropriate. In this context, we emphasize 
        that more flexibility in exchange rates is desirable for major 
        countries or economic areas to promote smooth and widespread 
        adjustments in the international financial system based on 
        market mechanisms.

    All G-7 Ministers and Central Bank Governors--including Alan 
Greenspan and myself--agreed with that statement. And let me be clear: 
the G-7 message is consistent with our strong dollar policy which I 
have consistently reiterated since my confirmation hearing. As I have 
said often, a country can not devalue itself into prosperity. A strong 
dollar is in the U.S. national interest. The G-7 message is also 
consistent with the Agenda for Growth, which is about a stronger world 
economy and flexibility.
    Among the many currencies discussed in the Report, China's received 
special attention. China does not meet the technical requirements of 
the 1988 Trade Act--the same finding for nearly 10 years of past 
reports. China's global current account surplus has declined, and China 
has had a peg over a long time period during both upward and downward 
pressures on the currency. But it is clear that a flexible, market-
based, exchange rate is appropriate for China. Given China's strong 
growth and substantial foreign exchange reserves, following on a series 
of economic reforms, China now has an opportunity to show leadership on 
the important global issue of exchange rate flexibility.
    Greater exchange rate flexibility would allow China greater scope 
to maintain a low-inflation, pro-growth monetary policy. It would also 
enable China to enjoy the benefits, while helping mitigate the risks, 
of a more open capital account. And it would help improve the 
allocation of resources and the quality of financial intermediation in 
the Chinese economy. More broadly, a more flexible rate would help 
reduce macroeconomic imbalances.
    A rules-based system of trade and finance is essential for all 
nations to maximize the benefits of trade and generate the highest 
levels of economic growth. A pegged exchange rate is not appropriate 
for a major economy like China and should be changed.
    For all these reasons, we are continuing our efforts to urge the 
Chinese to adopt a flexible exchange rate. I took this case to Beijing 
last month, emphasizing the need for exchange rate flexibility, along 
with reductions in barriers to trade and capital flows. And last 
weekend, following immediately on the heels of the President's meeting 
with President Hu, I met with the Chinese Finance Minister and Central 
Bank Governor in Mexico.
    China's response to this engagement is encouraging:

 Earlier this month China's Central Bank Governor said: ``With 
    the role of the market becoming increasingly important, the 
    exchange rate of the RMB will be finally determined decisively by 
    the market forces and have great flexibility.''
 China's central bank is undertaking a number of capital market 
    liberalization measures. In addition, Governor Zhou has endorsed a 
    project in which the Chicago Mercantile Exchange and the Foreign 
    Exchange Trade System & National Interbank Funding Center of China 
    will develop a currency futures market in China.
 Vice Premier Huang Ju has accepted my invitation to come to 
    Washington for an in-depth, high-level discussion of these issues.
 A new technical cooperation agreement on financial issues 
    related to exchange rates was announced by President Bush and 
    President Hu. China's Central Bank Governor and I will be 
    responsible for implementing this program.
 The G-7 finance ministries and the Chinese finance ministry 
    and central bank have begun talks on economic and financial market 
    issues for the first time ever. Their first meeting was last month 
    in Dubai.

    We are encouraged by the steps the Chinese are taking, but we urge 
continued and speedy progress toward the goal of exchange rate 
flexibility. The Chinese are discussing exchange rate policy in 
international fora, and at home. China's leadership recently called for 
active advance of the reform in the financials system and exchange rate 
policy. The leadership also recognized that opening up of its capital 
market is seen by Beijing as an important step in moving to a flexible 
exchange rate. Further, the establishment of a strong regulator will 
help China's banking system see much needed improvement. Success will 
require daily engagement with the Chinese. For this reason, the 
Treasury Department is establishing an attache presence in China.
    As this example of China indicates, I recognize the need to address 
exchange rates as part of our overall international economic strategy. 
But, as the example of China also indicates, I believe that the course 
we are on of financial diplomacy is the right course and the most 
effective way to bring about change.

Conclusion
    Strengthening the economic recovery in the United States is our key 
economic objective. I am very concerned about job creation in the 
United States. The President's Six Point Plan is designed to remove 
impediments to growth and job creation. We have undertaken an ambitious 
drive to remove rigidities and barriers wherever they exist and to 
thereby create a level playing field that promotes increased 
international trade. The G-7 Agenda for Growth is an important step 
forward. So, too, are the bilateral discussions we have had with many 
countries on economic and financial issues. We will continue to work 
hard to accomplish our objectives.

        RESPONSE TO WRITTEN QUESTIONS OF SENATOR CARPER 
                       FROM JOHN W. SNOW

Q.1. The Treasury report concludes that ``no major trading 
partners of the United States manipulated exchange rates.'' 
However, according to Japan's Ministry of, Finance, the 
Japanese Government has intervened more than 60 times since 
January 2000 in currency markets, spending over $220 billion on 
such actions. How do Japan's repeated and massive interventions 
square with your findings of no manipulation to gain trade 
advantages, particularly given the fact that high-ranking 
Japanese officials, including Prime Minister Koizumi, have 
indicated they are intervening in part to provide their exports 
with a competitive advantage?

A.1. The Omnibus Trade and Competitiveness Act of 1988 (the 
Act) directs the Treasury to analyze the exchange rate policies 
of other countries and consider whether these countries 
manipulate the rate of exchange between their currency and the 
dollar for purposes of preventing effective balance-of-payments 
adjustments or gaining unfair competitive advantage in 
international trade. We concluded, on careful examination, that 
Japan did not meet the technical requirements to be designated 
under terms of the Act. In carrying out the most recent 
analyses of exchange rate policies we consulted with the 
International Monetary Fund, as required under the Act. IMF 
management and staff concur with our assessment regarding 
Japan.
    This year, Japan has increased its money supply sharply to 
overcome deflation. Japan has also taken more vigorous steps to 

address its banking sector problems in an effort to provide a 
foundation for domestic, demand-led growth.
    In these circumstances, Japanese authorities have expressed 
concern that a strong and rapid appreciation of the yen would 
be inconsistent with Japan's underlying economic fundamentals 
and would jeopardize a fragile recovery.
    Even though we concluded that Japan did not meet the 
technical requirements under the Act, we have made clear to 
Japanese authorities that they should allow market forces to 
play a greater role in exchange rate determination.

Q.2. Japanese automakers have received substantial benefits of 
a direct export subsidy over the last several years from a weak 
yen, which is kept weak by the massive interventions by Japan. 
The weak yen has allowed Japanese automakers to reap a roughly 
20 percent windfall cost advantage over the past 3 years, which 
they have used in a variety of ways to gain market share here 
in the United States, as well as make record profits. Given 
that 60 percent of the U.S. trade deficit with Japan is in the 
automotive sector, is it U.S. Treasury policy to allow a 
foreign government to continue to provide such a substantial 
direct export subsidy when it makes up so much of our bilateral 
trade deficit with Japan?

A.2. The market for yen financial assets is very large and deep 
and Japan has no restrictions on capital flows that would limit 
pressure on its currency. Although Japan's intervention may 
have slowed the pace of yen appreciation, the yen has still 
strengthened materially over the last year. The yen has risen 
close to 10 percent against the dollar since the beginning of 
this year and over 20 percent since the beginning of 2002. Over 
the last 3 years the yen has fluctuated in a range of 135 to 
108 yen per dollar. The yen's value, in terms of the dollar, is 
currently roughly the same as it was 3 years ago.

Q.3. Mr. Secretary, I have auto plants in my State, which 
provide good jobs for good people. If this trend continues--if 
the yen is allowed to continue in its overly weak state--those 
auto plants and the good jobs they provide are going to be in 
danger. Over the past 3 years, Japan's auto exports to the 
United States are edging back up to near-historic levels, 
despite increased production facilities in the United States. 
How do you expect the U.S. auto industry to compete with 
Japanese automakers when Japanese automakers have a 20 percent 
cost advantage?

A.3. Japan's intervention has not resulted in growing exports 
to our market. Our bilateral trade deficit with Japan currently 
stands at $64 billion (average through September at an annual 
rate), down from a record high of $81.6 billion in 2002.
    In particular, merchandise imports from Japan have been on 
a downward trend since peaking in 2000 and so far this year are 
running about 21 percent below their 2000 level. As a result, 
goods imports from Japan as a share of nominal U.S. GDP have 
fallen to 1.1 percent--the lowest since 1980--from the 1.5 
percent share that prevailed in the latter half of the 1990's.
    Although imports of Japanese automotive products (cars, 
trucks, and parts) reached record levels in 2002, they have 
since moderated and through September were roughly 3 percent 
below their year-earlier level.

        RESPONSE TO WRITTEN QUESTIONS OF SENATOR MILLER 
                       FROM JOHN W. SNOW

Q.1. Mr. Secretary, Paul O'Neill, your predecessor, came before 
this Committee on May 1, 2002. I told him then, as I am telling 
you now, that as a Senator from Georgia, I have to be a little 
bit parochial. I have to look out for those 8 million people in 
Georgia. There are some industries in our State--forestry, 
textiles, automotive, agriculture, who have been complaining to 
me for over a year, pretty loudly, that the dollar is making it 
difficult for them to export profitably, and easier for imports 
to take their market share here in the United States. The paper 
industry has seen more than 90 percent of the growth in their 
U.S. markets captured by imports.
    How would you respond to my constituent industries that are 
so very concerned about this matter? How would you respond to 
Joyce Williams?
    Are you seeing any foreign countries engaging in currency 
manipulation with the U.S. dollar, for purposes of preventing 
effective balance of payments adjustments or gaining an unfair 
competitive advantage in international trade?
    What actions have you taken to date to encourage other 
governments to seek to strengthen their currency vis-a-vis the 
dollar? Is there anything further that you think should be 
done?

A.1. We are concerned about the difficulties that a number of 
U.S. industries have experienced. Soft domestic demand and weak 
growth abroad (which has hindered export growth) have been 
principal reasons for sluggish recovery in many industries. The 
U.S. economy is now showing healthier growth. The early and 
timely fiscal response of the Administration, working with 
Congress, and the Jobs and Growth Tax Relief Reconciliation Act 
enacted in May, have spurred an acceleration of real growth in 
GDP. Private analysts forecast this growth to continue at above 
4 percent, or around 1 percentage point above the growth in 
potential output, over the next year. We are now seeing the 
beginning of a turnaround in the labor market and sustained 
growth above potential should trigger stronger job gains, with 
several private sector estimates predicting the creation of 
about 2 million new jobs by the third quarter of 2004.
    The Administration's international economic strategy aims 
for higher economic growth throughout the world. For example, 
at the recent meeting of the G-7 Governors and Finance 
Ministers in Dubai, we gained agreement on a new ``Agenda for 
Growth.'' Under this milestone agreement, G-7 countries have 
committed to concrete structural reform actions to increase 
productivity, spur growth, and create jobs. They have agreed, 
for the first time, to a process for benchmarking and reporting 
on their performance.
    The Department of the Treasury, in carrying out its 
responsibilities under the Omnibus Trade and Competitiveness 
Act of 1988 (the Act), analyzes the foreign exchange policies 
of foreign countries, in consultation with the International 
Monetary Fund, and considers whether countries manipulate the 
rate of exchange 
between their currency and the dollar for purposes of 
preventing effective balance-of-payments adjustments or gaining 
unfair competitive advantage in international trade. In the 
October 2003 ``Report to Congress on International Economic and 
Exchange Rate Policies,'' Treasury concluded that no major 
trading partner of the United States met the technical 
requirements to be designated under terms of the Act. But in 
submitting the report, Secretary Snow explained that the Bush 
Administration believes that the international trading system 
works best with free trade, the free flow of capital and 
market-based exchange rates among the major economies. An 
efficient system of trade and finance, with fair and enforced 
rules, is essential for all nations, including the United 
States, to realize the greatest benefits from trade and to 
generate the highest levels of economic growth.
    This view was affirmed, in the context of the G-7 ``Agenda 
for Growth,'' in the Dubai communique statement on exchange 
rates: ``We reaffirm that exchange rates should reflect 
economic fundamentals. We continue to monitor exchange markets 
closely and cooperate as appropriate. In this context, we 
emphasize that more flexibility in exchange rates is desirable 
for major countries or economic areas to promote smooth and 
widespread adjustments in the international financial system 
based on market mechanisms.''

Q.2. In Fortune, from Sunday October 26, 2003, Warren Buffett 
said, ``But as head of Berkshire Hathaway, I am in charge of 
investing its money in ways tha t make sense. And my reason for 

finally putting my money where my mouth has been so long 
(investments in foreign currencies) is that our trade deficit 
has greatly worsened, to the point that our country's ``net 
worth,'' so to speak, is now being transferred abroad at an 
alarming rate.''
    Mr. Secretary if Warren Buffett is worried, why aren't you?

A.2. The October 2003 Report to Congress on International 
Economic and Exchange Rate Policies described how developments 
in the overall trade or current account balance reflect 
developments in national investment and saving. The current 
account deficit is conceptually equal to the gap between 
investment and saving. When investment in the United States is 
higher than domestic saving, then foreigners make up the 
difference, and the United States has a current account 
deficit. In contrast, if saving were to exceed investment, then 
the United States would have a current account surplus.
    In recent years, foreign interest in investing in the 
United States has permitted the United States to invest more 
than it otherwise would have been possible. Investment in the 
United States creates ``net worth.'' This additional U.S. 
investment allows business to pay better wages, and earn higher 
profits even after paying foreigners an appropriate return on 
their investment.

Q.3. The U.S. automotive sector believes Japan is manipulating 
its currency to maintain an unfair trade advantage. The 
industry believes the Japanese may be violating Article IV of 
the IMF Charter and Section 3 of the 1988 Omnibus Trade Act.
    Do you agree with them?

A.3. The Department of the Treasury, in carrying out its 
responsibilities under the Omnibus Trade and Competitiveness 
Act of 1988 (the Act), analyzes the foreign exchange policies 
of foreign countries, in consultation with the International 
Monetary Fund, and considers whether countries manipulate the 
rate of exchange between their currency and the dollar for 
purposes of preventing effective balance of payments 
adjustments or gaining unfair competitive advantage in 
international trade. In its most recent report, Treasury 
concluded, on careful examination, that Japan did not meet the 
technical requirements to be designated under terms of the Act. 
IMF management and staff concur with our assessment regarding 
Japan.
    Over the last 3 years, the yen has fluctuated in a range of 
135 to 108 yen per dollar. The market for yen financial assets 
is very large and deep and Japan has no restrictions on capital 
flows that would limit pressure on its currency. Although 
Japan's intervention may have slowed the pace of yen 
appreciation, the yen has still strengthened materially over 
the last year. The yen has risen close to 10 percent against 
the dollar since the beginning of this year and over 20 percent 
since the beginning of 2002.
    This year, Japan has increased its money supply sharply to 
overcome deflation. Japan has also taken more vigorous steps to 

address its banking sector problems in an effort to provide a 
foundation for domestic, demand-led growth. In these 
circumstances, Japanese authorities were concerned that a 
strong and rapid appreciation of the yen would be inconsistent 
with Japan's underlying economic fundamentals and would 
jeopardize a fragile recovery.
    Even though we concluded that Japan did technical 
requirements to be designated Act, we have made clear to the 
Japanese they should allow market forces to play exchange rate 
determination.



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