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

[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]

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

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

HEARING

before the

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

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

__________

APRIL 14, 2005

__________

Serial No. 109-13

__________

Printed for the use of the Committee on Ways and Means

_____

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COMMITTEE ON WAYS AND MEANS

BILL THOMAS, California, Chairman

E. CLAY SHAW, JR., Florida CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut FORTNEY PETE STARK, California
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. MCNULTY, New York
ROB PORTMAN, Ohio WILLIAM J. JEFFERSON, Louisiana
PHIL ENGLISH, Pennsylvania JOHN S. TANNER, Tennessee
J.D. HAYWORTH, Arizona XAVIER BECERRA, California
JERRY WELLER, Illinois LLOYD DOGGETT, Texas
KENNY C. HULSHOF, Missouri EARL POMEROY, North Dakota
SCOTT MCINNIS, Colorado STEPHANIE TUBBS JONES, Ohio
RON LEWIS, Kentucky MIKE THOMPSON, California
MARK FOLEY, Florida JOHN B. LARSON, Connecticut
KEVIN BRADY, Texas RAHM EMANUEL, Illinois
THOMAS M. REYNOLDS, New York
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana

Allison H. Giles, Chief of Staff

Janice Mays, Minority Chief Counsel

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

C O N T E N T S

__________

Page

Advisories announcing the hearing................................ 2

WITNESSES

Sanders, Hon. Bernard, a Representative in Congress from the
State of Vermont............................................... 12

______

President's Council of Economic Advisers, Kristin J. Forbes,
Ph.D., Member.................................................. 21
Office of the U.S. Trade Representative, Charles W. Freeman III,
Assistant U.S. Trade Representative of China Affairs........... 36
Congressional Budget Office, Douglas Holtz-Eakin, Ph.D., Director 47

______

Fisher-Barton Co., Watertown, WI, on behalf of the National
Association of Manufacturers, Richard Wilkey, President........ 86
International Federation of Phonogram Industries, on behalf of
the Recording Industry Association of America, Jay Berman,
Chief Executive Officer Emeritus............................... 96
Weil Brothers Cotton Company, Montgomery, AL, Robert S. Weil, II,
Chairman and Chief Executive Officer, National Cotton Council,
Vice President................................................. 102
U.S. Chamber of Commerce, Myron Brilliant, Vice President for
East Asia...................................................... 108
YKK Corporation of America, Marietta, GA, Alex Gregory, President
and Chief Executive Officer.................................... 118
Eastman Machine Company, Buffalo, NY, Robert Stevenson, Chief
Executive Officer.............................................. 122
Federal Express Corporation, Memphis, TN, David Spence, Managing
Director for Regulatory Affairs Legal Department............... 125

SUBMISSIONS FOR THE RECORD

Advanced Medical Technology Association, Meena Khandpur,
statement...................................................... 136
Alticor, Inc., Richard N. Holwill, statement..................... 138
American Apparel & Footwear Association, Arlington, VA, Nate
Herman, statement.............................................. 140
American Farm Bureau Federation, Robert Stallman, statement...... 142
American Forest & Paper Association, Donna Harman, statement..... 145
American Foundry Society, Shane Downey, statement and attachment. 148
American Iron and Steel Institute, China Currency Coalition,
Steel Manufacturers Association, John Nolan, joint statement... 152
American National Standards Institute, David L. Karmol, statement 156
ASTM International, West Conshohocken, PA, James Thomas,
statement...................................................... 160
Autor, Erik O., National Retail Federation, letter............... 186
Carteaux, William R., Society of the Plastics Industry, Inc.,
statement...................................................... 189
China Currency Coalition, John Nolan, joint statement............ 152
Coalition of Service Industries, Robert Vastine, statement....... 162
Computing Technology Industry Association, Roger Cochetti, letter 170
ContiGroup Companies, Inc., New York, NY, J.P. Gorgue, statement. 171
Downey, Shane, American Foundry Society, statement, and
attachment..................................................... 148
Gorgue, J.P., ContiGroup Companies, Inc., New York, NY, statement 171
Gregory, Alex, YKK Corporation of America, Marietta, GA,
statement...................................................... 200
Harman, Donna, American Forest & Paper Association, statement.... 145
Herman, Nate, American Apparel & Footwear Association, Arlington,
VA, statement.................................................. 140
Holwill, Richard N., Alticor, Inc., statement.................... 138
Johnson, Cass M., National Council of Textile Organizations,
statement...................................................... 175
Karmol, David L., American National Standards Institute,
statement...................................................... 156
Kellwood Company, Chesterfield, MO, Wendy Wieland Martin, letter. 172
Khandpur, Meena, Advanced Medical Technology Association,
statement...................................................... 136
Kondor Waffenamt, Apple Valley, CA, Richard Radcliffe, letter.... 174
Martin, Wendy Wieland, Kellwood Company, Chesterfield, MO, letter 172
Meakem, John, National Electrical Manufacturers Association,
Rosslyn, VA, statement......................................... 184
National Council of Textile Organizations, Cass M. Johnson,
statement...................................................... 175
National Electrical Manufacturers Association, Rosslyn, VA, John
Meakem, statement.............................................. 184
National Retail Federation, Erik O. Autor, letter................ 186
Nolan, John, American Iron and Steel Institute, China Currency
Coalition, Steel Manufacturers Association, joint statement.... 152
Radcliffe, Richard, Kondor Waffenamt, Apple Valley, CA, letter... 174
Society of the Plastics Industry, Inc., William R. Carteaux and
Karen Bland Toliver, statement................................. 189
Stallman, Robert, American Farm Bureau Federation, statement..... 140
Steel Manufacturers Association, John Nolan, joint statement..... 152
Stewart and Stewart, Terence P. Stewart Esq., statement.......... 193
Thomas, James, ASTM International, West Conshohocken, PA,
statement...................................................... 160
Toliver, Karen Bland, Society of the Plastics Industry, Inc.,
statement...................................................... 189
Vastine, Robert, Coalition of Service Industries, statement...... 162
YKK Corporation of America, Marietta, GA, Alex Gregory, statement 200

UNITED STATES-CHINA

ECONOMIC RELATIONS AND

CHINA'S ROLE IN THE WORLD ECONOMY

----------

THURSDAY, APRIL 14, 2005

U.S. House of Representatives,
Committee on Ways and Means,
Washington, DC.

The Committee met, pursuant to notice, at 11:03 a.m., in
Room 1100, Longworth House Office Building, Hon. William M.
Thomas (Chairman of the Committee) presiding.
[The advisory and revised advisory announcing the hearing
follow:]

ADVISORY

FROM THE
COMMITTEE
ON WAYS
AND
MEANS

CONTACT: 202-225-1721
FOR IMMEDIATE RELEASE
April 01, 2005
FC-6

Thomas Announces Hearing on

United States-China Economic Relations and

China's Role in the World Economy

Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways
and Means, today announced that the Committee will hold two trade-
related hearings in April: 1. United States-China Economic Relations
and China's Role in the World Economy, and 2. Implementation of the
Dominican Republic-Central America Free Trade Agreement (DR-CAFTA).

1. UNITED STATES-CHINA ECONOMIC RELATIONS AND CHINA'S ROLE IN THE WORLD
ECONOMY

The hearing on United States-China economic relations and China's
role in the world economy will take place on Thursday, April 14, 2005,
in the main Committee hearing room, 1100 Longworth House Office
Building beginning at 10:00 a.m. Oral testimony at this hearing will be
from both invited and public witnesses. Any individual or organization
not scheduled for an oral appearance may submit a written statement for
consideration by the Committee or for inclusion in the printed record
of the hearing.

BACKGROUND ON CHINA HEARING:

Since the United States and China established diplomatic relations
in 1979, China has become an increasingly important trading partner of
the United States and a major player in the global economy. Two-way
trade between the two countries has increased since that time, growing
from $4.8 billion in 1980 to $231.42 billion in 2004. In 2004, China
was the United States' third largest trading partner, the second
largest supplier of U.S. imports, and the fifth largest buyer of U.S.
exports. The U.S. trade deficit with China was $162 billion in 2004.
Ten percent of all U.S. trade is with China.

Reflecting its growing role in the world economy, China became a
member of the World Trade Organization (WTO) on December 11, 2001,
after many years of negotiations on its accession. Since its accession
to the WTO, China's integration into the world economy has proceeded
rapidly. As a result, Congress, the Administration, and the U.S.
private sector have focused on China's compliance with its WTO
commitments, its trade balance, the relationship between China's pegged
currency and trade with the United States, and other macroeconomic
policies.

The goal of this hearing is to discuss China's importance as an
economic partner to the United States and the issues surrounding the
United States-China economic relationship. In announcing the hearing,
Chairman Thomas stated, ``China is an important player in the U.S. and
global economies. We have been able to resolve many disputes, but we
face more challenges to ensure that China integrates itself into the
rules-based trading system that governs all WTO members. During this
hearing, we will focus on China's important economic role in the world,
its progress in meeting its trade commitments, and its macroeconomic
policies.''

FOCUS OF THE CHINA HEARING:

The hearing will focus on United States-China economic relations
and China's role in the world economy, with a narrower focus on the
following: (1) China's progress and U.S. response in the implementation
of China's WTO accession commitments (including issues relating to
China's enforcement of intellectual property rights, use of subsidies,
and the use of non-tariff barriers such as standards and import
licensing that affect imports); (2) trade relations between the United
States and China; (3) China's currency management and other
macroeconomic issues; and (4) the relationship between trade with China
and the U.S. economy, particularly the manufacturing sector.

DETAILS FOR SUBMISSIONS OF REQUESTS TO BE HEARD AT THE

CHINA HEARING:

Requests to be heard at the hearing must be made by telephone to
Michael Morrow or Kevin Herms at (202) 225-1721 no later than the close
of business Tuesday, April 5, 2005. The telephone request should be
followed by a formal written request faxed to Allison Giles, Chief of
Staff, Committee on Ways and Means, U.S. House of Representatives, 1102
Longworth House Office Building, Washington, D.C. 20515, at (202) 225-
2610. The staff of the Committee will notify by telephone those
scheduled to appear as soon as possible after the filing deadline. Any
questions concerning a scheduled appearance should be directed to the
Committee staff at (202) 225-1721.

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

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

In order to assure the most productive use of the limited amount of
time available to question witnesses, all witnesses scheduled to appear
before the Committee are required to submit 300 copies, along with an
IBM compatible 3.5-inch diskette in WordPerfect or MS Word format, of
their prepared statement for review by Members prior to the hearing.
Testimony should arrive at the full Committee office, 1102 Longworth
House Office Building, no later than close of business on Monday, April
11, 2005. The 300 copies can be delivered to the Committee staff in one
of two ways: (1) Government agency employees can deliver their copies
to 1102 Longworth House Office Building in an open and searchable box,
but must carry with them their respective government issued
identification to show the U.S. Capitol Police, or (2) for non-
government officials, the copies must be sent to the new Congressional
Courier Acceptance Site at the location of 2nd and D Streets, N.E., at
least 48 hours prior to the hearing date. Please ensure that you have
the address of the Committee, 1102 Longworth House Office Building, on
your package, and contact the staff of the Committee at (202) 225-1721
of its impending arrival. Due to new House mailing procedures, please
avoid using mail couriers such as the U.S. Postal Service, UPS, and
FedEx. When a couriered item arrives at this facility, it will be
opened, screened, and then delivered to the Committee office, within
one of the following two time frames: (1) expected or confirmed
deliveries will be delivered in approximately 2 to 3 hours, and (2)
unexpected items, or items not approved by the Committee office, will
be delivered the morning of the next business day. The U.S. Capitol
Police will refuse all non-governmental courier deliveries to all House
Office Buildings.

WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE AT THE

CHINA HEARING:

Please Note: Any person(s) and/or organization(s) wishing to submit
for the hearing record must follow the appropriate link on the hearing
page of the Committee website and complete the informational forms.
From the Committee homepage, http://waysandmeans.house.gov, select
``109th Congress'' from the menu entitled, ``Hearing Archives'' (http:/
/waysandmeans.house.gov/Hearings.asp?congress=17). Select the hearing
for which you would like to submit, and click on the link entitled,
``Click here to provide a submission for the record.'' Once you have
followed the online instructions, completing all informational forms
and clicking ``submit'' on the final page, an email will be sent to the
address which you supply confirming your interest in providing a
submission for the record. You MUST REPLY to the email and ATTACH your
submission as a Word or WordPerfect document, in compliance with the
formatting requirements listed below, by close of business Thursday,
April 28, 2005. Finally, please note that due to the change in House
mail policy, the U.S. Capitol Police will refuse sealed-package
deliveries to all House Office Buildings. Those filing written
statements who wish to have their statements distributed to the press
and interested public at the hearing can follow the same procedure
listed above for those who are testifying and making an oral
presentation. For questions, or if you encounter technical problems,
please call (202) 225-1721.

2. IMPLEMENTATION OF THE DOMINICAN REPUBLIC-CENTRAL AMERICA FREE TRADE
AGREEMENT

The hearing on implementation of the DR-CAFTA will take place on
Thursday, April 21, 2005, in the main Committee hearing room, 1100
Longworth House Office Building, beginning at 10:00 a.m. Oral testimony
at this hearing will be from both invited and public witnesses. Invited
witnesses will include Ambassador Peter F. Allgeier, Acting United
States Trade Representative. Any individual or organization not
scheduled for an oral appearance may submit a written statement for
consideration by the Committee and for inclusion in the printed record
of the hearing.

BACKGROUND ON DR-CAFTA HEARING:

On October 1, 2002, the President formally notified Congress that
he would pursue a Free Trade Agreement (FTA) with Central America.
Negotiations began in January 2003. Following nine rounds of
negotiations, agreement was reached with El Salvador, Guatemala,
Honduras, and Nicaragua on December 17, 2003, and with Costa Rica on
January 25, 2004. Negotiations to include the Dominican Republic in
CAFTA began in January 2004 and concluded on March 15, 2004. On May 28,
2004, Ambassador Robert Zoellick and ministers of five Central American
countries signed the CAFTA. On August 5, 2004, Ambassador Zoellick, the
Dominican Republic's Secretary for Industry and Commerce Sonia Guzman,
and representatives of five Central American nations signed the DR-
CAFTA.

The DR-CAFTA would immediately eliminate tariffs on more than 80
percent of U.S. exports of consumer and industrial products, phasing
out the rest over 10 years, thereby opening DR-CAFTA's markets to U.S.
goods, services, and farm products and leveling the playing field for
U.S. workers and farmers. Because the Central American countries
already enjoy duty free access to the United States for over 75 percent
of their exports, the agreement is estimated by the International Trade
Commission (ITC) to have minimal effect on imports to the United
States. At the same time, U.S. agricultural exports to the Dominican
Republic-Central American region are estimated to increase by nearly
$900 million under the agreement. The ITC found that manufacturers
would also benefit through increased exports, especially in sectors
such as fabric and yarn, information technology products, agricultural
and construction equipment, paper products, pharmaceuticals and medical
and scientific equipment. The agreement includes a negative list for
services with very few reservations. All agricultural and industrial
products are covered by the agreement. The agreement also contains
strong protections for U.S. investors.

The United States and the DR-CAFTA region had two-way trade of
$33.4 billion in 2004. The DR-CAFTA countries combined make up the 2nd-
largest U.S. market in Latin America, behind only Mexico. The United
States exports more than $15 billion annually to the region, making it
America's 13th-largest export market worldwide.

In announcing the hearing, Chairman Thomas stated, ``I am very
pleased not only about the potential commercial opportunities for our
countries but also about the stability and development that the DR-
CAFTA agreement brings to the region. This agreement will cement many
of the democratic, legal, and economic reforms that these countries
have struggled with in recent years, and it will do so while providing
expansive trade opportunities for U.S. goods and services immediately.
I look forward to moving this agreement quickly.''

FOCUS OF THE DR-CAFTA HEARING:

The hearing will examine the DR-CAFTA and the benefits that the
agreement will bring to American businesses, farmers, workers,
consumers, and the U.S. economy.

DETAILS FOR SUBMISSIONS OF REQUESTS TO BE HEARD AT THE

DR-CAFTA HEARING:

Requests to be heard at the hearing must be made by telephone to
Michael Morrow or Kevin Herms at (202) 225-1721 no later than the close
of business Tuesday, April 12, 2005. The telephone request should be
followed by a formal written request faxed to Allison Giles, Chief of
Staff, Committee on Ways and Means, U.S. House of Representatives, 1102
Longworth House Office Building, Washington, D.C. 20515, at (202) 225-
2610. The staff of the Committee will notify by telephone those
scheduled to appear as soon as possible after the filing deadline. Any
questions concerning a scheduled appearance should be directed to the
Committee staff at (202) 225-1721.

In order to assure the most productive use of the limited amount of
time available to question witnesses, all witnesses scheduled to appear
before the Committee are required to submit 300 copies, along with an
IBM compatible 3.5-inch diskette in WordPerfect or MS Word format, of
their prepared statement for review by Members prior to the hearing.
Testimony should arrive at the full Committee office, 1102 Longworth
House Office Building, no later than close of business on Monday, April
18, 2005. The 300 copies can be delivered to the Committee staff in one
of two ways: (1) Government agency employees can deliver their copies
to 1102 Longworth House Office Building in an open and searchable box,
but must carry with them their respective government issued
identification to show the U.S. Capitol Police, or (2) for non-
government officials, the copies must be sent to the new Congressional
Courier Acceptance Site at the location of 2nd and D Streets, N.E., at
least 48 hours prior to the hearing date. Please ensure that you have
the address of the Committee, 1102 Longworth House Office Building, on
your package, and contact the staff of the Committee at (202) 225-1721
of its impending arrival. Due to new House mailing procedures, please
avoid using mail couriers such as the U.S. Postal Service, UPS, and
FedEx. When a couriered item arrives at this facility, it will be
opened, screened, and then delivered to the Committee office, within
one of the following two time frames: (1) expected or confirmed
deliveries will be delivered in approximately 2 to 3 hours, and (2)
unexpected items, or items not approved by the Committee office, will
be delivered the morning of the next business day. The U.S. Capitol
Police will refuse all non-governmental courier deliveries to all House
Office Buildings.

WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE AT THE

DR-CAFTA HEARING:

Please Note: Any person(s) and/or organization(s) wishing to submit
for the hearing record must follow the appropriate link on the hearing
page of the Committee website and complete the informational forms.
From the Committee homepage, http://waysandmeans.house.gov, select
``109th Congress'' from the menu entitled, ``Hearing Archives'' (http:/
/waysandmeans.house.gov/Hearings.asp?congress=17). Select the hearing
for which you would like to submit, and click on the link entitled,
``Click here to provide a submission for the record.'' Once you have
followed the online instructions, completing all informational forms
and clicking ``submit'' on the final page, an email will be sent to the
address which you supply confirming your interest in providing a
submission for the record. You MUST REPLY to the email and ATTACH your
submission as a Word or WordPerfect document, in compliance with the
formatting requirements listed below, by close of business Tuesday,
April 26, 2005. Finally, please note that due to the change in House
mail policy, the U.S. Capitol Police will refuse sealed-package
deliveries to all House Office Buildings. Those filing written
statements who wish to have their statements distributed to the press
and interested public at the hearing can follow the same procedure
listed above for those who are testifying and making an oral
presentation. For questions, or if you encounter technical problems,
please call (202) 225-1721.

FORMATTING REQUIREMENTS FOR BOTH HEARINGS:

The Committee relies on electronic submissions for printing the
official hearing record. As always, submissions will be included in the
record according to the discretion of the Committee. The Committee will
not alter the content of your submission, but we reserve the right to
format it according to our guidelines. Any submission provided to the
Committee by a witness, any supplementary materials submitted for the
printed record, and any written comments in response to a request for
written comments must conform to the guidelines listed below. Any
submission or supplementary item not in compliance with these
guidelines will not be printed, but will be maintained in the Committee
files for review and use by the Committee.

1. All submissions and supplementary materials must be provided in
Word or WordPerfect format and MUST NOT exceed a total of 10 pages,
including attachments. Witnesses and submitters are advised that the
Committee relies on electronic submissions for printing the official
hearing record.

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

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

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

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

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

ADVISORY

FROM THE
COMMITTEE
ON WAYS
AND
MEANS

CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
April 07, 2005
FC-6-Revised

Change in Time for Hearing on

United States-China Economic Relations and

China's Role in the World Economy

Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways
and Means, today announced that the Committee hearing on United States-
China Economic Relations and China's Role in the World Economy,
previously scheduled for 10:00 a.m. on Thursday, April 14, 2005, in the
main Committee hearing room, 1100 Longworth House Office Building, will
now be held at 11:00 a.m.

All other details for the hearing remain the same. (See Full
Committee Advisory No. FC-6, dated April 1, 2005.)

Chairman THOMAS. Good morning. Since becoming a member of
the World Trade Organization in 2001 China's growth and
integration into the world economy has moved very quickly.
Trade between our two countries increased 50 times in 25 years
from 4.8 billion in 1980 to 231.4 billion in 2004. China is now
our third largest trading partner, the second largest supplier
of U.S. imports and the fifth largest buyer of U.S. exports.
China's growth, as you might expect, has led to friction and
calls for a diligent compliance monitoring and other causes.
For that reason the Committee has held hearings in the past and
continues to work with the Administration and directly with
Chinese officials. For example, last year Members met with
Chinese Vice Premier Wu Yi at the successful conclusion of the
U.S.-China Joint Committee for Commerce and Trade. We were
concerned then with the discriminatory standard for wireless
Internet equipment and a discriminatory VAT on semiconductors.
In both cases the Administration brought these matters to a
amicable resolution.
We underscored our concern about the rampant counterfeiting
of U.S. intellectual property, but despite some progress China,
in my opinion, has not resolved this significant problem. Not
only has it not resolved it, it hasn't resolved it inside its
own government offices. China's practice of pegging its
currency to the U.S. dollar is obviously also a focal point of
criticism. How China deals with certain macroeconomic issues is
also in question, particularly the state of its banking system,
the manner in which loans are granted, the artificially low
interest rates that create cheap money lead to unsound lending
practices. Our witnesses will hopefully keep us focused on
those particular items describing what impact they have on our
trade and other issues. I do look forward to hearing more about
what the Administration is doing to move China to a more
flexible exchange rate while not undercutting their very
fragile banking system.
Frankly, our biggest concerns are just exactly what do our
experts believe are appropriate steps to take and what are not
appropriate steps to take, both in the short term, the medium
and the long term because it is quite apparent, given the rapid
emergence of China on the world scene on trade, as indicated by
the impact on our trade numbers, that China is not only here to
stay but many people say that China has tomorrow all to itself.
I am interested in hearing how our other trading partners are
dealing with China's trade and macroeconomic policies, and
whether or not short of some of the major confrontations we
have seen, unfortunately, between major trading nations in the
World Trade Organization, how we might be able to work in a
coordinated way to continue to bring China into the world
family of responsible trading nations. Now I recognize the
gentleman from New York, Mr. Rangel, for any opening comments
he wants to make.
[The opening statement of Chairman Thomas follows:]
Opening Statement of The Honorable Bill Thomas, Chairman, and a
Representative in Congress from the State of California
Good morning. Since becoming a member of the World Trade
Organization (WTO) in 2001, China's growth and integration into the
world economy has moved very quickly. Trade between our two countries
increased 50 times in 25 years, from $4.8 billion in 1980 to $231.4
billion in 2004. China is now our third largest trading partner, the
second largest supplier of U.S. imports, and the fifth largest buyer of
U.S. exports.
China's growth, as you might expect, has led to friction and calls
for diligent compliance monitoring and other causes. For that reason
the Committee has held hearings in the past and continues to work with
the Administration and directly with Chinese officials. For example,
last year Members met with Chinese Vice-Premier Wu Yi at the successful
conclusion of the U.S.-China Joint Committee for Commerce and Trade. We
were concerned then with a discriminatory standard for wireless
Internet equipment and a discriminatory VAT on semiconductors. In both
cases, the Administration brought these matters to an amicable
resolution. We underscored our concern about the rampant counterfeiting
of U.S. intellectual property, but despite some progress, China, in my
opinion, has not resolved this significant problem. Not only has it not
resolved it, it hasn't resolved it inside its own government offices.
China's practice of pegging its currency to the U.S. dollar is
obviously also a focal point of criticism. How China deals with certain
macroeconomic issues is also in question, particularly the state of its
banking system, the manner in which loans are granted, and the
artificially low interest rates that create cheap money and lead to
unsound lending practices. Our witnesses will hopefully keep us focused
on those particular items describing what impact they have on our trade
and other issues. I do look forward to hearing more about what the
Administration is doing to move China to a more flexible exchange rate,
while not undercutting their very fragile banking system.
Frankly, our biggest concerns are just exactly what do our experts
believe are appropriate steps to take and what are not appropriate
steps to take, both in the short term, the medium and the long term.
Because it's quite apparent--given the rapid emergence of China on the
world scene of trade, as indicated by the impact on our trade numbers--
that China is not only here to stay, but many people say that China has
tomorrow all to itself.
I am interested in hearing how our other trading partners are
dealing with China's trade and macroeconomic policies and whether or
not, short of some of the major confrontations we've seen,
unfortunately, between major trading nations in the WTO, how we might
be able to work in a coordinated way to continue to bring China into
the world family of responsible trading nations.

Mr. RANGEL. Thank you. First let me thank you, Mr.
Chairman, for calling this hearing, and I hope at the end of
the day or at the end of the testimony of the Administration,
that we have a better understanding of what our trade policy
is, specifically what our trade policy is with China. It is
clear that the current trade policy has failed. It is also
clear that you mention trade in connection with any country or
combination of countries, and every problem that the United
States has is attributed to trade. I was a little surprised to
hear that people are now supporting the Central American Free
Trade Agreement (CAFTA) without justifying CAFTA because this
would unite us against a failed China policy. I don't think any
economists have challenged the fact that the trade deficit with
China and the trade deficit generally is very dangerous toward
the security, the economic security, but with the issue of
Taiwan constantly coming up, there is implications that even
from a military point of view China has been able to provide a
superior Navy around the Taiwan situation. So, I hope that it
will not be difficult for the Administration to admit that we
don't have a trade policy, and rather help us to try to develop
one. This is so serious, Mr. Chairman, I hope you don't mind if
I like to yield to Mr. Cardin who is very concerned about this.
Chairman THOMAS. I would tell the gentleman that the Chair
intended to recognize on their own time the Chairman of the
Trade Subcommittee and the Ranking Member of the Trade
Subcommittee since this is a broad-based full Committee
hearing, but that the bulk of the workload, as is always the
case, will be carried out in Subcommittee. If that is an
appropriate procedure with the Ranking Member, the Chair would
recognize the gentleman from Florida, Mr. Shaw, the Chairman of
the Trade Subcommittee.
Mr. SHAW. Thank you, Mr. Chairman. Today the Committee, as
you already have said, addresses one of the most pressing trade
issues facing American businesses and consumers, the impact of
global trade with the People's Republic of China. In my 3
months as Chairman of the Trade Subcommittee I have met with
many domestic interests, and one common theme exists: there is
considerable concern regarding our bilateral trade with China.
I look forward to hearing from our witnesses this morning and
working with you and our other colleagues on both sides of the
aisle to strengthen U.S. trade interests.
In 2001 China successfully joined the World Trade
Organization (WTO). Three years later Chinese exports grew by
an estimated 35 percent for a total of 593 billion, while its
imports grew by 36 percent for a total of 561 billion. These
figures are startling. China continues to pose many challenges
and opportunities for us. It is undeniable that China will
continue to grow and consumer more resources and produce more.
Much of this production will be for its own population which is
becoming more affluent, but even with remarkable annual growth
of over 9 percent, it will take many years for China to catch
up with the standards of living in the developed countries. We
are now just in a global economy. We are in a global
competition, and my interest is in making sure American
companies have the ability to compete. Trade statistics show
that the United States is one of the top export destinations
for Chinese goods but the Europeans are ahead of us on exports
to China. I would be interested to learn what they are doing
that we are not.
Many United States businesses have told me that one of the
reasons for this disparity is that when Chinese buyers are
shopping they cannot easily and quickly come to the United
States because of the restrictions and delays in obtaining
visas. I am told that if a German company wants to obtain a
visa for a Chinese buyer, the German Consulate can turn out a
visa in 24 hours. By the time the United States visa is issued
we have lost the sale. This is a hidden cost to the United
States' firms and I hope the witnesses will address that here
today. I support the Administration's strategy in engaging the
Chinese on a consistent and high level. The Administration has
been able to respond appropriately and firmly and has obtained
good results such as on the VAT issues. We still have the
intractable problem of intellectual property piracy in China
and in other countries. More work has to be done to open the
Chinese markets to our goods and services. Finally I want to
address the issue of the Chinese currency. I join the growing
chorus of concern about the manner in which Beijing has pegged
its currency to the dollar. I have heard from a number of
domestic industries opposing the Chinese policy of pegging the
currency to the dollar. I strongly support efforts to pressure
China to liberalize its currency. However, we must take care in
this approach. We cannot push to a crisis point. The prospect
of a devastating financial crisis is a distinct possibility. We
all remember the 1997 crisis with a shudder and we must remain
consistent with our world trade obligations and avoid
retaliation against our companies.
Mr. Chairman, I again applaud you for calling this hearing
and look forward to the panels.
Chairman THOMAS. Thank the Chairman. The Chairman would
recognize the gentleman from Maryland, the Ranking Member on
the Trade Subcommittee.
Mr. CARDIN. Let me thank the Chairman for this time, and
also thank the Chairman for holding this hearing on China. I
think this is one of the most important hearings that we can
hold in regards to our trade agenda. We have this hearing with
the backdrop of the most recent reports on the trade deficit
this past month, February, being $61 billion. We are on track
to exceed last year's record number deficit, which was $617
billion. Clearly, Mr. Chairman, these deficits are
unsustainable. We need trade policies that will reduce our
deficits, not increase our deficits, and we need to know what
steps are being taken by the Administration using our existing
trade rights and using our leverage within the WTO to reduce
those deficits.
The largest trade deficit that we have is with China. It
reached $162 billion in 2004, and in simple terms this means
that for every six ships that come into America with product
from China, only one leaves with product, five leave empty. If
you look at the type of products that are being exported by the
United States to China, you see that the leading categories are
basically junk or scrap steel or cardboard containers that are
used by China to send back product to the United States. That
simply is unacceptable. China has been increasing its ownership
of U.S. IOUs faster than any other country. The United States
now owes China more than $194 billion, and that has to raise
concerns. Our trade policies are not working. I believe this
Administration must be more aggressive in utilizing the tools
that are at their disposal to enforce U.S. trade rights.
Mr. Chairman, it has been pointed out that it has been
about 4 years since China's accession into the WTO. We were
told that by bringing China into the global rules-based trading
system that we would be able to engage China more aggressively.
It has not worked. What are the lessons that we learn from the
accession of China into the WTO? I know, Mr. Chairman, that we
are looking at other major countries for accession into the WTO
including Russia. I would hope that the lessons that we learn
from China that we can use in our negotiations with Russia. We
certainly don't want to see the same circumstance repeated
again.
My concern is that the Administration seems to be afraid to
use the rules to ensure that U.S. companies and workers get the
benefits that they are due under the WTO and the U.S. accession
agreement. Let me cite three examples if I might. First in
regards to piracy. The piracy rates in China are over 90
percent. I join Leader Pelosi, Mr. Rangel, Mr. Levin and other
Members urging this Administration to take action against China
in the WTO in regards to piracy. It is estimated to be $2.5
billion. Mr. Chairman, we are not just talking about the
entertainment community. We are talking about reverse
engineering of manufactured products that we see pirated in
China. We need to take action that we are entitled to take
under our trade remedies against China.
In that same letter we urged the Administration to take
action against China on currency manipulation. Each of us have
spoken to that. It is estimated that it may undervalue the
China currency by as much as 40 percent, placing the United
States' manufacturers, producers and farmers at just an unfair
position for access to the China market. We need to take action
against China now in regards to the currency manipulation.
Last, let me mention the issue of using the safeguard
mechanisms that were agreed to as part of the WTO accession
agreements, that we should be more aggressive in doing that.
Let me just mention textiles. We all know that the global
textile quota expired on January the 1st, and we have seen a
surge of textile products from China enter the U.S. market. We
need to be more aggressive in taking action against China.
In all three of these cases the Administration has failed
to take decisive action. We need to be more aggressive. Being
aggressive with trade policy can clearly make a difference. I
do look forward to listening to the witnesses that are on our
panel. I must say, Mr. Chairman, I am disappointed that no one
from Treasury is here to testify. I hope that is not an
indication that Treasury has no interest in the currency issue
in China because I do think we need to develop that capacity
within Treasury to be aggressive. I will be asking a question
to the Administration witness, and that is: our current polices
have not worked; what is your plan? What are you recommending
that we do in order to bring about a more favorable trade
position between the United States and China? Thank you, Mr.
Chairman.
Chairman THOMAS. Thank the gentleman. The Chair would
remind Members that one of the first hearings in early February
this Committee had was with the Secretary of the Treasury
himself, and that perhaps there may be additional deputy
secretaries that would be available to us if the Senate would
release the hold on the nominees that are currently over in the
Senate. It would be helpful if the gentleman could coordinate
his concern about the lack of Treasury representatives at this
hearing with the lack of the ability of the Senate to move
forward with filling those vacancies.
Mr. CARDIN. If the Chairman would yield just very quickly,
I would be glad to join him in making sure we have someone at
treasury that is focused on the currency issue in China, and I
would be glad to work with the Chairman in that regard.
Chairman THOMAS. I think you will find we have some
formidable witnesses, one in particular, who is perfectly
comfortable in testifying on the question of currency in China
just because she doesn't currently wear a hat that says
``Treasury deputy secretary.'' Any other Members who wish to
make a statement can do so by placing a written statement in
the record without objection. The Chair would now like to move
to the first panel which consists of one Member, the Honorable
Bernie Sanders, a representative from Vermont. Thank you for
being with us, Bernie, and any written statement that you have
will be made a part of the record, and you can see fit to
address us for the time you have in any way you see fit.

STATEMENT OF THE HONORABLE BERNARD SANDERS, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF VERMONT

Mr. SANDERS. Mr. Chairman, thank you very much, and Ranking
Member Rangel and distinguished colleagues for allowing me to
participate in what I consider to be an extraordinarily
important hearing. I do so as the author of legislation which
would repeal permanent normal trade relations with China, and
that legislation at this point has the support of 52 Democrats
and 18, 18 Republicans, and I think if that bill was brought to
the floor of the House, all of you would be very surprised at
the number of votes that we would get. Mr. Chairman, as I am
sure you know, Albert Einstein once said that, quote, ``The
definition of insanity is doing the same thing over and over
again and expecting different results.'' If that is true, then
certainly there can be only one to describe our current
unfettered free trade policy with China and other countries,
and that is that it is insane. Mr. Chairman, while I want to
say that I disagree very strongly with you and Mr. Shaw's view
on trade, I also have to say that I am very, very disappointed
in my Democrat colleagues. I think that both political parties
are way out of touch with what American workers and the
American people are feeling, and I think the American people
want fundamental changes in our trade policies, and I hope that
both parties will be able to do that.
The simple truth of the matter is, is that our current
trade policies have failed. One of the major reasons that the
middle class in America is shrinking, poverty is increasing and
the gap between the rich and the poor is growing wider is due
to our disastrous, unfettered free trade policies. If the
United States is to remain a major industrial power, producing
real products and creating good-paying jobs, we must repeal
permanent normal trade relations with China and develop a new
set of trade policies which work for the American middle class
and working class, and not just for the chief executive
officers of large corporations. Mr. Chairman, in the last 4
years we have lost about 16 percent of our manufacturing jobs.
In my own small State of Vermont we have lost 20 percent of
manufacturing jobs. From 1989 until 2004 we have lost at least
1.5 million jobs as a result of our trade relationship with
China.
Permanent Normal Trade Relations (PNTR) has also had a very
negative impact on wage growth. Real wages for the overwhelming
majority of American workers are declining and real wages today
are lower than they were some 30 years go. Is trade the only
reason for that? No. Is it a significant reason for that? Yes,
it is. Mr. Chairman, I am especially concerned about an issue
that we hear very little discussion about. What about the kids
who are graduating high school today? 30 years ago those young
people were able to get jobs in manufacturing plants, make
decent wages, decent benefits. Today they are working at
WalMarts, they are working at McDonald's, and their wages today
are precipitously lower than they were 25, 30 years ago. We
have got to deal with that issue.
Mr. Chairman, the simple truth of the matter is that I
didn't hear one word about that today. The simple truth is that
American workers cannot and should not be asked to compete
against desperate people in an authoritarian country like
China, people who are forced to work for 20 or 30 cents an hour
and who go to jail if they try to form an independent union or
stand up for political freedom. That is a patently absurd
policy which should not be allowed to continue. On behalf of
the American people we should not be allowing large
multinational corporations to throw American workers out on the
street, move their plants to China and other low-wage
countries, and then bring their products back into this country
tariff free or with almost no tariffs.
Mr. Chairman, year after year we were told by supporters of
PNTR about the great markets that would be open to us and all
the products we would be able to sell in China. The reality is,
however, that in 2004 we experienced a record-breaking $617
billion overall trade deficit. The U.S. trade deficit with
China alone was 162 billion, the largest ever bilateral trade
deficit with any country, and roughly equal to our total trade
deficit only 6 years ago. We are moving in exactly the wrong
direction in trade with China. According to the National
Association of Manufacturers, not great friends of mine, if we
continue our current policy our trade deficit with China will
more than double to over 330 billion in 2008. Incredibly, the
trade deficit with China has increased by 29 percent over the
last year alone, and almost 50 percent since the passage of
PNTR. How can this policy be a success when our trade deficit
is soaring year after year?
Mr. Chairman, in industry after industry corporate America
is shipping our manufacturing plants, our good-paying jobs to
China and other low-wage countries. Anyone who went Christmas
shopping this year knows that more and more products on the
shelves are made in China: toys, bicycles, computers,
televisions, shoes and sneakers, all kinds of clothing,
telephones, furniture, auto parts, even artificial Christmas
decorations. Mr. Chairman, you may remember those little flags
that the leadership gave us to wave, the little American flags
when we were commemorating the tragedy of 9/11. Those little
American flags were made in China. As bad as that is, we should
be very aware that PNTR with China is not only leading to the
destruction of traditional manufacturing and blue collar jobs,
it is beginning to lead to the destruction of our whole
information technology white collar job sector. Not only is
China rapidly becoming the manufacturing center of the world,
it is quickly becoming the information technology hub as well.
According to a recent study done by Gartner, 30 percent of our
information technology jobs are in danger of being outsourced
overseas during the next decade.
Andy Grove, the founder of Intel, predicted last year that
the United States will lose the bulk of its information
technology jobs to China and India over the next decade. John
Chambers, the chief executive officer of Cisco, was typical of
many high-tech leaders when he said, and I quote, ``China will
become the IT center of the world. . . . What we're trying to
do is outline an entire strategy of becoming a Chinese
company,'' end of quote. Mr. Chairman, the simple question is,
if we are losing our blue collar jobs in traditional
manufacturing, if we are losing our white collar jobs for our
college kids, where are the jobs going to be for our children
and our grandchildren? The Bureau of Labor Statistics already
tells us, as they project jobs into the future, that the
majority of the fastest-growing jobs in America are going to be
low wage jobs with on-the-job training. So, Mr. Chairman, I
think we cannot accept when people like Jeff Immelt of General
Electric say, and I quote, ``When I am talking to GE managers,
I talk China, China, China, China. You need to be there.''
Thomas Donahue, the chief executive officer of the U.S. Chamber
of Commerce urges, he urges American companies to send jobs
abroad. Bill Gates, the wealthiest man in America, tells us
that Communist authoritarian China has created, ``a brandnew
form of capitalism, and as a consumer it's the best thing that
ever happened.'' Mr. Chairman, the time is long overdue to
understand we have made a big mistake. It will be a disaster
for our country if we continue these trade policies. It is time
to rethink them, and I would urge you and Members of this
Committee to join me in demanding a repeal of PNTR with China
and the negotiating of a new trade policy which is fair to
American workers. Mr. Chairman, thank you very much.
[The prepared statement of Mr. Sanders follows:]
Statement of The Honorable Bernard Sanders, a Representative in
Congress from the State of Vermont
Chairman Thomas, Ranking Member Rangel, and my fellow colleagues,
as the author of legislation to repeal Permanent Normal Trade Relations
with China which has the support of 52 Democrats and 18 Republicans,
thank you for giving me the opportunity to testify today.
Mr. Chairman, as I'm sure you know, Albert Einstein once said that
``The definition of insanity is doing the same thing over and over
again and expecting different results''.
If that is true, then certainly there can be only one way to
describe our current unfettered free trade policy: insane.
The simple truth of the matter is that our current trade policy has
failed. One of the major reasons why the middle class is shrinking,
poverty is increasing, the gap between the rich and poor is growing
wider is due to our disastrous unfettered free trade policy.
But, I think it is safe to say that if I was a CEO who was making
500 times what the average worker earns, and tens of millions of
dollars in total compensation each and every year, I would tell you
that our trade policy has been a success. It has enabled me to throw
American workers out on the street, hire workers in China for 20 cents
an hour with no benefits to make my products, and ship those goods back
into the United States tariff free, or for virtually tariff free. And,
that's why corporate America spent more than $113 million to persuade
Congress to grant PNTR to China despite Harris polling showing 79%
opposition from the U.S. public. And, that's why corporate America
still supports PNTR today.
But, for the middle class, Normal Trade Relations with China has
been a different story. From 1989 until 2004, we have lost at least 1.5
million jobs as a result of our trade relationship with China. PNTR has
also had a very negative impact on wage growth. Real wages for the
overwhelming majority of U.S. workers are now lower than they were two
years ago. And, according to Richard B. Freeman, a Harvard economist,
who was quoted in a recent New York Times article said that millions of
skilled Chinese, Indian and other Asian workers entering the global
labor market will increasingly pull down American wages.
``Globalization is going to make it harder for American workers to have
the wage increases and the benefits that we might have expected,'' he
said.
Mr. Chairman, in 2004, we experienced a record breaking $617
billion trade deficit. The U.S. trade deficit with China alone was $162
billion, the largest-ever bilateral trade deficit with any country and
roughly equal to our total trade deficit only six years ago. In 1990,
our trade deficit with China was only $11.5 billion. Incredibly, the
trade deficit with China has increased by 29 percent over the last year
alone and almost 50 percent since the passage of PNTR. Very few experts
in this area doubt that the trade deficit will continue to escalate in
the years ahead, and in fact, we are headed towards a $700 billion plus
trade deficit this year.
According to the very conservative National Association of
Manufacturers, if we continue our current policy, our trade deficit
with China will more than double to over $330 billion in 2008.
In industry after industry corporate America is shipping our
manufacturing plants, our good paying jobs, to China where desperate
people are forced to work for wages as low as 20 cents an hour. Anyone
who went Christmas shopping this year knows that more and more products
on the shelves are made in China: toys, bicycles, computers,
televisions, shoes and sneakers, all kinds of clothing and hats,
telephones, furniture, auto parts and even artificial Christmas
decorations. Ironically, the little American flags that members of
Congress wave around are often made in China, as over 100 million of
them have been made there since 2001.
In the last 4 years the United States has lost 2.7 million
manufacturing jobs, over 16 percent of our entire manufacturing sector.
In my small state of Vermont we have lost 20 percent of our
manufacturing sector during that period. PNTR with China, and our
disastrous trade policies in general, are one of the key reasons for
that.
As bad as that is, we should be very aware that PNTR with China is
not only leading to the destruction of traditional manufacturing and
blue collar jobs. It is leading to the loss of millions of high-tech,
information technology jobs as well. Not only is China rapidly becoming
the manufacturing center of the world, it is quickly becoming the
information technology hub as well. These are the jobs, we have been
told for years, that our children would be inheriting and are being
educated for.
According to a recent study by Gartner, 30% of our information
technology jobs are in danger of being outsourced overseas during the
next decade.
Andy Grove, the founder of Intel, predicted last year that the
United States will lose the bulk of its information technology jobs to
China and India over the next decade. John Chambers, the CEO of Cisco,
was typical of many high-tech leaders when he said: ``China will become
the IT center of the world. . . . What we're trying to do is outline an
entire strategy of becoming a Chinese company.''
Mr. Chairman, if our manufacturing sector continues to collapse,
and we lose the bulk of our IT jobs to China and India in the next
decade, what jobs will be there for our kids? Good question. Let's get
an answer from the Bureau of Labor Statistics ``Jobs of the Future''.
According to this report 7 out of the top ten industries that will
experience the most job growth are low wage, low skill, low benefit
jobs: nursing aides, orderlies and attendants; waiters and waitresses;
janitors and cleaners; cashiers; food preparers and fast food servers;
customer service representatives; and retail salespersons.
What jobs does the BLS study tell us will be lost in the next
decade? The study says that we will lose 18 percent of our aerospace
manufacturing jobs, 12 percent of our computer and electronic
production workers, 17 percent of our chemical manufacturing jobs, 20
percent of our steel workers, 31 percent of our textile mill jobs, and
69 percent of our apparel manufacturing jobs.
And, Mr. Chairman, we must also not forget, that at the same time
that American companies are throwing workers out on the street and
shipping our decent-paying jobs to China, they are receiving hundreds
of billions of dollars in corporate welfare and tax breaks, and our
actually bragging about shipping our jobs overseas.
Jeff Immelt of General Electric says: ``When I am talking to GE
managers, I talk China, China, China, China, China. You need to be
there. . . . I am a nut on China. Outsourcing from China is going to
grow to $5 billion.''
Thomas Donahue, the CEO of the U.S. Chamber of Commerce ``urges''
American companies to send jobs overseas.
Bill Gates, the wealthiest man in America tells us that Communist
authoritarian China has created, ``a brand new form of capitalism, and
as a consumer it's the best thing that ever happened.''
Mr. Chairman in that context, what we have to understand is that
our trade policy has failed during Administration after Administration,
Congress after Congress, controlled by Republicans and Democrats. I
would respectfully assert that we have got to rethink our trade policy
and that is why I hope you will join me in supporting my legislation to
repeal PNTR with China.

Chairman THOMAS. The Chair thanks the gentleman from
Vermont. Any Member wish to inquire?
Mr. RANGEL. Yes, briefly.
Chairman THOMAS. Gentleman from New York.
Mr. RANGEL. What do you think the implication would be if
we killed the bill that we have with China as it relates to the
World Trade Organization?
Mr. SANDERS. I think obviously if the U.S. Congress
repealed PNTR it would have a profound impact on the whole
discussion of international trade and our relationship within
the WTO. Mr. Rangel, my view is that trade is a good thing, a
positive thing. My view is that our current trade policies are
a disaster for the American worker and that we have got to
renegotiate our trade agreements all across the board. I am
concerned about poor people throughout the world, and I want to
see their standard of living grow, but we don't have to destroy
the American middle class to improve the lots of poor people
around the world. So, clearly it would be profound, but I am
suggesting that the time is long overdue for this Congress to
take a profound step and stop the decline of the middle class.
Mr. RANGEL. Thank you.
Chairman THOMAS. Any additional inquiries? The gentleman
from Florida.
Mr. SHAW. Just briefly, Mr. Chairman. Mr. Sanders, we also
have concern about our trade relations with China and that is
why we are having that hearing today. So, we are hopeful to
learn from this. However, I think that cutting off trade, our
normal trade relations with China, concerned about several
things. One is what effect would that have on the $35 billion
exports that we have to China? Are any of those jobs in
Vermont?
Second, would it result in a partial collapse of the
Chinese economy, and what effect would that have on our economy
and the world economy? What effect would that have on
unemployment and global unemployment? I share your concern that
we have to level out our imbalance which is really growing out
of control and something we need to be very concerned about,
but I think that to use a meat ax on a problem that should be
negotiated would be a terrible mistake. I think we need to
negotiate. We need to get concessions from the Chinese, and I
think they will be forthcoming because the Chinese economy is
very dependent upon the United States, and I think that they
certainly want to do what they can to avoid our country taking
a radical step, as I consider would be of passage of the bill
that you are supporting.
Mr. SANDERS. Mr. Shaw, I would respond this way. you are
correct in saying that we have $35 billion in export to China
and that is a lot of money. As you know, we have five times as
much in terms of import, and that gap between exports and
imports is growing wider. So, the question, it is a fair
question, what impact the loss--and it is not a question of
loss--what impact it would have on our exports, but you also
got to consider what is happening to our economy as a result of
our disastrous trade deficit with China today, and not only in
jobs, but an issue that we don't discuss enough, wages. With an
explosion of technology and worker productivity, Mr. Shaw, why
aren't wages going up in the United States? Why are they
declining? Don't you think that that has something to do with
American workers being forced to compete against people who
make 30 cents an hour? You suggest that what I am proposing is
a meat ax, and in some way you are correct, but the reason that
I brought forth that legislation is I want to catch your
attention and the attention of the American people. The current
trade policies are failing, and nibbling around the edges is
not going to do it. I am not against trade with China. I think
there is a lot to be said for trade with China. It has got to
be done in a way that benefits us, not just large corporations.
Mr. SHAW. Thank you, Mr. Chairman.
Chairman THOMAS. Any additional Member? The gentlewoman
from Connecticut.
Mrs. JOHNSON OF CONNECTICUT. Thank you. You know, Mr.
Sanders, I agree with you that this is a serious matter that we
have to address. I was part of a bipartisan group that worked
on altering America's trade policy during the '80s to address
the impact of the entry of Japan into the world market, and
there are things that we can do and we must respond more
rapidly in 2005 than we had to respond in the '80s. I think it
is important to diagnose the issue correctly, and while we have
a lot more goods coming from China, we don't have a lot more
imports coming from all of Asia. There is a routing issue here
where goods are going from other Asian countries to China and
then to America, so it does--we just need to be accurate about
how we respond, about how we understand the problem so we can
be accurate in how we respond.
The other thing that I want to point out as we consider a
proposal as radical as yours is that we have done mighty
little, and particularly given the pace of change and the
environment we live in, to help make our companies more
competitive. There are lots of fronts on which we could be
moving ahead in a bipartisan fashion to address rising health
care costs, to address the unlevel playing field in
international tax policy, to address energy costs, to address
legal costs. Most of those initiatives get bogged down here in
Congress and take four or five years to attend to.
So, Congress has to begin thinking about domestic policy in
the context of the pace of change of a global environment, and
that is every bit as important. Our savings is the lowest it
has ever been at. So, you know all those problems. They are as
much a part of solving this as improved trade policy, and I say
to myself and I would say to you, make no mistake about that.
Mr. SANDERS. If I may briefly respond, Mrs. Johnson. I
certainly agree with your assertion that we have to deal with
domestic issues as well as we look at the overall trade
situation. We probably do not agree--I think we need a national
health care plan to put us on a level playing field, and you
probably disagree. More importantly, I think--and an issue I
haven't heard discussed, and Mrs. Johnson, you as a Member of
the Committee have to address it--talking about making our
companies more competitive. You know and I know that virtually
every major corporation in America today is investing huge
sums, tens and tens of billions of dollars in China, and I have
to tell you, I do not believe that there is anything that you
can do to make America competitive with China in terms of
wages, which to my view is the major issue. How are we going to
compete with a country that pays workers 30 cents an hour and
puts them in jail when they form a union? You tell me how we
are going to do that.
Mrs. JOHNSON OF CONNECTICUT. Mr. Sanders, we certainly
disagree on that. We have competed with countries that are
paying very low wages for decades, and we can do it, but it
requires a far more comprehensive analysis of both the problem
and our response to it, which is what this hearing is
initiating. It also means that domestically we don't have the
luxury of the same old debates that we have debated here in
this House for the last 20 years I have been here, and the
ability to change the nature of those debates is not impressive
to me. So, thank you.
Mr. SANDERS. Mrs. Johnson, with all due respect, I don't
think you have addressed that issue. Can the American worker,
should the American worker be forced to compete against
somebody who makes 30 cents an hour who goes to jail if they
want to form an independent union? I don't think any American
worker or any company can compete under those circumstances.
That is why they are going to China.
Mrs. JOHNSON OF CONNECTICUT. We certainly want a level
playing field, no question about it.
Mr. CARDIN. Mr. Chairman?
Chairman THOMAS. The gentleman from Maryland.
Mr. CARDIN. Thank you, Mr. Chairman. Mr. Chairman, those of
us who support what Mr. Sanders is pointing out about the need
for a dramatic change in our trade policy but disagree with the
approach that he would take in the repeal of the PNTR--which as
Mr. Rangel points out, the repeal of PNTR with China would
basically blow up the WTO--I think you have a responsibility to
suggest what would take its place. You have acknowledged that
trade is important, that we need to be engaged in international
trade, and if we don't use the WTO, what do we have? I think it
is incumbent upon those who believe that the WTO needs to be
basically repealed to give us what mechanism would be used.
I do want to point out that I am in complete agreement with
the point that you made. We need a dramatic change in trade
policy in this country, but I think it starts with enforcing
our trade rules that were hard negotiated, particularly the WTO
accession agreement. That gives us certain rights and we
haven't exercised those rights. We have rights under the WTO
and we haven't brought cases to them. Look, the currency
manipulation hasn't been tested. We think it is a no-brainer as
far as violating the principles of WTO. So, I guess the point
that I would bring out is that we agree with the frustration
that you have expressed and that we just can't do patchwork
change in our trade policy, that we must enforce our trade
rights and we must negotiate with our trading partners much
more effective trade agreements to recognize the differences
among our countries. To suggest that we pull out of
international trade without having another mechanism in place,
to me would be counterproductive.
Mr. SANDERS. Mr. Cardin, I agree with much of what you
said, but you still did not address that question. Should an
American worker I Maryland or Vermont be forced to compete
against somebody who makes 30 cents an hour and goes to jail if
he or she stands up for her----
Mr. CARDIN. Of course not.
Mr. SANDERS. Well, that is what the----
Mr. CARDIN. We should be in our trade agreements enforcing
international labor standards that make it clear. One of the
things that our party, the Democratic Party has stood for is
moving forward in international labor standards and trade
agreements because of the points that you bring out. We agree
with that point. The point is, how do you move forward on those
issues? We do have certain rights, and some of the issues that
you are referring to violate WTO standards, and we haven't
brought the cases against these countries.
Mr. SANDERS. Wait a second. If we agree with those
positions, then why did we enter PNTR? It is no secret that
workers in China go to jail when they stand up for their
rights, that they are working for horrendous wages, that there
is a huge amount, millions of workers prepared to work there
for nothing, almost nothing. We entered into that agreement
understanding that.
Mr. CARDIN. There were certain provisions in the PNTR that
Mr. Levin negotiated, that was negotiated in good faith that
are in those bills that provide for the monitoring, provide for
the actions to be taken, and this Administration has not taken
those actions.
Mr. SANDERS. Nor have past Administrations.
Mr. CARDIN. PNTR wasn't there--it wasn't implemented until
this Administration.
Mr. SANDERS. You are right, just NAFTA, right.
Mr. CARDIN. Just look at our timing, I hope a Democratic
Administration will have the opportunity to do that 1 day.
Chairman THOMAS. Any additional Member inquiries? The
gentleman from California, Mr. Becerra.
Mr. BECERRA. Thank you, Mr. Chairman. Mr. Sanders, thank
you very much for your testimony. One question to you. Any
comment on those who are saying that we must pass the Dominican
Republic Central American Free Trade Agreement that was
negotiated by this Administration with those countries
recently, and that may be before us this year or next year for
congressional approval? Any comment about those who say that we
must have this Central American deal; otherwise the situation
will get even worse with regard to China and the difficulties
for the Central American Dominican Republic?
Mr. SANDERS. Mr. Becerra, I think that the NAFTA policy has
failed, China has failed, and I do not, cannot understand why
anybody would want to expand a policy which is failing the
American people. So, I think CAFTA would be another disastrous
trade policy and I would hope we do not pass it.
Chairman THOMAS. The gentleman relinquish his time? The
gentleman from California relinquish his time?
Mr. BECERRA. Yes, Mr. Chairman.
Chairman THOMAS. Thank you. Thank you, Bernie. The Chair
would have some concern that if the response to every possible
trade agreement is that we shouldn't have one. That then
clearly draws a fundamental difference between many Members
of--I think all Members of this panel and the gentleman's
position. However, I do want to focus on the comments that the
gentleman from Vermont made about the mission of dealing with
China.
The Chair believes we are probably going to have a hearing
on Japan as well, but when you examine Japan and its lack of
natural resource but its ability to focus and become a power in
the world, when you take a look at China's assets at the
beginning of the process and how rapidly they have moved, there
is just no question that we are going to have to engage China
both in terms of a narrow trading partner, but as a phenomenon
in world trade that everyone needs to focus on. The Chair
appreciates the gentleman from Vermont's fundamental
presentation in front of the Committee that we have to deal
with it. How we deal with it is obviously going to be a matter
of disagreement, but there is no question that the China issue
is absolutely in the forefront, not just of the United States
and its trade, but frankly, the world. I want to thank the
gentleman.
Mr. SANDERS. Mr. Chairman, I want to thank you very much
for this opportunity. Again, my view is not that we should not
have trade. Of course we should have trade. It should be a
trade policy that works for the American worker. Thank you
again very much.
Chairman THOMAS. Thank you very much. The Chair is looking
at a series of votes, and would very much like to at least
begin the next panel, and then we will have to recess because
there is currently on the floor a motion to adjourn. We are
going to have then an additional 5 to 10 minutes of debate, and
then we will go to a series of votes. The Chair is not inclined
to go over and vote on the motion to adjourn, and the Chair
intends to continue to run the Committee until we have votes on
the previous question and on the rule.
With that, the Chair would ask if Dr. Kristin Forbes, who
is a member of the President's Council of Economic Advisers;
and Charles W. Freeman, III, the Assistant U.S. Trade
Representative on China Affairs, would please come forward to
the dais. The third member of the panel, Dr. Douglas Holtz-
Eakin, our Director of the Congressional Budget Office, will
join us at some time during the hearing. He is currently
engaged in other activities, will be here as soon as possible.
First of all thank you, and any written testimony you may have
will be made a part of the record and you may address in any
way you see fit for the time you have, and I will begin with
Dr. Forbes and then move to Mr. Freeman. Dr. Forbes.

STATEMENT OF KRISTIN J. FORBES, PHD, MEMBER, PRESIDENT'S
COUNCIL OF ECONOMIC ADVISERS

Ms. FORBES. Mr. Chairman, Ranking Member and Members of the
Committee, thank you for inviting me to testify. I will briefly
summarize my longer written testimony which focuses on China's
economic development and how China's growth has affected global
trading patterns in the U.S. economy. I will also discuss how
the Administration has followed a multi-pronged strategy to
ensure that the United States continues to benefit from China's
economic emergence. China's recent economic performance has
been impressive. Since 1980 China's annual rate of real GDP
growth averaged over 9 percent. That is among the most rapid
sustained periods of growth observed anywhere in the world at
any time. China's rapid economic growth has generated a
dramatic improvement in the lives of Chinese citizens. The
World Bank reports that China's economic growth has been the
single most important factor countering global poverty since
the 1980s.
Despite these important accomplishments, China continues to
face significant structural economic challenges: a weak banking
system, environmental degradation, a rapidly aging population
and inefficient state-owned enterprises. China also faces a
number of immediate challenges related to its rapid growth and
overheating economy including bottlenecks, shortages and a
potential housing price bubble in select cities. The government
has relied largely on administrative controls instead of more
market-based mechanisms to try to slow growth, creating
additional economic distortions that will lower productivity
and growth in the future. Therefore, as we discuss economic
engagement with China, it is important to keep in mind the
substantial challenges that China faces. As China's economy has
developed China has played a more important role in global
trade flows. China's demand for imports has boosted export
growth in many economies, especially Asian neighbors and
commodity exporters. Although China's exports have increased
drastically, if you will look at the chart there, this has
raised concerns about other countries' abilities to compete
with these exports. This export growth is not unprecedented.
The graph right there replicates Figure 4 in the testimony. As
you can see on the graph, several Asian economies such as Japan
and Korea have actually experienced even more rapid export
growth during their periods of rapid economic development than
recently experienced by China.
As China has grown, U.S. exports to China have increased
dramatically so that China is currently the fifth largest
export market for the U.S. U.S. exports to China have increased
by nearly 115 percent since 2000, as shown on the graph. This
is the fastest rate of increase to any country in the world
over this period. This increase in U.S. exports to China is
particularly noteworthy considering that U.S. exports to the
rest of the world were fairly stable between 2000 and 2004, as
shown in the graph also. Even if growth in China moderates,
China can continue to be an important source of U.S. export
growth in the coming years. Although U.S. imports from and
exports to China have both been increasing rapidly, the U.S.
had a trade deficit with China equal to about 1.4 percent of
U.S. GDP in 2004. Although trade with China is often blamed for
the recent increase in the trade deficit, this is not entirely
accurate for three reasons.
First, as shown in the figure, the U.S. trade deficit,
excluding China, the full bar, has also risen sharply. Trade
with China accounted for roughly a quarter of the increase in
the U.S. trade deficit since 1997. That is only slightly more
than the contributions to the increase in the U.S. trade
deficit from NAFTA and from Europe. In fact, China's
contribution to the overall U.S. trade deficit today is
currently less in percentage terms than it contributed in 1997.
Second, increased imports from China largely reflect
decreased imports of the same goods from other countries
instead of a net increase in the U.S. trade deficit. Many of
the products that the U.S. currently imports from China were
previously imported from other countries, not produced in the
United States. As shown on the next graph, although the share
of U.S. imports coming from China (the red part of the bar) has
increased since 1990, the share of imports coming from the
other countries in the Pacific rim (which is the rest of the
bar) has actually fallen by even more than the increased share
of imports coming from China. Therefore, the share of total
imports coming into the U.S. from the Pacific Rim, including
China, has actually fallen. Much of China's recent increase in
the U.S. import share (the red part of the graph) has largely
come at the expense of Japan (the yellow part of the graph).
Third, it is important to keep in mind that we should be
focusing on the multilateral trade balance instead of the
bilateral balance between any two countries to understand the
corresponding factors that are causing the large U.S. trade
deficit. A multilateral trade deficit reflects a shortage of
national saving relative to national investment. Therefore, if
the U.S. trade deficit could suddenly be reduced, this would
need to occur with a corresponding adjustment in other
variables, such as an increase in the U.S. trade deficit with
other countries, an increase in U.S. national saving or a
decline in U.S. national investment.
The Administration has been pursuing an active and multi-
pronged agenda to ensure that the U.S. continues to benefit
from China's growth and increased trade flows. Individual
sectors of the U.S. economy have faced increased competitive
pressure due to China's increased role in global trade.
Adjusting to these changes can be difficult, not only for
individual companies but also for their families and their
communities. Therefore, the Administration has taken a number
of steps to help individuals adjust to these changes and to
ensure that U.S. workers have adequate skills in order to
succeed in new job opportunities, adopt new technologies and
benefit from increased trade. Several Administration programs
and new proposals to achieve these goals include the recent
expansion of trade adjustment assistance, the President's Jobs
for the 21st Century Initiative, a pilot program for Personal
Reemployment Accounts, and a proposal for opportunity zones
that will help workers in poor communities and communities that
have lost jobs in sectors such as manufacturing and textiles.
As a strong signal of commitment to all of these programs, the
President has proposed over $21 billion for worker training and
employment programs in the 2006 budget. In addition to taking
steps to help U.S. workers adjust to increased global trade
flows, the Administration has also actively engaged to ensure
that China continues to open its market to U.S. imports and
fully implements its commitments to the WTO. The Administration
is also encouraging China to reduce barriers to capital flows,
develop more sophisticated capital markets and adopt a more
flexible exchange rate regime. The Administration believes that
now is the appropriate time for China to move to a more
flexible exchange rate regime. It is in China's best interest
to adopt a more flexible currency now while economic growth is
strong. A more flexible currency would provide China with
greater independence in monetary policy, a step that could be
very useful today to help reduce the current risk of
overheating.
The Chinese authorities have clearly stated their intent to
move to a more flexible exchange rate regime. Although they
have not specified a date for this adjustment, China has taken
a number of steps over the past year to develop the
infrastructure and tools to successfully adopt more exchange
rate flexibility. For example, China is developing foreign
exchange trading including hedging instruments and internal
controls on foreign exchange exposure. Last month China
announced steps to allow foreign banks to trade and quote
prices in eight currency pairs. This provides a platform that
can now be used to trade a more flexible yuan. The
Administration, led by the Treasury Department, has also been
actively involved in assisting the Chinese authorities in
resolving concerns in areas they see as obstacles to exchange
rate flexibility. For example, the U.S. Treasury has
established a technical cooperation working group that had
three sessions with China in 2004 to focus on these issues.
Additional sessions are already planned for 2005. I have
participated in a Joint Economic Committee meeting last fall,
chaired by Secretary Snow, to discuss financial and exchange
rate issues with senior Chinese officials. The U.S.
Administration has recently built on these bilateral
engagements by continuing to work through multilateral
channels.
For example, the International Monetary Fund has repeatedly
called for China to adopt a more flexible exchange rate regime
including more recently in its World Economic Outlook, which
was just released as part of this weekend's Bank/Fund meetings.
A final key pillar of the Administration's strategy to ensure
that the U.S. benefits from China's rapid growth and increased
trade flows is to strengthen the U.S. economy and ensure that
the U.S. is an attractive location for companies to do
business. To achieve these goals the Administration will
continue to restrain spending, strengthen institutions for
future generations and support pro-growth policies. The
Administration will continue to enforce our trade agreements
and lower barriers to trade through multilateral and bilateral
trade agreements to ensure that U.S. companies can successfully
compete in foreign markets.
GDP growth in the U.S. in the last 2 years was higher than
in any other member of the G-7 group of developed economies.
This trend is expected to continue in 2005, as shown on the
graph. The IMF just released new predictions that growth in the
U.S. will be 3.6 percent in 2005. That is stronger than in
every other member of the G-7, and double the expected growth
rates in Germany, Japan and Italy. Therefore, to conclude, as
we discuss different proposals to shape the future of the U.S.
and its relationship with China, we must be careful not to
threaten this success with short-term fixes that could damage
our long-term competitiveness. Instead, as the U.S.
Administration pursues an active and multi-pronged agenda to
ensure that the U.S. benefits from rapid growth and development
in China, we must remember that any steps taken to smooth this
adjustment should also ensure the U.S. continues to be a
competitive and dynamic economy. The Administration is
committed to continuing and building on these efforts.
Thank you.
[The prepared statement of Ms. Forbes follows:]
Statement of Kristin J. Forbes, Ph.D., Member, President's Council of
Economic Advisers
Mr. Chairman and Members of the Committee, thank you for inviting
me to testify on the subject of China's economy and the impact of
China's development on global trade and the U.S. economy. I will begin
by discussing China's recent economic performance--highlighting not
only its successes, but also its ongoing challenges. Then I will
discuss how China's growth and development are affecting global trading
patterns. Next I will provide a more specific evaluation of how China's
development is impacting the U.S. economy, focusing on U.S. trade
patterns, the U.S. trade deficit, and U.S. employment. Finally, I will
close by describing steps the Administration has taken and will
continue to take to help the United States adapt to and benefit from
China's economic development.
A key theme throughout my comments is that China's rapid economic
growth and its emergence as an important force in the global economy
and global trading system presents a valuable opportunity for the
United States. China (along with the United States) has recently been a
key engine of global growth and China has been among the fastest
growing market for U.S. exports. Adjusting to China's economic
emergence, however, also presents challenges. The U.S. Administration
is pursuing an active and multi-pronged agenda to ensure that the
United States is able to benefit from these changes and to help
facilitate the adjustment process. Although this process will be
difficult at times, any steps taken to facilitate adjustment should
also be aimed at supporting, if not improving, the competitiveness and
dynamism of the U.S. economy.
China's Economic Performance

Although China's recent economic performance has been impressive
and received substantial attention, the country still faces imposing
challenges, such as resolving longer-term structural problems and
addressing shorter-term risks related to overheating. In 2004, China's
growth rate in real GDP was 9.5% (according to official Chinese
government statistics).\1\ This was among the fastest rates of economic
growth anywhere in the world--although several countries rebounding
from sharp recessions (such as Venezuela and Uruguay) experienced
higher growth rates in 2004. Even more important than strong GDP growth
in any given year, however, is a country's ability to maintain strong
growth over an extended period of time. According to this criterion,
China's economic performance is even more remarkable. Since 1980
China's annual rate of real GDP growth averaged over 9%--among the most
rapid, sustained periods of growth observed anywhere in the world at
any time. [Figure 1.]
---------------------------------------------------------------------------
\1\ Chinese government statistics are imprecise and subject to
error. Private sector estimates indicate that real GDP growth in China
was likely higher than the official government estimates in 2004.

[GRAPHIC] [TIFF OMITTED] 23921A.001

This sustained rate of strong GDP growth has raised China's total
annual output from about $300 billion in 1980 to more than $1.6
trillion today. At the end of 2004 China was the world's seventh
largest economy when total output is measured using current exchange
rates, ranking just behind Italy and ahead of Canada. Using purchasing-
power parity exchange rates (which adjust for price differences for the
same goods across countries), China was the world's second largest
economy--ranked only behind the United States.
China's rapid economic growth has generated a dramatic improvement
in the lives of Chinese citizens. Faster economic growth is the only
way to substantially and permanently raise peoples' standards of living
and provide resources to reduce poverty. In 1980, China's per capita
income was approximately $220--less than that of countries such as
Chad, India, Ghana, and Nigeria. Today China's per capita income has
increased nearly five-fold to more than $1,000--so that the average
citizen in China is more than three times as wealthy as the average
person in Chad, Ghana and Nigeria, and closer to average income level
in countries such as the Philippines.
China's social indicators have also improved significantly. Since
the 1970's, average life expectancy in China has risen from 65 to 72
and adult illiteracy has fallen by half. From 1980 to 2000, infant
mortality fell by nearly 20%. But perhaps the most noteworthy, and most
uplifting, has been how China's growth has reduced global poverty. The
World Bank reports that China's economic growth has been the single
most important factor in countering global poverty since the 1980's.
Since 1980, over 220 million Chinese citizens have been lifted above
the global poverty line. Nearly 75% of the reduction in poverty
throughout the developing world has taken place in China. During the
same period, China's rate of rural poverty declined by 89%. During just
the 1990's, the number of people consuming the equivalent of less than
$1 per day declined from 368 million to 265 million.\2\
---------------------------------------------------------------------------
\2\ World Bank Country Assistance Strategy for China. February
2003. Speech by World Bank Vice President for Asia and the Pacific.
October 17, 2004.
---------------------------------------------------------------------------
Despite these important and impressive accomplishments, China
continues to face significant economic challenges. The banking system
is still dominated by the government, causing an inefficient allocation
of credit and impeding the growth of domestic capital markets. The
banking system is believed to be insolvent if assessed according to
western accounting standards, and the value of bank loans that are
likely to never be fully repaid may be as large as 40% of GDP. China's
rapid growth and heavy reliance on coal to satisfy its energy
requirements have caused severe environmental damage. China's
population is aging rapidly, with the ratio of working-age people to
retirees falling from about six today to two in 2040. This will impose
significant fiscal costs on the government, especially as many citizens
have no formal pension or health care coverage. State-owned enterprises
consume a large share of public resources, contribute to banks' non-
performing loans, and constrain the credit available to fund private-
sector development. At the same time that the Chinese government is
attempting to restructure its inefficient state-owned enterprises--
often resulting in substantial layoffs--the government is concerned
about creating jobs rapidly enough too absorb over 200 million new
labor market entrants over the next decade.
In addition to each of these longer-term structural challenges,
China also faces a number of immediate challenges related to its rapid
growth and overheating economy. After experiencing real GDP growth of
9.3% in 2003, the Chinese government took a number of steps to attempt
to rein in growth. Most of these steps were in the form of
administrative controls and central government directives. For example,
the government expanded price controls, placed restrictions on
investment in certain sectors, and rationed bank credit for certain
projects. The central bank of China raised interest rates (albeit only
by 27 basis points) in October of 2004 and relaxed controls on certain
interest rates so that banks could charge more for loans. Despite these
attempts to slow growth, real GDP growth accelerated to 9.5% in 2004--
well above the government target of about 7%.
This potentially unsustainable rate of growth presents a number of
risks. Bottlenecks and shortages have already occurred in a number of
sectors--including energy and transportation. Inflation could also pick
up quickly. Although inflation fell slightly to 2.8% (y/y) in 2004 from
3.2% (y/y) in 2003, this was a sharp pickup from deflation in 2002.
Moreover, recent data suggest that inflation increased again in 2005--
reaching 3.9% (y/y) in February. One price increase of particular
concern is the sharp rise in housing prices in major cities, which some
analysts have interpreted as evidence that Chinese cities are
experiencing a housing bubble. Average residential housing prices in
the city center of Shanghai jumped 28% in 2004.\3\ Although the
government has recently taken steps to rein in housing prices--such as
raising down-payment requirements, increasing mortgage costs, and
raising the tax rate on short-term capital gains for real estate in
Shanghai--it is unclear if these steps will be effective.
---------------------------------------------------------------------------
\3\ Source: Economist, ``Property in China'', March 23, 2005.
---------------------------------------------------------------------------
Moreover, by relying mainly on administrative controls instead of
more market-oriented mechanisms to try to slow growth throughout the
economy, China is creating additional economic distortions that will
lower productivity and growth in the future. These concerns are
supported by recent data on fixed investment. Investment in fixed
assets (such as factories, equipment, property and infrastructure) has
been increasing rapidly--growing by almost 26% in 2004--so that fixed
investment in 2004 reached 51 percent of GDP according to official
Chinese statistics. This is very high and well above rates observed
elsewhere. For example, the investment-to-GDP level in India and the
United States averaged about 23% and 18%, respectively, over the decade
through 2002. The average ratio for lower-middle income countries
(which includes China) was 26%. The level and growth of fixed
investment in China suggest that resources are not being used
efficiently and therefore it will be increasingly difficult to sustain
high growth rates.
If the Chinese economy is overheating and ``bubbles'' have formed
in some sectors, such as housing, any adjustment could be sharp and
severe. In the past twenty-five years, China experienced three episodes
of overheating--in 1982, 1987, and 1992. In the first two of these
episodes, a sharp increase in inflation was immediately followed by a
rapid slowdown in growth. Although a slowdown in China could reduce
global commodity prices, thereby benefiting net commodity importers, a
sharp fall in Chinese growth could have serious repercussions for
countries that have relied heavily on exports to China to support
growth. This risk is greatest for many Asian economies and countries
that are commodity exporters.
Therefore, as we discuss U.S. economic engagement with China, it is
important to keep in mind the substantial challenges China currently
faces in maintaining its high rate of economic growth and how China's
strong economic growth has benefited the global economy. Although China
has had remarkable success in raising its per capita income level, it
is still a relatively poor country (especially when compared to many of
its Asian neighbors). Although China's rapid growth has lifted hundreds
of millions of people out of poverty, there are still hundreds of
millions of people in China living in abject poverty. The World Bank
estimates that over 200 million Chinese (about 15% of the population)
remain below the international poverty threshold of $1 per day.
Moreover, since the United States and China are expected to be key
drivers of global economic growth in 2005, any policies that cause a
sharp economic slowdown in China could undermine global economic
growth. It is in the interest of the United States and entire global
economy that China reduces its risk of overheating, avoids a sharp
economic slowdown, addresses its significant structural challenges, and
continues to be a robust engine of global growth.
China and Global Trading Patterns

As China's economy has grown and developed, China has played a more
important role in global trade flows. My colleague from USTR will
provide a more detailed discussion of China's trading relationships, so
I will only comment briefly on this topic. I will focus on the broader
implications of China's emergence as an important participant in global
trade.
China's emergence as a major participant in world trade is fairly
recent. Total imports to and exports from China were modest throughout
the 1980's. [Figure 2.] Imports and exports grew more rapidly in the
mid-1990's, partially in anticipation of China's entry into the WTO.
China's trade flows have increased even more dramatically since 2000.
As a result, the level of Chinese goods' imports and exports has more
than tripled over the past five years.

[GRAPHIC] [TIFF OMITTED] 23921A.002

Focusing first on China's imports, China's increased demand for
foreign manufactured goods and raw materials has been dramatic. In
fact, China is now the world's largest importer of both iron and steel,
and the world's third largest importer of manufactured goods. China now
purchases about one-third of global soybean imports and one-quarter of
global cotton imports. China's imports of both manufactured goods and
raw materials have more than doubled over the past seven years. China's
demand for imports is particularly striking when measured relative to
GDP per capita. Data from the International Monetary Fund indicate that
at the end of 2003 China imported $363 worth of goods per dollar of per
capita income--far higher than the comparable $34 for the United
States, $20 for Germany, $13 for the United Kingdom and $11 for Japan.
This increased Chinese demand for imports has boosted exports and
growth in many economies, especially Asian neighbors and commodity
exporters.
Some U.S. business owners are surprised to see this rapid growth in
China's imports, since many companies have faced challenges penetrating
the domestic Chinese market. It is true that there are hurdles to doing
business in China--such as the weak protection of intellectual property
rights and difficulty complying with Chinese regulations that are often
not transparent. Even with these challenges, however, China has made
progress opening up relatively quickly in a short period of time.
[Figure 3.] According to the most common economic measure of openness
(the share of imports in GDP), China's imports of goods are roughly 34%
of GDP, well above the 13% share for the United States and 10% share
for Japan.

[GRAPHIC] [TIFF OMITTED] 23921A.003

Turning next from China's imports to its exports, although China's
exports have increased rapidly, this growth is not unprecedented.
Several Asian economies actually experienced even more rapid export
growth during their period of rapid economic development than China.
For example, Japan, South Korea, and the newly-industrialized economies
of Asia (Hong Kong, Singapore and Taiwan), had even faster export
growth over an extended period of time than recently experienced by
China. [Figure 4.]

[GRAPHIC] [TIFF OMITTED] 23921A.004

This combination of rapid growth in both Chinese imports and
exports has generated a moderate trade surplus for China over most of
the last 15 years. The trade balance has recently increased slightly,
from 1.8% of GDP in 2003 to 2.0% of GDP in 2004. (China's current
account surplus increased from 3.2% to 4.2% of GDP over the same
period.) Much of this trade surplus, however, results from trade with
the United States (discussed in more detail below). China has actually
had trade deficits or very modest surpluses with many other economies
and regions of the world. For instance, in 2004 China had a trade
deficit equivalent to 1.4% of GDP with Japan, 2.3% of GDP with Korea,
and 3.5% of GDP with Taiwan. China's trade deficits with most countries
are so large that China has sustained a trade deficit with the world
excluding the United States for several years, and in 2004 China's
trade deficit with the world excluding the United States was 2.9% of
GDP. [Figure 5.]

[GRAPHIC] [TIFF OMITTED] 23921A.005

Another important aspect of China's growing trade integration with
the global economy is the role of foreign direct investment. Although
China still maintains controls on many types of capital flows, China is
fairly open to most types of foreign direct investment (FDI). Net FDI
in China totaled $64 billion in 2004, making China the world's second
largest FDI recipient in that year (after the United States). On a
cumulative basis, the United States is the second largest foreign
investor in China after Hong Kong, with $48 billion invested through
2004.
High levels of foreign investment in China are closely related to
China's trade flows because many of ``China's exports'' to other
countries are actually goods produced by multinational companies in
China or Chinese companies that are partially owned by foreigners. In
fact, a large fraction of the recent surge in Chinese exports has come
from Chinese subsidiaries of global multinational corporations. The
share of Chinese exports produced by foreign firms rose from 1% in 1985
to 55% in 2003.\4\
---------------------------------------------------------------------------
\4\ Source: Nicholas Lardy, ``China: The Great New Economic
Challenge,'' in C. Fred Bergsten (2004) The United States and the World
Economy: Foreign Economic Policy for the Next Decade.
---------------------------------------------------------------------------
Trade between China and the United States

China's rapid growth in its trade flows, foreign investment and
overall economy has been apparent not only in the global economy, but
also in the world's largest economy--the United States. U.S. purchases
of Chinese goods have nearly doubled since 2000, so that the United
States is currently China's most important export market. In 2002,
China was the 2nd largest source of U.S. imports (behind only Canada).
U.S. exports to China have also increased dramatically so that
China is currently the 5th largest export market for the United States.
Between 2003 and 2004, U.S. exports to China increased by 22%. This was
among the largest increases in U.S. exports to any country in the
world. Even more impressive, U.S. exports to China have increased by
nearly 115% since 2000. The United States has not increased exports by
a comparable amount to any other country in the world over this period.
This increase in exports to China is particularly noteworthy
considering that U.S. exports to the rest of the world were fairly
stable between 2000 and 2004. [Figure 6.] Moreover, even if growth in
China moderates, China's large population of over 1.3 billion
individuals combined with its expected growth rate higher than in most
other large economies suggest that China will continue to be an
important driver of U.S. export growth in the coming years.

[GRAPHIC] [TIFF OMITTED] 23921A.006

Although U.S. imports from and exports to China have both been
increasing rapidly, trade between the U.S. and China is imbalanced. In
2004 the United States reported a trade deficit with China in goods of
$162 billion, which is equal to 1.4% of U.S. GDP. This is about 25% of
the total U.S. trade deficit of 5.5% of GDP in 2004. Since the U.S.
trade deficit with China has increased over the same period that the
overall U.S. trade deficit has increased, trade with China is often
blamed for the recent increase in the U.S. trade deficit. This is not
entirely accurate, however, for three reasons.
First, the U.S. trade deficit excluding China has also risen
sharply. In fact, even if the U.S. trade deficit with China was not
included, the U.S. trade deficit would still have increased sharply
from 1.6% of GDP in 1997 to 4.2% at the end of 2004. [Figure 7.] Trade
with China accounted for roughly 24% of the increase in the U.S. trade
deficit since 1997--only slightly more than the contributions from U.S.
trade with the Euro area (20%) and NAFTA (18%). In fact, China's
current contribution to the overall U.S. trade deficit is slightly less
than its contribution in 1997, when the U.S. trade deficit with China
was 1.5% of GDP.

[GRAPHIC] [TIFF OMITTED] 23921A.007

Second, increased imports from China largely reflect decreased
imports of the same goods from other countries, instead of a net
increase in the U.S. trade deficit. In other words, many of the
products that the United States currently imports from China were
previously imported from other countries, not produced domestically in
the United States. For example, although the share of U.S. goods'
imports coming from China has increased since 1990, the share of
imports coming from other countries in the Pacific Rim has fallen by
even more--so that the total share of U.S. imports coming from the
Pacific Rim (including China) has actually fallen. [Figure 8.] In fact,
much of China's recent increase in U.S. import share has come largely
at the expense of Japan. Japan's share of U.S. goods imports fell from
12.0% in 2000 to 8.8% in 2004. Over the same time period, China's share
of U.S. goods imports increased from 8.2% to 13.3%. Therefore, the
share of U.S. imports coming from both China and Japan has only
increased slightly, from 20.2% in 2000 to 22.1% in 2004.

[GRAPHIC] [TIFF OMITTED] 23921A.008

This pattern of increased U.S. imports from China largely replacing
imports from other Asian countries is apparent not only in bilateral
trade patterns, but also in many of the individual sectors in which
U.S. imports from China have recently surged. For example, the share of
U.S. footwear imports from China increased from 9% in 1989 to 69% in
2003, while the share of U.S footwear imports from other Asian
countries (Japan, Hong Kong, Taiwan, and South Korea) fell from 51% to
1% over the same period. South Korea's share of the U.S. footwear
import market fell from 27% in 1990 to 0.3% by 2004, while Taiwan's
share fell from 16% to 0.4%.
Third and finally, although China is competitive with some low-end
U.S. manufacturing products, U.S. trade with China is largely
complementary. U.S. imports from China are over 60% consumer goods and
27% capital goods. U.S. exports to China are largely capital goods
(46%), industrial supplies (35%), and food (11%). U.S. consumers and
U.S. companies that purchase Chinese goods benefit from less expensive
Chinese products. Many U.S. retailers that specialize in consumer goods
have been able to open more stores and hire more workers due to their
ability to sell lower priced goods imported from China. These trends
have been particularly beneficial for many low--and middle-income
Americans that spend a higher share of their incomes on consumer goods
that are more likely to be imported from China.
For all of these reasons, focusing just on the bilateral trade
deficit with China is problematic. In fact, the bilateral trade balance
between any two countries is generally not considered meaningful in an
economic sense. Instead, it is more important to focus on multilateral
trade balances, and the corresponding domestic factors causing any
multilateral imbalances. A multilateral trade deficit reflects a
shortage of national savings relative to national investment.
Therefore, any reduction in the U.S. trade deficit would need to be
balanced by a reduction in the difference between U.S. national savings
and investment. If the U.S trade deficit with China was suddenly
reduced, it would need to occur with a corresponding adjustment in
other variables--such as an increase in the U.S. trade deficit with
other countries, an increase in U.S. national savings, or a decline in
U.S. national investment. An increase in U.S. national savings or a
decline in U.S. national investment would likely correspond to slower
growth in the United States.
In addition to the relationship between trade with China and the
U.S. trade deficit, a closely related issue that has received
substantial attention is the impact of China's economic growth and
increased trade flows on U.S. employment--especially manufacturing
employment. Trade with any country does play a role in shifting U.S.
employment towards industries in which the United States has a
comparative advantage (mostly services and high-skilled, high-tech
manufactured products). Increased trade with China, however, has not
caused a large share of aggregate U.S. job losses, even in the
manufacturing sector as a whole.
Increased trade with China is a relatively recent phenomenon, while
manufacturing employment has been declining as a share of total U.S.
employment for decades. This long-term downward trend in manufacturing
employment primarily reflects relative gains in manufacturing
productivity that have not been offset sufficiently by increased
purchases of manufactured goods. In fact, although U.S. manufacturing
employment has fallen roughly 20% since 1970, rapid productivity growth
has allowed manufacturing production to more than double over the same
period.
More recently, the most severe job losses in U.S. manufacturing
were mainly concentrated in industries where imports from China are
small. Five industries that have contributed significantly to
manufacturing job losses since 1997 are: computer and electronic
equipment (15.4% of all manufacturing job losses from 1997 to 2004),
transportation equipment (8.5%), machinery (11.4%), fabricated metal
products (6.4%), and apparel (13.4%). With the exception of apparel,
these are export-intensive industries for the United States. Therefore,
a more important factor driving job losses in these sectors (with the
exception of apparel) was slower export growth to most of the world
(excluding China) instead of increased competition from China.
Moreover, employment in the United States has recovered over the
past two years, at the same time that imports from China have continued
to increase. In fact, over a longer time period, there is no apparent
relationship between imports from China, or even total imports, and
U.S. unemployment. [Figure 9.]Even though imports as a percentage of
GDP (from China as well as the world) have increased since the 1970's,
this has not led to any significant increase in the U.S. unemployment
rate. Over the past decade the U.S. economy has experienced
historically low unemployment, even though imports grew significantly.
Roughly 3 million jobs were created in the United States since May
2003, 33,000 jobs were added in manufacturing since February 2004, and
the unemployment rate fell to 5.2% in March--below the average of the
past three decades. All of these improvements in the U.S. labor market
occurred as imports from China surged. Moreover, as trade between the
United States and China continues to increase, analysts expect strong
job growth to continue in the United States. Blue Chip consensus
forecasts predict that approximately 2.2 million jobs will be added to
the U.S. economy in 2005 and 2006.

[GRAPHIC] [TIFF OMITTED] 23921A.009

Administration Engagement to Ensure the United States Benefits
from China's Economic Development

The Administration has been pursuing an active and multi-pronged
agenda to ensure that the United States continues to benefit from
China's economic growth and increased trade flows. It will be important
to continue and strengthen these efforts. Even if trade with China has
had a relatively small impact on aggregate U.S. employment and the
recent increase in the U.S. trade deficit, individual sectors of the
U.S. economy can be harmed by China's rapid economic growth and
increased role in global trade. Although some companies and their
corresponding workers benefit from increased exports to China, other
companies and workers face greater competition from increased imports
from China. Although many U.S. consumers benefit from cheaper sneakers,
toys and sporting goods from China, other Americans could become
unemployed due to this greater competition. These difficult adjustments
affect not only individual companies and workers, but also their
families and communities. Therefore, the Administration has taken a
number of steps to help individuals adjust to these changes and to
ensure that U.S. workers have adequate skills in order to succeed in
new job opportunities. After discussing these specific steps, I will
then describe a number of additional components of the Administration's
strategy (including on exchange rate policy and maintaining U.S.
competitiveness) to ensure that the United States continues to benefit
from China's economic development.
The Administration has taken a number of important steps to ensure
that U.S. workers have adequate skills in order to adapt to and benefit
from increased trade with China (as well as trade with all other U.S.
trading partners). Several programs focus on ensuring that workers
receive training so that they can adopt new technologies to succeed in
the global economy. For example, the Trade Adjustment Assistance (TAA)
program was recently expanded to cover more workers and provide more
income support, training, relocation and job search allowances. A
health coverage tax credit was also added. The President's ``Jobs for
the 21st Century'' initiative supports students and workers by
improving high school education and strengthening post-secondary
education and job training. This initiative includes funding to
increase job training at community colleges. In addition, to help
workers find better, higher-paying jobs, the President has proposed
doubling the number of people trained through our principal job-
training grant programs that are authorized under the Workforce
Investment Act.
To further increase individual choice for workers, Innovation
Training Accounts, as proposed by the President in his Job Training
Reform proposal, build upon the success of Individual Training Accounts
that are authorized under the Workforce Investment Act. Innovation
Training Accounts allow individuals to access a broad range of public
and private training resources through a single, self-managed account.
They would also authorize longer-term training opportunities by
acknowledging that many skills needed for today's jobs require more
than just short-term attention and exposure.
Another important new step for helping Americans succeed is
Personal Reemployment Accounts (PRAs). PRAs will provide certain
individuals who lose their job with money that they can use in a manner
they think will best help them obtain a new job--such as for training,
transportation, child care, or relocation. Workers who find new jobs
quickly and retain those jobs for six months will receive a
reemployment bonus. The Department of Labor currently is administering
a PRA demonstration that includes seven states.
Also, to help workers in poor communities and communities that have
lost manufacturing, textile and other jobs, the President has proposed
the creation of opportunity zones. These zones will include special tax
relief and other incentives to attract new business and to improve
housing, job training, and high-tech infrastructure in order to assist
these communities. Although none of these proposals can fully remove
the difficulty and suffering for workers and their families when they
become unemployed, they should help ease the transition and help
provide workers with new skills to find employment. As a strong signal
of commitment to all of these programs, the President has proposed over
$21 billion for worker training and employment programs in the 2006
budget, including more than $7 billion in Pell Grants to be used at
two-year post-secondary schools, where many people train for work.
In addition to taking steps to help U.S. workers adjust to
increased global trade flows, the Administration is also taking a
number of steps to ensure that the U.S. continues to benefit from
increased trade with China. The Administration is actively engaged in a
number of dialogues and meetings to ensure that China continues to open
its market to U.S. exports and fully implements its commitments made to
the World Trade Organization. China must continue to open its markets
to U.S. services, agriculture and industrial products, as well as to
effectively enforce intellectual property laws. My colleague from the
USTR will discuss the Administration's vigorous efforts in these areas
in more detail.
The Administration is also actively engaged with China to reduce
barriers to capital flows, develop more open and sophisticated capital
markets, and adopt a more flexible exchange rate regime. The
Administration has stated in private bilateral meetings as well as in
multilateral forums (such as the G-7, IMF, and APEC), that the
international trading system works best with free trade, the free flow
of capital, and currency values set in open and competitive markets. In
particular, the Administration believes that now is the appropriate
time for China to adopt a more flexible exchange rate regime. It is in
China's best interest to adopt a more flexible currency now while
economic growth is strong. A more flexible currency would provide China
with greater independence in monetary policy--a step that would help
reduce the current risk of overheating.
The Chinese authorities, on a number of occasions, have clearly
stated their intent to move to a more flexible exchange rate regime.
Although they have not specified a date for this adjustment, China has
recently taken a number of steps to build the necessary infrastructure
and gain experience useful to successfully adopt more exchange rate
flexibility. For example, China has recently taken important steps to
develop foreign-exchange trading, including the development of hedging
instruments and internal controls on foreign-exchange exposure. In
March 2005 China announced that seven international banks would join
two domestic ones as market makers for foreign-exchange trading. These
banks will be able to trade and quote prices in eight currency-pairs--
providing a platform that can then be used to trade a more flexible
yuan. China is also making solid progress in restructuring its state-
owned banks by reducing non-performing loans and improving lending
standards and corporate governance.
The Administration, led by the U.S. Treasury Department, has also
been actively assisting the Chinese authorities in resolving concerns
in areas they see as obstacles to exchange rate flexibility. For
example, the U.S. Treasury has established a Technical Cooperation
Working Group that had three sessions with China in 2004 to focus on
issues such as supervising banks' management of exchange rate risk and
regulating foreign currency derivatives' markets. Additional sessions
are already planned for 2005. In September 2004, Secretary Snow hosted
a high-level meeting of the Joint Economic Committee (JEC), which
included Federal Reserve Chairman Greenspan and 40 Chinese delegates.
The JEC discussed a range of economic and financial issues and agreed
to a joint public statement including China's commitment to exchange
rate flexibility. The U.S. Treasury Department also designated a
special representative, Ambassador Paul Speltz, to continue frequent
dialogue with the Chinese government on these issues and encourage them
to accelerate movement toward a flexible exchange rate regime.
The U.S. Administration has also recently built on these bilateral
engagements by continuing to work through multilateral channels to
encourage China to move to more exchange rate flexibility. In February
of 2005, G-7 Finance Ministers and Central Bank Governors met again
with their Chinese counterparts. They reaffirmed their support for
flexible exchange rates and emphasized that more flexibility ``is
desirable for major countries that lack such flexibility to promote
smooth and widespread adjustments in the international financial
system.'' In the last two months key Ministers in Japan, Korea, and
Britain have spoken publicly on the need for a flexible currency regime
in China. The International Monetary Fund has repeatedly called for
China to adopt a more flexible exchange rate regime, including most
recently in its World Economic Outlook just released as part of the
Bank-Fund Spring meetings. President Haruhiko Kuroda, in his first
press conference as the new head of the Asian Development Bank, also
urged China to adopt more exchange rate flexibility.
A final key pillar of the Administration's strategy to ensure that
the United States benefits from China's rapid economic growth and
increased trade flows is to strengthen the U.S. economy and make
certain that the United States is an attractive and competitive
location for companies to do business. In an effort to attain these
goals, the Administration will continue to restrain spending and
strengthen institutions such as social security for future generations.
The Administration will continue to enforce our trade agreements and
lower barriers to trade through multilateral and bilateral trade
agreements, in order to ensure that U.S. companies can successfully
compete in foreign markets. The Administration will also continue to
support pro-growth policies, such as: making tax relief permanent;
reducing the burden of lawsuits by supporting additional tort reform;
passing a comprehensive national energy policy in order to increase
energy efficiency and ensure an affordable and predictable energy
supply; making health care costs more affordable through proposals such
as Association Health Plans, tax-free Health Savings Accounts and
health information technology; and streamlining regulations to ensure
that they are reasonable and affordable.
Final Thoughts

China's rapid economic growth and development has lifted hundreds
of millions of people out of poverty and helped spur global exports and
global growth. China's emergence as a significant participant in the
global economy and global trade, however, also presents challenges as
countries, including the United States, adjust to these developments.
The U.S. Administration is pursuing an active and multi-pronged agenda
to ensure that the United States is able to benefit from these changes.
Since China is one of the fastest growing export markets in the world,
part of this agenda will continue to be to ensure that U.S. companies
have access to this large market and the opportunity to compete.
Although adjusting to China's increased economic role will not be easy,
it is important to remember that any steps taken to smooth this
adjustment should also be aimed at ensuring the United States continues
to be a competitive and dynamic economy.
Average GDP growth in the United States in 2003 and 2004 was higher
than in any other member of the G-7 group of developed economies. This
trend is expected to continue in 2005--with the IMF forecast predicting
that growth in the U.S. will be 3.7% in 2005--not only stronger than in
every other member of the G-7--but more than double the expected growth
rates in Germany, Italy, and Japan. [Figure 10.]

[GRAPHIC] [TIFF OMITTED] 23921A.010

Therefore, as we discuss different proposals to shape the future,
we must be careful not to threaten this success with short-term fixes
that could damage our long-term competitiveness. Instead, it is
important to focus on ways to help strengthen the U.S. economy as the
global economy evolves, and ensure that we continue to improve the
competitiveness of companies operating in the United States. The
Administration is committed to continuing and building on these
efforts.

Chairman THOMAS. Mr. Freeman.

STATEMENT OF CHARLES W. FREEMAN, III, ASSISTANT U.S. TRADE
REPRESENTATIVE OF CHINA AFFAIRS, OFFICE OF THE U.S. TRADE
REPRESENTATIVE

Mr. FREEMAN. Thank you, Chairman Thomas and Members of the
Committee. I do appreciate the opportunity to testify today on
issues surrounding U.S.-China trade. I have submitted prepared
testimony but would like to summarize that and offer a few
thoughts on the key issues affecting bilateral U.S.-China
trade. Obviously with concerns raised by Congressman Sanders
and others about our trade deficit with China and the other
issues that are inherent in this complex a relationship as that
which we have with China, a number of very positive economic
considerations to that relationship can be overlooked. This is
especially true as we review the years since China joined the
WTO on December 11, 2001.
We should not forget in approving China's accession to WTO,
the United States did not make any specific new concessions to
China other than to agree to accord China the same treatment it
accords the other 146 members of the WTO. In contrast, China
committed to make dramatic changes to its trade regime and to
open its market significantly to U.S. manufactured goods,
agricultural commodities and services. As a result, and as
discussed by my colleague from CEA, U.S. exports to China have
increased dramatically to $35 billion in 2004, close to double
the total for 2001. From 2001 to 2004 U.S. exports to China
increased eight times faster than U.S. exports to the rest of
the world. As a result, China rose from our ninth largest
export market in 2001 to become our fifth largest export market
in 2004. China is more welcoming of imports than some of our
other trading partners in the region, especially given this
stage in its development. China is certainly a major exporting
power. It is the world's third biggest now, but it is also the
third biggest importing economy.
Our focus at USTR, therefore, is ensuring that U.S.
exporters of manufactured goods, agricultural commodities and
services have unimpeded access to China's market and that
Chinese trade practices do not otherwise unfairly disadvantage
U.S. producers. The emphasis in this work has been to focus on
resolving problems in a way that delivers results as
expeditiously as possible for America. With that in mind the
Administration has had a comprehensive engagement with China
that has over the course of the past few years resulted in
solutions to trade concerns that have enabled billions of
dollars of goods and services to reach China's markets. In late
2003 President Bush and Chinese Premier Wen Jiaboa constructed
a problem-solving dialogs that resulted in the resolution of 7
potential WTO cases against China in 2004 and paved the way for
a resolution of the first ever and only WTO case filed against
China by any WTO member on China's tax treatment of imported
semiconductors.
We clearly continue to have our work cut out for us and
there are a number of critical trade issues with China that we
will face over the months and years to come. Intellectual
property rights infringement is obviously at the top of our
priority list with respect to China. We have initiated a
comprehensive strategic effort to deal with the problem of IPR
infringing exports from China. We are reviewing the consistency
of China's IPR regime with WTO requirements and we are working
to improve the capacity for IPR enforcement in China. Later
this month the Administration will complete an out of cycle
review of China's IPR regime under Special 301 of the Trade Act
1974, and we look forward to working with Congress and industry
to address the results of that review. With the end of the
textile quota system on January 1st of this year we clearly
face a dramatic shift in textile and apparel trade patterns
that has already been of profound benefit to China. The scale
of China's textile production and the fact that China was not a
member of the WTO when the agreement on textiles and clothing
was established in 1995 is one of the main reasons we
negotiated the special textile safeguard as part of China's WTO
accession agreement during the previous Administration.
As you know we exercised that safeguard a number of times
in 2003, and recently, following the rise of textile imports
earlier this year, the Administration self-initiated safeguard
investigations in to imports of three categories of apparel
from China. In addition to these issues and apart from issues
with which other agencies, including Department of the Treasury
and Labor, are seized, the Administration is working hard
across the board to encourage greater market access for our
agriculture producers, intellectual property rights holders,
service providers and manufacturers. We have an ongoing dialog
with our Chinese counterparts to improve access for U.S.
agriculture into China which is already a very significant
market for our farmers, to reduce barriers to trade in services
in which enjoy a healthy surplus with China, ensure the ability
of our exporters to distribute goods easily in China, do away
with industrial and tax policies, standards and other measures
that encourage Chinese enterprises to develop at the expense of
our exporters, and ultimately and finally, improve China's
regulatory transparency.
We are making good headway, but continuing on this path
requires constant vigilance and the attention of Congress and
senior officials across the range of departments. Your
continued leadership and support on these issues and constant
encouragement of both the Administration and the Chinese
government to make sure that this is a trade relationship that
works for American interests is critical. We look forward to
continuing our production relationship with your offices, and I
look forward to your questions. Thank you.
[The prepared statement of Mr. Freeman follows:]
Statement of Charles W. Freeman III, Assistant U.S. Trade
Representative of China Affairs, Office of the U.S. Trade
Representative
Introduction
Chairman Thomas, Congressmen Rangel and Members of the Ways and
Means Committee, I appreciate the opportunity to testify today on
issues surrounding the U.S.-China trade relationship and, in
particular, the Administration's efforts in ensuring that China
fulfills the commitments that it made upon joining the World Trade
Organization (WTO). This is a subject of considerable importance and a
matter of great priority for the Administration and the Office of the
U.S. Trade Representative (USTR), in our capacity as the lead agency
with responsibility for U.S. trade policy.
Clearly, China's economic emergence presents both challenges and
opportunities for U.S. manufacturers, farmers, service providers and
workers. While there is much positive to say about our success in
penetrating the Chinese market, there is understandable concern that
certain Chinese trade practices have frustrated efforts to further open
the market, or have in other ways contributed to our large and growing
trade deficit with China.
There are several areas where we have problems with China's trade
practices, and this Administration is working vigorously to address
those, using the most effective tools at our disposal, including our
trade remedy laws.
Let me first put in context the concerns about our trade
relationship with China:

When China joined the WTO in December 2001, the United
States did not make any specific new concessions to China, other than
to agree to accord China the same treatment it accords the other 146
members of the WTO. In contrast, China committed to make dramatic
changes to its trade regime and to open its market significantly to
U.S. manufactured goods and services.
U.S. exports to China have increased dramatically since
China joined the WTO in 2001. U.S. exports to China totaled $35 billion
in 2004, close to double the total for 2001. In fact, from 2001 to
2004, U.S. exports to China increased nearly eight times faster than
U.S. exports to the rest of the world. As a result, China rose from our
ninth largest export market in 2001 to our fifth largest export market
in 2004.
In the past four years, the Administration has taken
aggressive action to help facilitate this export growth, using a
variety of diplomatic, legal and other tools to bring real results in
our trade relationship. In 2004, we used high-level dialogue and trade
diplomacy to resolve seven potential WTO disputes with China, and we
were the first (and still only) WTO member to file a dispute settlement
case against China at the WTO.
In part as a result of these efforts, the American
Chamber of Commerce opined in September 2004 that, ``[w]ith the
exception of intellectual property rights, we believe China is
substantially in compliance with its WTO deadlines and specific
obligations.'' That is an optimistic opinion in some respects, but it
does reflect the significant progress China and the United States have
made in the years since China's WTO accession.
Our trade deficit with China is driven by many factors,
including the strong growth of our economy and our expanding ability to
buy and consume large amounts of imports.
A large portion of the recent increase in our trade
deficit with China represents a shift in trading patterns, particularly
in Asia, and has come at the expense of other countries. That is, much
of the import growth from China is displacing imports from other
countries rather than U.S. production.
With respect to our trade remedy laws, the United States
was the first WTO member to invoke the China-specific textile safeguard
to address market disruption caused by a surge in Chinese imports, and
has just self-initiated investigations to consider limits on additional
categories. We have also continued to apply our anti-dumping laws with
respect to unfairly traded imports from China and make use of special
non-market economy methodologies in assessing dumping margins.

With this background, let me give some more detail about China's
implementation of its WTO commitments and the Administration's efforts
to ensure an open and level playing field for our manufacturers,
service suppliers, farmers and workers.
China's WTO Compliance
In its accession agreement to the WTO, China agreed to extensive,
far-reaching and often complex commitments to change its trade regime,
at all levels of government. China committed to implement a set of
sweeping reforms that required it to lower trade barriers in virtually
every sector of the economy, to provide national treatment and improved
market access to goods and services imported from the United States and
other WTO members, and to protect intellectual property rights (IPR).
China also agreed to special rules regarding subsidies and the
operation of state-owned enterprises, in light of the state's large
role in China's economy. In accepting China as a fellow WTO member, the
United States also secured a number of significant concessions from
China that protect U.S. interests during China's WTO implementation
stage. Implementation should be substantially completed--if China fully
adheres to the agreed schedule--by December 11, 2007.
To date, while China's efforts to fulfill its WTO commitments are
impressive, they are far from complete. At times, China's efforts have
been unsatisfactory, and the Administration has responded with
appropriate steps in such cases. The first year of China's WTO
membership (2002) saw significant progress, as China took steps to
repeal, revise or enact more than one thousand laws, regulations and
other measures to bring its trading system into compliance with WTO
standards. In 2003, however, China's WTO implementation efforts lost
momentum, and we identified numerous specific WTO-related problems.
In response, the Administration stepped up its efforts to engage
China's senior leaders. In December 2003, President Bush and China's
Premier, Wen Jiabao, committed to upgrade the level of economic
interaction and to undertake an intensive program of bilateral
interaction with a view to resolving problems in the U.S.-China trade
relationship. Premier Wen also committed to facilitate the increase of
U.S. exports to China. This new approach was exemplified by the highly
constructive Joint Commission on Commerce and Trade (JCCT) meeting in
April 2004, with Vice Premier Wu Yi chairing the Chinese side and
Secretary of Commerce Evans and United States Trade Representative
Zoellick chairing the U.S. side. At that meeting, which followed a
series of frank exchanges covering a wide range of issues in late 2003
and early 2004, the two sides achieved the resolution of no fewer than
seven potential disputes over China's WTO compliance. Those successes
ranged across the economic spectrum, from wireless standards to
biotechnology to trading rights and distribution services.
At the same time, when our discussions with China were not
successful, we did not hesitate to use the full range of tools made
available to us as a result of China's WTO accession. The United States
filed, and was able to successfully resolve, the first-ever dispute
settlement case brought against China at the WTO. In that case, the
United States, with support from four other WTO members, challenged
discriminatory value-added tax policies that favored Chinese-produced
semiconductors over imported semiconductors. In July 2004, about three
months after the United States had initiated the case, China agreed to
end its discriminatory policies, allowing U.S. manufacturers to
preserve and expand their $2 billion export business to China.
Our trade relationship with China is large and growing, so it is
not surprising that despite successes in a number of areas, some
problems still remain and new ones have emerged. Of key concern, for
example, is that China's implementation of its WTO commitments has
lagged in areas in which the United States has a competitive advantage,
particularly where innovation or technology plays a key role. At
present, we are pressing China in the following priority areas:

The Administration places the highest priority on
improving the protection of intellectual property rights (IPR) in
China. Counterfeiting and piracy in China are at record levels and are
hurting a wide range of U.S. businesses. While China has recently taken
a number of steps at the national level to address this situation, such
as lowering the value thresholds that trigger criminal investigations
and prosecutions, so far these steps have not translated into actual
reduced infringement at the provincial and municipal levels. The
Administration is currently conducting a China-specific out-of-cycle
review under the Special 301 provisions of U.S. trade law and will take
appropriate action at the conclusion of that review to ensure that
China develops and implements an effective system for IPR enforcement,
as required by the WTO's Agreement on Trade-Related Aspects of
Intellectual Property Rights.
Supplementing these bilateral IPR efforts, the
Administration has taken comprehensive action to block trade around the
world in counterfeit and pirated goods through the Strategy Targeting
Organized Piracy (STOP!), a U.S. government-wide initiative begun in
October 2004 to empower U.S. businesses to secure and enforce their
intellectual property rights in overseas markets, to stop fakes at U.S.
borders, to expose international counterfeiters and pirates, to keep
global supply chains free of infringing goods, to dismantle criminal
enterprises that steal U.S. intellectual property and to reach out to
like-minded U.S. trading partners in order to build an international
coalition to stop counterfeiting and piracy worldwide.
While China has implemented its commitment to allow
companies and individuals to import goods into China directly without
having to use a middleman, our companies are not faring as well when it
comes to selling those same products at the wholesale and retail level
in China. China did issue regulations calling for timely implementation
of its WTO commitment to open up wholesaling and retailing to foreign
companies by December 2004. However, U.S. and other foreign companies
have encountered impediments to actually providing these services
because of ambiguities in the application of these regulations, as well
as related licensing procedures. The Administration has been pressing
the Chinese authorities to clarify these procedures so that our
companies can take advantage of the rights that they have in the
wholesaling and retailing areas. Meanwhile, one segment of the
distribution services sector--direct selling--is causing particular
concern. Not only has China failed to implement timely regulations, but
China is also considering restrictions that would make it difficult or
impossible for U.S. direct selling companies to operate in China. The
Administration has made clear its serious concerns in this area.
Since acceding to the WTO, China has periodically
resorted to policies that limit market access by non-Chinese origin
goods and that aim to extract technology and intellectual property from
foreign rights-holders. The objective of these policies seems to be to
support the development of Chinese industries that are higher up the
economic value chain than the industries that make up China's current
labor-intensive base, or simply to protect less-competitive domestic
industries. Of particular concern is China's recent proposal to
implement restrictive government procurement policies for software,
which will not only hurt U.S. interests but also undermine China's
efforts to develop its software industry. The United States and China
made important progress toward resolving conflicts over a number of
these industrial policies in 2004 (for instance, China's proposed use
of a unique, mandatory Chinese standards for wireless encryption), but
more work needs to be done, and the advent of new or similar policies
in the future will require continued vigilance.
While the United States enjoys a substantial surplus in
trade in services with China, and the market for U.S. service providers
in China is increasingly promising, problems remain in a number of
important service sectors. Through an opaque regulatory process, overly
burdensome licensing and operating requirements, and other means,
Chinese regulatory authorities continue to frustrate efforts of U.S.
providers of insurance, express delivery, telecommunications and other
services to achieve their full market potential in China.
With U.S. agricultural exports totaling $5.5 billion in
2004, China has become one of the fastest growing overseas markets for
U.S. farmers. Despite this growth, however, China's regulation of the
agricultural sector is beset by uncertainty. Capricious practices by
Chinese customs and quarantine officials can delay or halt shipments of
agricultural products into China, while sanitary and phytosanitary
standards with questionable scientific bases and a generally opaque
regulatory regime frequently bedevil traders in agricultural
commodities. While the Administration was able to make substantial
headway on a number of key issues in agricultural trade in 2004,
particularly in the area of biotechnology approvals and the removal of
problematic sanitary and phytosanitary measures that had been
curtailing trade, maintaining and improving China's adherence to WTO
rules in the area of agriculture will require continued high-level
attention in the months and years to come. Currently, one of our top
priorities in this area is for China to re-open its market to U.S. beef
based on internationally accepted scientific standards for human and
animal health.
While China's Ministry of Commerce has made laudable
moves toward adopting WTO transparency norms, other ministries and
agencies have lagged behind. As a result, China's regulatory regimes
continue to suffer from opacity, frustrating efforts of foreign--and
domestic--businesses to achieve the potential benefits of China's WTO
accession. The Administration remains committed to seeking improvements
in this area.
U.S. Enforcement of Trade Remedy Laws
The rapid expansion of trade between the United States and China
since China's WTO accession has inevitably led in some cases to
competition between our domestically produced goods and Chinese
imports. When our industries face injurious trade with China, the
Administration is fully committed to enforcing U.S. trade remedy laws
and to exercising the important rights that the United States
negotiated under China's WTO accession agreement.
One important U.S. right is the ability to continue to apply
special methodologies to China under the antidumping laws. The
Administration has applied those special methodologies in numerous
cases. Since China's entry into the WTO, the Department of Commerce has
imposed 22 antidumping orders on imports from China, representing one-
third of total U.S. antidumping orders issued during that time period.
As part of the WTO accession agreement, the United States
negotiated--and China agreed to--two separate China-specific safeguard
mechanisms that allow WTO members to address market disruption caused
by increasing economic integration with China. One of these mechanisms,
the product-specific safeguard, was codified as Section 421 of the
Trade Act of 1974, and is available until December 11, 2013. Since the
implementation of Section 421, five petitions have been brought
requesting import relief. In two cases, the International Trade
Commission found that our domestic producers' market had not been
disrupted by imports from China. In three other cases, while the ITC
found market disruption, the President determined that the adverse
impact on the U.S. economy of employing a safeguard was clearly greater
than the benefits from providing import relief. While to date no import
relief has been granted under Section 421, the President, in his most
recent determinations, reiterated his commitment to using this
safeguard mechanism when the circumstances of a particular case
warrant.
The second safeguard mechanism agreed to by China as part of its
WTO accession package, available until December 31, 2008, allows WTO
members under certain circumstances to invoke a 7.5 percent cap on
annual growth in imports of a given textile category for up to one year
(6 percent for wool products). In 2003 and 2004, when most categories
of textiles and apparel products were still subject to quotas, the
Committee for Implementation of Textile Agreements (CITA) found for
petitioners in four investigations under this safeguard mechanism and
imposed 7.5 percent caps on imports of Chinese socks, knit fabric,
brassieres, and robes and dressing gowns.
On January 1, 2005, the structure of global trade rules that had
governed the textiles sector for several decades changed, as all WTO
members lifted remaining quotas on textile and clothing imports in
accordance with an agreement negotiated more than 10 years ago. While
the Administration has confidence in the ability of our textile
industry to compete under these new circumstances, many countries,
including the United States, face new competitive challenges as a
result of the lifting of the quotas.
In late 2004, the Administration agreed to consider 12 petitions
from industry alleging a ``threat'' of market disruption due to
anticipated surges in Chinese imports following the lifting of quotas
at the beginning of this year. However, in a lawsuit initiated by one
group of textile importers, the U.S. Court of International Trade
enjoined the United States from further consideration of these threat-
based requests. The Administration has appealed that injunction and is
awaiting a decision. In the interim, the Department of Commerce
implemented a new system to monitor imports of textiles and apparel
products in order to provide the Administration and the public timely
access to preliminary data regarding the impact of imports on the U.S.
market. Using that data, earlier this month, CITA self-initiated
safeguard investigations of cotton knit shirts and blouses, cotton
trousers and cotton and man-made fiber underwear from China, all of
which have been imported in substantially increased quantities in the
first three months of this year. A short time later, U.S. industry
filed seven petitions, covering 14 other product categories. We are in
the process of considering those now.
Broader U.S.-China Economic and Trade Cooperation
As China's integration into the world economy deepens, it becomes
increasingly important for the United States and China to work together
to promote our mutual interests. The United States and China have
discussed various ways in which we can cooperate on international
economic and trade issues, particularly given our largely complimentary
economies.
Of particular importance at this time are the WTO's Doha
Development Agenda negotiations. We have had frank discussions with
China on the progress of those negotiations and will continue to engage
China in an effort to promote our common areas of interest. In the
coming year, China will become a focal point in the negotiations, as
Hong Kong will be hosting the WTO's Sixth Ministerial Conference in
December, when WTO members intend to set the stage for conclusion of
the negotiations in 2006.
Conclusion
Mr. Chairman and members of the Committee, thank you for providing
me with the opportunity to testify. I look forward to your questions.

Chairman THOMAS. Thank you very much. I enjoyed reading the
testimony that you submitted. I want to congratulate you, Dr.
Forbes. You got in almost every one of the graphs that you had
in your written statement in your verbal presentation. It is
useful and valuable information. I don't know whether the rules
permit me to say this, but C-SPAN is taping this and they will
show it at a later date, and so far I don't know if we are
going to retain the audience that began at the beginning
because they probably want to submit at least one unit and
perhaps three units of graduate credit for the way in which we
discuss this issue. I could ask you a series of questions
dealing with the ongoing difficulty notwithstanding the fact
our ability to export agricultural products to China, but if
not a systematic, certainly an enduring non-tariff trade
barrier problem with sanitary and phytosanitary concerns. It
just seems as though you can never get on top of it, and China
is not the only one that has that problem.
What I am trying to do is cut through a lot of these
particulars, especially in response to what people are reading
about in the headlines in terms of the enormous trade
imbalance, and notwithstanding the factual evidence of
comparing the rapid growth of the beginning of the trade
imbalance with China and parallel it with Korea and Japan, that
is to assume that that means it is okay because it has some
historical relevance, and most people would say that they do
not agree with that. So, one of the things that I would like
you to do, if possible in the brief response time, is to take a
step back from the very narrow particulars that you have
presented quite adequately, and give us two or three
fundamental ``don't do them,'' and hopefully two or three
fundamental ``dos.''
Now, we have some difficulty in dealing with that because
there is just a myriad of areas that we can examine in terms of
China, but one of the areas that I think, I hope is in your
response is what we can do to deal with the dual-ability of the
government of China to peg its currency which creates a
windfall and a distortion, but also to control the interest
rate which allows for an inordinate stimulant within the
country which magnifies the factor of the currency pegging, and
that where in your opinion can we get the Chinese to move on at
least some front. My personal belief is the interest rates are
far easier and ought to be opened up as much as possible so
that you can get a real indication of growth, and that the
currency would be a bit more unstabling in the Chinese economy,
and perhaps that would occur later. Two or three ``dos'' and
two or three ``don't's'' please.
Ms. FORBES. Okay. It is hard to limit myself to two or
three but I will try.
Chairman THOMAS. That is why I structured it that way.
Ms. FORBES. Yes. What not to do, I will start with that.
One policy I would highly recommend not to do is to put a large
tariff on all imports from China. That would not only hurt the
U.S. economy, for example, that would raise import prices in
the U.S., it would raise consumer prices in the U.S. so all of
your people in your district who like to shop at WalMart and
stores like that would suddenly see prices rise. This could
feed inflationary pressure in the U.S. It could raise the cost
of doing business in the U.S. for companies that import inputs
from China.
Chairman THOMAS. That is one.
Ms. FORBES. Second, what I would not do is up the rhetoric
so much against China that it becomes hard for them to work
with us in a collaborative engagement.
Chairman THOMAS. Okay.
Ms. FORBES. That was then a lead-in to what I would do. I
would support continued constructive engagement and
collaboration between the U.S. and China through a whole host
of dialogs which we have established in the Administration.
This has yielded real results. We have much more work to do,
but by working together I think we have accomplished much, much
more than bringing every single dispute to a multilateral
trading mechanism.
Chairman THOMAS. I will agree with that, but you need to
emphasize the wins, and frankly you need one or two big ones in
a short timeframe, as I hope you have noticed the change in the
climate. Thank you. Mr. Freeman?
Mr. FREEMAN. I think one of the dos from our standpoint is
to make sure that we are focusing on some of the real issues in
our trade relationship. Yes, the currency issue is fundamental,
but there are multiple different issues that really affect the
trade relationship and really are a priority, and a key one is
obviously intellectual property rights, and we really need
leadership, not just from the Administration, but also from the
Congress to make sure that China understands that it needs to
muster the political will to address the problem. There is a
lot that we can do, the Administration currently can do, to try
to work to limit the impact of imported counterfeiting into
this country from China, and also to try to develop the
capacity within China to take care of some of the legal
capacity in China to deal with IPR. Really it is about making
sure that the Chinese government understands that this is
something that requires them to exercise dramatic political
will to address the situation domestically.
Chairman THOMAS. You would think that for starters the
government of China itself would not utilize counterfeit
software within the government. That would seem to be a
reasonable first step. It is those kinds of counterpoints that
come back to you that in the Chair's opinion completely
demolishes your argument that you are going to be working
together and see progress moving forward. That kind of an
inability to respond specifically to the fact that at least the
Chinese government ought not to use it itself. Rather than
worry about exporting counterfeits to the U.S. or controlling
counterfeits within its own country, which are difficult in
many other countries as well, but at least the government
commits to not using it. Those are the kinds of points that if
they aren't articulated strongly by our government and not
responded to by the Chinese that is going to continue to feed
the attitude that you see here and obviously partially
expressed by the Chairman. The gentleman from Michigan wish to
inquire?
Mr. LEVIN. I am glad I came after you because it is a
follow up to what you said. You know I have read your
testimony, and I will tell you how it clearly comes across, and
that is the policy, the approach of this Administration is
basically acquiescence. It is not energetic. Just look at your
testimony, Ms. Forbes, on page 8 and 9. You give all the
reasons why it is wise to tone down concern about our trade
deficit with China. Excluding China the trade deficit has also
risen sharply. That does not cut much ice. That increased
imports from China largely reflect decreased imports of the
same goods from other countries, there has been some
displacement, but the figures show the overall imports from
Asia have increased.
Then you go on and say: Although China is competitive with
some low-end U.S. manufacturing--this is on page 8 and page 9--
U.S. trade with China is largely complementary. It is
increasingly less complementary. Mr. Freeman, you talk on page
6 about 421. You say: Well, today no import relief has been
granted under section 421. The President, in his most recent
determinations, reiterated his commitment to using this
safeguard when the circumstances of a particular case warrant.
That is very lame. Look, we worked on China. There is no
question about the need for engagement. We set up tools for the
Administration to use. It hasn't used them actively,
energetically. We set up, or wanted to be sure there was an
annual transitional review mechanism within the WTO. This
Administration has allowed the Chinese to make that essentially
meaningless. We set up the special safeguard. We worked hard to
get that in. There has been this flood of goods. The three
cases that were brought, the Administration turned down. So,
there is more rhetoric. The President says he will use it. He
hasn't, even though the ITC said, ``Use it.''
The textile safeguard. The Court, as you know, said there
could not be use in terms of threat, there had to be actual
impact. It was your regulations that essentially excluded
threat as a basis for action. You haven't used the 301 process.
You were petitioned to use it as to currency. You haven't used
it except in one case on anything. If there isn't action on
currency, we are going to take action to refile it to get you
moving, and if you don't do that, we will have to do something
else. You haven't used the dispute settlement mechanism.
feebly, compared to the past. On currency manipulation, look
almost everybody says to you, do something. Then you say you
are making progress. Nothing has happened in terms of the
pegging of the currency, zero. You use all kinds of economic
theories, all to essentially excuse--oh, not to excuse--to go
easy, to shrug your shoulders. I can just tell you it isn't our
imagination, it is what we see going on in terms of our
relationship, in terms of displacement here that makes people
want something more than rhetoric.
Mr. SHAW. [Presiding] The time of the gentleman has
expired, but if the panelists would like to--I don't know if
that was a question or a lecture, but----
Mr. LEVIN. It wasn't a lecture.
Mr. SHAW. The panel is invited to respond.
Mr. LEVIN. It wasn't a lecture, Mr. Chairman. I object to
your use of that term.
Mr. SHAW. If the panel would like to--I was looking for a
question, and Mr. Levin, I didn't find one. If the panel would
like to respond?
Ms. FORBES. Sure. I will respond briefly on the currency
issue, and then Charles will respond on some of the trade
issues. First and foremost, we are not shrugging our shoulders
and acquiescing. We are very engaged with China on the issue of
their exchange rate and strengthening their financial system.
We have got----
Mr. LEVIN. Will it be in the report that is supposed to
come out tomorrow? It hasn't been in the recent reports.
Ms. FORBES. The Treasury Department is working on the
report right now. Release has been delayed until probably the
end of the month, and it is too early to know what the----
Mr. LEVIN. Why wasn't it in previous reports?
Ms. FORBES. No, China was not found in previous reports
because if you look at the exact written statements in the
report, it says for China to be identified according to the
standards of the report, it must have a large multilateral
current account surplus. Actually, for most of last year it
looked like China would have a multilateral trade deficit, not
surplus. The bigger picture issue. We are very engaged with
China on this issue. We have had extensive dialogs. We have
sent a number of people to China to work with them on the
exchange rate. We established a technical cooperation working
group to help them work through how to move to a flexible
exchange rate. It sounds easy to us. It is a very difficult and
risky process. It is important for China to develop the tools,
trading platforms, hedging mechanisms, and so forth., before
they move to a flexible exchange rate. Over the past year they
have made progress in taking those technical steps, but we do
feel now that we have given them time, they have take the
steps, they have prepared themselves, and that now it is time
for them to move on their exchange rate regime. That is the
message China is hearing very loud and clear from the U.S.
government, as well as from the G-7, as well as from leading
officials around the world in multilateral institutions.
Mr. LEVIN. Heard that for years.
Mr. FREEMAN. To respond briefly, you are absolutely right,
that there is a very complex situation and requires a multi-
faceted approach and something that we have obviously worked
hard on. We are aware of how much effort that you put into--in
person--into the tools that allow us to really make progress,
and we do use those tools. The key thing is to try to make
progress. What we do is we work very closely with your
constituents and others, and your offices, to try to make sure
that we are delivering results that actually result in
meaningful progress for American businesses, to try to make
sure that we are increasing exports in the case of market
access issues. With respect to dispute settlement, we have used
the WTO process extraordinarily effectively, I believe, to try
to bring forward not only China to make sure that they
understand what requirements they have to meet, but actually to
resolve those cases before you have to go into litigation. We
are still the only one that has actually brought a WTO dispute
case to Geneva, and we did----
Mr. LEVIN. One case.
Mr. FREEMAN. Well, we still are the only one, and the issue
is not whether or not we filed a case, but whether it resolved
the issues that underlie the cases, and we have resolved thus
far eight in 2004, and continue to work on the range of others.
The other part of dispute resolution, as you know, is you have
to work closely with the constituents or the industries
involved, and they need to be 100 percent behind you going
forward. You are trying to deliver results for them. So, when
they are not 100 percent for dispute resolution, you need to
make sure that you are working to achieve their results in as
effective a manner as possible. With respect to the safeguards
and others, we have I think utilized the safeguard with respect
to textiles fairly assertively according to our Chinese
counterparts, and certainly we have been attempting to do that
within the boundaries of the WTO accession agreement that was
negotiated and resolved back in 1999.
As to 421, you are absolutely right, we have not yet
applied import relief in the three cases that we have seen, and
the reason is, as you know, you are trying with import relief
to benefit domestic industry. If you apply import relief and it
is of now benefit to a domestic industry, then you effectively
you are rewarding third countries and you are punishing U.S.
consumers. In the three cases to date that we have seen, at
least in two of them, there was fairly clear evidence that even
the petitioner would not have benefited by any relief, that
what would have happened is that you would have seen the
imports source shift from China to third countries. In the
third case, you had a very clear case of a lot of U.S.
producers benefiting more from not imposing import relief than
some of the petitioning industries. So, you have to ultimately
do a balance of interests in that case and try to make sure
that you are delivering the most economic benefit through the
process that you can and----
Mr. SHAW. Time has expired. The panel has been joined by
Dr. Doug Holtz-Eakin, who is the Director of the Congressional
Budget Office. So, we will suspend questioning, and look
forward to your testimony. As the other witnesses, your full
testimony has been made a part of the record and you may
proceed as you see fit.

STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, CONGRESSIONAL
BUDGET OFFICE

Mr. HOLTZ-EAKIN. Mr. Chairman and Members of the Committee,
thank you for the chance for the CBO to be here today and I
apologize for my late arrival. I was testifying on the other
side of the Capitol.
Mr. SHAW. We understand that takes a long time.
Mr. HOLTZ-EAKIN. I am delighted to be here. We have
submitted a fairly lengthy statement for the record. Let me
take only a few moments of your time to summarize some of the
key points. The highlights of that statement are that trade
with China is not the source of the U.S. trade imbalance or
more generally the U.S. current account deficit, that trade
with China is neither the root cause of our losses in U.S.
manufacturing employment. Fixing the dollar to yuan exchange
rate is not a panacea for China; neither is floating that
exchange rate a panacea for the United States. The emergence of
China as a significant global trading entity and as a source of
growth is an important development, but it has changed the
dynamics of specific markets, particularly commodities,
textiles and intellectual property.
Let me expand briefly on a few of these points but not all
of them. First and of recent interest has been the role of
trade with China in declines in U.S. manufacturing employment.
Between 2000 and 2004 what we have labeled the import
penetration ratio, the fraction of final sales attributed to
imports in manufactured goods, has risen from all countries
including China, from about 22.6 percent to 24.6 percent, and
China is the bulk of that. So, there has been a large increase
in manufacturing imports. Taken at face value, this might
suggest losses in manufacturing employment of 2 to 3 percent, a
small fraction of the overall 17 percent decline that occurred
during that period. However, if one goes underneath the
headline numbers, there is very little evidence that links
higher import penetration directly to the loss of jobs, despite
the suspicion that some industries may have been affected.
There is little difference between the job losses among those
industries that had large increased import penetration and
those that did not. Computers and electronic equipment are a
great case study in this regard. Imports from China increased
by a factor of about 2\1/2\ between 2000 and 2004. Using our
import penetration ratio, China's ratio rose from a bit above 4
to over 11 percent. So, there is a dramatic increase in the
import penetration of goods from China. Employment in this
industry declined equally dramatically, by about 430,000 jobs
or 27 percent.
However, the penetration ratio for overall imports of those
goods was essentially unchanged. So, the large increase in the
Chinese import penetration was offset by decreased imports
elsewhere, and the upshot has been that imports from China have
substituted for imports from other partners. Whereas, generally
much of the drop in employment is not attributed to imports,
but to a decline after the boom in the late 1990s in the
computer industry. For that reason, moving the exchange rate as
a solution to these kinds of problems strikes us as not
especially a high-return strategy. The impact of floating the
exchange rate is far from obvious. It would depend greatly on
how much of a change in the exchange rate got transferred into
net terms of trade and effective prices, and the degree to
which China relaxed its capital controls in the process.
On the former, China is to a great extent a location for
final assembly, and only about 20 to 30 percent of the total
value of an import from China might represent value added in
China. Changing the yuan exchange rate might make Chinese
finished goods more expensive, but it would make the cost of
much of their inputs cheaper than that impact on overall price
competitiveness is far less than the overall change in the
exchange rate. For example, to the extent that one did have
something like a 27-percent increase in the nominal yuan
xchange rate, this might yield as little as 8-percent increase
in the effective price to a U.S. purchaser, and to the extent
that the Chinese manufacturer was willing to accept the lower
profit margin, it would be a smaller imcrease yet. So, the
impacts are not as clear as the simple exchange rate change
might suggest. Finally, let me say a few words about the
particular markets in commodities, especially energy, textiles
and intellectual property.
With respect to energy, it is the case that sustained
growth in China has placed upward pressure on world energy
prices. These higher prices are not in and of themselves a
threat to U.S. economic growth, but do place us more
susceptible to price risks for any supply shock. On textiles,
this in the near term looks like a case study of the
difficulties facing the competitiveness of international trade.
There may remain internationally competitive U.S. firms in the
textile industry, but it is sensible to anticipate that the
industry will shrink. Managing that transition cost, especially
for the displaced workers, is central to reaping the benefits
of lower apparel prices and greater exports of U.S. cotton.
Finally, on intellectual property, it is important to
enforce the proper rights of the creators of intellectual
property, U.S. manufacturers and creative artists. However,
this takes place in two important international contexts, one
which is the difficulties of enforcing digital property rights
everywhere, and in China the difficulty in moving toward
greater reliance on private property rights for all products,
not just intellectual property. I apologize for being late. I
apologize for talking extremely fast, and I look forward to
your questions.
[The prepared statement of Mr. Holtz-Eakin follows:]
Statement of Douglas Holtz-Eakin, Ph.D., Director, Congressional Budget
Office
Mr. Chairman and Members of the Committee, thank you for inviting
the Congressional Budget Office (CBO) to testify on economic
relationships between the United States and China and on China's role
in the world economy. Today, I will review some of the basic facts of
U.S. trade with China; the impact of China's exchange rate policy on
the U.S. current-account deficit; the impact of trade with China on
manufacturing jobs in the United States; and recent developments in the
markets for petroleum and other commodities, products based on
intellectual property, and textiles and apparel.
Economic Linkages Between the United States and China
The United States' current-account balance includes net investment
income and net unilateral transfers, as well as the balance of trade in
goods and services; thus, it is an overall summary of the United
States' transactions with the rest of the world. The current-account
balance--in deficit by some $666 billion in 2004--also reflects the
difference between saving and investment in the United States. Those
activities are driven by market forces that incorporate a complex mix
of factors in the U.S. and foreign economies--such as business cycles,
demographic trends, monetary and fiscal policies, political stability,
opportunities for profits, taxation, and the regulatory environment.
One important component of the current-account deficit is the U.S.
trade deficit in goods, which was over $700 billion in 2004.\1\ Of
that, the deficit for trade in goods with China accounted for about
$176 billion.\2\ Having increased rapidly in recent years, it now is
the single largest bilateral deficit (see Table 1). Nevertheless,
because the United States' trade deficit with the rest of the world has
risen about as fast, the deficit with China has generally remained
between 20 percent and 25 percent of the total (see Figure 1).
---------------------------------------------------------------------------
\1\ Figures for trade in goods are based on data from the Bureau of
the Census, which differ from the measurements used by the Bureau of
Economic Analysis for the current-account balance.
\2\ No data exist on trade in services with China.

Table 1. The 10 Largest U.S. Trade Deficits in Goods in 2004
------------------------------------------------------------------------
U.S. Trade Deficit
U.S. Trade Deficit in Goods with Each
in Goods in Country as a
Billions of Percentage of
Dollars Total
------------------------------------------------------------------------
China 175.8 24.8
------------------------------------------------------------------------
European Union 118.3 16.7
------------------------------------------------------------------------
Japan 78.9 11.1
------------------------------------------------------------------------
Canada 72.1 10.2
------------------------------------------------------------------------
Mexico 47.0 6.6
------------------------------------------------------------------------
South Korea 21.5 3.0
------------------------------------------------------------------------
Venezuela 21.5 3.0
------------------------------------------------------------------------
Malaysia 18.2 2.6
------------------------------------------------------------------------
Saudi Arabia 17.3 2.4
------------------------------------------------------------------------
Nigeria 15.6 2.2
------------------------------------------------------------------------
Memorandum:
All Countries 708.9 100.0
------------------------------------------------------------------------
Source: Congressional Budget Office based on data from the Bureau of the
Census
Note: Numbers are based on free-alongside-ship values of total exports
and customs-insurance-freight values of general imports.

Figure 1. The United States' Trade Balance in Goods with China and
with the World, 1989 to 2004

(Billions of dollars)

[GRAPHIC] [TIFF OMITTED] 23921A.011

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

Much popular attention has been focused on the role of the dollar/
yuan exchange rate in determining the volume of trade flows. However,
China's exchange rate policy has only a modest influence on the overall
trade deficit and, in turn, on the current-account deficit. Any
influence probably stems as much from the role of China's central bank
in increasing liquidity in the United States as from maintaining the
price competitiveness of Chinese goods and services.
China has fixed the exchange value of the yuan at about 8.3 yuan
per dollar since 1995. China pegs the value of the yuan to the dollar
through the use of exchange controls in conjunction with its official
buying and selling of dollars. If exporters' earnings and inflows of
foreign capital result in more dollars received than are needed to
purchase imports, China requires that the dollars be turned in to the
central bank in exchange for yuan at the fixed rate. If a shortage of
dollars develops, those accumulated dollars (referred to as foreign
exchange reserves) can be provided to importers in exchange for yuan at
the prescribed rate. Over the past few years, China's fixed exchange
rate policy has yielded its central bank a large and rising volume of
assets. From 2000 to 2004, those foreign exchange reserves rose at an
average annual rate approaching 40 percent, reaching $610 billion--most
of it in U.S. dollar assets.
Although the Chinese government's purchases of U.S. dollar assets
have prevented the yuan from appreciating against the dollar and
contributed to lower interest rates in the United States (encouraging
U.S. spending), China's currency policy is not primarily responsible
for the large U.S. current-account deficit. The steady rise in the U.S.
current-account deficit has resulted from many developments, including
stronger economic growth in the United States than in other industrial
countries, faster productivity growth in the United States since 1995,
and strong international demand for U.S. assets from countries besides
China; for example, the Japanese government purchased more U.S. dollar
assets than the Chinese government did over the 2000-2004 period.
There is concern that a large sale of U.S. Treasury securities by
the Chinese could cause a significant increase in the Treasury yield
and a sharp fall in the dollar. Such fears appear to be exaggerated.
The combined holdings of China and Hong Kong represented only slightly
more than 5 percent of outstanding U.S. Treasury securities at the end
of 2004.\3\ Therefore, even a large sale by China would be a modest
fraction of the highly liquid market for Treasury securities
worldwide.\4\ Only if such a sale triggered a broader shift against
dollar--denominated assets could it spur a noticeable rise in U.S.
interest rates. At the same time, any broad fall in the dollar relative
to other currencies would help improve the U.S. trade balance, lowering
the foreign-currency price of U.S. exports and raising the price that
U.S. businesses and consumers pay for imports.
---------------------------------------------------------------------------
\3\ At that time, China owned $195 billion and Hong Kong, $53
billion in such securities.
\4\ China owns other dollar-denominated assets as well. If they
were included, CBO's conclusions would probably not change
significantly.
---------------------------------------------------------------------------
The future of China's exchange rate policy is unclear. In contrast
to the recent past, China may not wish to continue to fix its currency
at 8.3 yuan per dollar. A growing stock of dollar assets exposes
China's central bank to large capital losses if the yuan does
eventually appreciate. The longer the fixed-exchange-rate regime, the
larger the accumulated dollar assets, and the bigger the potential
capital loss.\5\ Moreover, as the Chinese become wealthier and import
more from the rest of the world, the benefits of freeing the yuan to
appreciate and commanding greater purchasing power would also grow.
Ultimately, those arguments for allowing the yuan to float may outweigh
two factors that up to now appear to have played a more dominant role:
China's desire for rapid, export-led growth to employ its large
population moving from farms, and concerns about the maturity of the
Chinese financial system.
---------------------------------------------------------------------------
\5\ At the end of 2004, China's foreign exchange reserves amounted
to about 38 percent of its gross domestic product.
---------------------------------------------------------------------------
The implications of ultimately allowing the yuan to float will
depend on whether or not China retains capital controls. Without
capital controls, to the extent that Chinese citizens and businesses
wanted to diversify their portfolios and reduce their exposure to
potential problems in the Chinese banking system, they would probably
remove some of their funds from Chinese banks, leading to an outflow of
funds to other countries. China's commercial banks have been struggling
to resolve a large amount of nonperforming loans--that is, loans not
being repaid or repaid on time--and rebuild their capital bases. Any
outflow, if sufficiently severe, could cause financial stress if
capital controls were removed prematurely.
If China Allows the Yuan to Float and Retains Capital Controls
If China retains capital controls and the dollar/yuan exchange rate
is determined solely by the supply of and demand for dollars from trade
flows, then the yuan will probably appreciate against the dollar and
the bilateral deficit in the U.S. goods trade with China will
diminish.\6\ The resulting dollar/yuan exchange rate, reflecting a
constrained capital market, would be higher than a market rate that
reflected the supply and demand of dollars from both trade flows and
from unconstrained capital flows.
---------------------------------------------------------------------------
\6\ At the current exchange rate, there is an excess supply of
dollars (from exports to the United States) relative to the demand for
dollars (from imports to China from the United States). Left unchecked,
that would exert downward pressure on the price of dollars in terms of
yuan. The yuan would have to appreciate substantially against the
dollar to induce those exports to fall and those imports to rise until
the demand for dollars equaled the supply.
---------------------------------------------------------------------------
Although the yuan would appreciate in that scenario, the overall
U.S. current--account deficit would probably diminish by less than the
bilateral trade deficit with China would. As exchange rates shifted,
the pattern of trade would change, most likely resulting in imports to
the United States from other, now more competitive countries. Viewed
from another perspective, the cessation of purchases of dollar assets
by the Chinese government would reduce one external source of capital
for the United States. However, more capital might come from other
countries, thereby diminishing the improvement in the U.S. current-
account deficit.
Regardless of the extent to which any appreciation of the yuan
affected U.S. economic growth and employment overall, it would directly
affect consumers and some producers in the United States by increasing
the prices paid for imports and reducing the prices paid for exports.
If China Allows the Yuan to Float and Lifts Capital Controls
The Chinese government has indicated its willingness to allow the
yuan to float and its intent to become more integrated with the
international financial market. Private bond-rating agencies report
that the government has made significant, though not yet sufficient,
progress in improving the soundness of the Chinese banking system--a
necessary condition for removing capital controls.\7\ Moreover, China
recently made arrangements with seven international commercial banks to
help two domestic banks gain the necessary expertise for foreign
exchange trading. Those steps suggest a greater preparedness for open
trade in both goods and capital.
---------------------------------------------------------------------------
\7\ Standard & Poor's reports that the Chinese government recently
injected $45 billion into two major state-owned commercial banks,
although that rating agency still considers capitalization to be weak
and the level of assets that are impaired to be high. Fitch Ratings
suggests that the rules for the capital required of Chinese banks have
come up to Basel I standards.
---------------------------------------------------------------------------
If China allows the yuan to float and simultaneously lifts capital
controls, the impact on the value of the yuan is less clear than when
capital controls remain. If a sufficiently large outflow of private
funds occurred, occasioned by the liberalization of capital controls,
the yuan might depreciate. (A potential factor in this regard is that a
portion of the buildup of China's reserves may reflect an inflow of
funds by speculators in anticipation of gains from a revaluation. If
the currency was allowed to float and reach its market value, such one-
sided speculative activity would cease, thereby ending that source of
upward pressure on the yuan.)
In the absence of large outflows of private capital from China, a
move by the Chinese government to float the yuan would reduce the
demand for U.S. dollar assets. That decline in demand would tend to
lower the exchange value of the dollar.
Ultimately, however, trade is not affected by the nominal exchange
rate alone, but by the relative prices of exports and imports. The
effect of a change in the dollar/yuan exchange rate on the bilateral
trade balance will depend on the extent to which Chinese and U.S.
exporters pass through that change to their export prices.
The Effect of a Stronger Yuan
If the yuan appreciated relative to the dollar, it would directly
increase the U.S. price of imports from China. However, those increases
would probably be much less than the appreciation of the yuan itself.
One reason is that a large share of the price of Chinese exports
reflects the cost of imported materials, and an appreciation of the
yuan would reduce the yuan prices of many of those inputs. Only the
value added in China would be made more expensive in dollar terms by
the yuan's appreciation. One group of analysts has estimated that, on
average, only 20 percent to 30 percent of the value of exported Chinese
goods represents value added in China.\8\ If so, a 20 percent
appreciation of the yuan would increase the final dollar price of the
exports by only 4 percent to 6 percent (20 percent appreciation times
20 percent to 30 percent value added), even if the extra cost were
passed through completely.
---------------------------------------------------------------------------
\8\ See the statement of Lawrence J. Lau, ``Is China Playing by the
Rules? Free Trade, Fair Trade, and WTO Compliance,'' before the
Congressional-Executive Commission on China (September 24, 2003); and
Xikang Chen and others, ``The Estimation of Domestic Value-Added and
Employment Induced by Exports: An Application to Chinese Exports to the
United States'' (presentation to the Institute of Systems Science,
Academy of Mathematics and Systems Science, Chinese Academy of
Sciences, Beijing, June 18, 2001). See also Xikang Chen and others,
``The Estimation of Domestic Value-Added and Employment Induced by
Exports'' (revised December 2001), as cited in the statement of Stephen
S. Roach before the Commission on U.S.-China Economic and Security
Review, September 25, 2003.
---------------------------------------------------------------------------
Moreover, Chinese firms and their workers may also absorb part of
any increase in the yuan's exchange value. Exporters tend to try to
prevent the appreciation of their currencies from eroding their price
competitiveness (and thus market shares) in the international market by
accepting a cut in their profit margins. The opportunity for such cost
cutting is presumably limited to the value added in China, unless
Chinese exporters can find even cheaper sources of their imported
inputs.
The ultimate impact of any resulting price increase on the volume
of U.S. imports from China depends on how competitive China is compared
with other countries. If the countries that previously assembled the
products that China now assembles remain close competitors of China,
then a price increase of plausible magnitude might be enough to induce
a substantial shift in production from China back to those other
countries. In effect, the process by which U.S. imports from China grew
over time would to some extent be reversed. Imports from China would
decline (or grow more slowly), but imports from the other countries
would rise. The United States' overall trade deficit would decline only
slightly.
U.S.-Chinese Bilateral Trade in Goods
While the dollar value of U.S. exports of goods to China has more
than doubled since 2000, the value of U.S. imports of goods from China
has increased even more--creating a widening bilateral trade deficit in
goods for the United States that now is the largest one it has with any
of its trading partners. Part of that growth in the imports of goods,
however, has displaced imports from other countries rather than U.S.
domestic production.
As described, the primary force driving the increase in imports of
goods from China is that manufacturers have shifted the final assembly
of many of their products from other Asian countries (and perhaps a few
non-Asian countries) to China. Much of the value of Chinese exports
thus consists of parts made elsewhere in Asia. Consequently, the United
States' bilateral trade deficit with China reflects the net balance of
trade in goods with many Asian countries that is channeled primarily
through China.
With the growth of U.S. exports to and U.S. imports from China,
China has become one of the United States' most important trading
partners. Last year, the largest category of U.S. exports of goods to
China was semiconductors and other electronic components, while the
largest category of imports of goods was computer equipment.
U.S. Exports of Goods to China
U.S. exports to China have grown rapidly but remain only a small
percentage of total U.S. exports. That rapid growth has raised China
from the 10th largest U.S. export market in 1997 to the fifth largest
in 2004. In fact, between 2000 and 2004, exports to China accounted for
half of the increase in total U.S. exports (see Table 2).

Table 2. The 10 Largest Markets for U.S. Exports of Goods
(Billions of dollars)
------------------------------------------------------------------------
U.S. U.S.
Exportsof Exportsof Change, 2000
Goods in Goods in to 2004
2000 2004
------------------------------------------------------------------------
Canada 176.4 187.7 11.3
------------------------------------------------------------------------
European Union 167.9 172.6 4.6
------------------------------------------------------------------------
Mexico 111.7 110.8 -0.9
------------------------------------------------------------------------
Japan 65.3 54.4
------------------------------------------------------------------------
China 16.3 34.7 18.5
------------------------------------------------------------------------
South Korea 27.9 z -1.6
------------------------------------------------------------------------
Taiwan 24.4 21.7 -2.6
------------------------------------------------------------------------
Singapore 17.8 19.6 1.8
------------------------------------------------------------------------
Hong Kong 14.6 15.8 1.2
------------------------------------------------------------------------
Australia 12.5 14.3 1.8
------------------------------------------------------------------------
Memorandum:
All Countries 780.4 816.5 36.1
------------------------------------------------------------------------
China's Share of Total 2.1 4.2 51.2
(Percent)
------------------------------------------------------------------------
Source: Congressional Budget Office based on data from the Bureau of the
Census.
Note: Numbers given are free-alongside-ship values of total exports.

Some of the largest categories of exports by value in 2004 were
semiconductors and other electronic components, waste and scrap,
soybeans, aerospace products and parts, and various electronic
equipment (such as navigational and medical instruments) (see Table 3).
The identity of the 10 largest categories has changed very little since
2002, although the ranking within the top 10 has changed slightly. An
exception is cotton exports--ranked seventh in 2004 after growing
tenfold in value between 2002 and 2004--which supplied raw materials
for China's rapidly growing textile and apparel industries.

Table 3. The 10 Largest Categories of U.S. Exports of Goods to China in
2004
------------------------------------------------------------------------
In Billions of As a Percentage
Product Category a Dollars of Total
------------------------------------------------------------------------
Semiconductors and Other 3.6 10.3
Electronic Components
------------------------------------------------------------------------
Waste and Scrap 2.5 7.2
------------------------------------------------------------------------
Soybeans 2.3 6.7
------------------------------------------------------------------------
Aerospace Products and Parts 2.1 6.1
------------------------------------------------------------------------
Navigational, Measuring, 1.7 5.0
Electromedical, and Control
Instruments
------------------------------------------------------------------------
Other Basic Organic Chemicals 1.6 4.6
------------------------------------------------------------------------
Cotton 1.4 4.1
------------------------------------------------------------------------
Resin and Synthetic Rubbers 1.4 4.0
------------------------------------------------------------------------
Computer Equipment 1.4 3.9
------------------------------------------------------------------------
Other General-Purpose Machinery 1.1 3.2
------------------------------------------------------------------------
Memorandum:
All Product Categories 34.7 100
------------------------------------------------------------------------
Source: Congressional Budget Office based on data from the Bureau of the
Census.
Note: Numbers are free-alongside-ship values of total exports.
a Product categories correspond to five-digit codes of the North
American Industrial Classification System.

U.S. Imports of Goods from China
In the past four years, U.S. imports from China roughly doubled
(see Table 4). With that rapid growth, China has moved from being the
fifth largest supplier of U.S. imports in 1997 to the third largest in
2004, when it accounted for almost 14 percent of U.S. imports.

Table 4. The 10 Largest Suppliers of U.S. Imports of Goods
(Billions of dollars)
----------------------------------------------------------------------------------------------------------------
U.S. Imports of U.S. Importsof Change, 2000 to
Goodsin 2000 Goods in 2004 2004
----------------------------------------------------------------------------------------------------------------
European Union 233.9 290.0 57.0
----------------------------------------------------------------------------------------------------------------
Canada 232.7 259.8 27.1
----------------------------------------------------------------------------------------------------------------
China 107.6 210.5 102.9
----------------------------------------------------------------------------------------------------------------
Mexico 137.5 157.8 20.4
----------------------------------------------------------------------------------------------------------------
Japan 150.6 133.3 -17.3
----------------------------------------------------------------------------------------------------------------
South Korea 41.7 47.8 6.1
----------------------------------------------------------------------------------------------------------------
Taiwan 42.3 36.2 -6.0
----------------------------------------------------------------------------------------------------------------
Malaysia 26.4 29.1 2.7
----------------------------------------------------------------------------------------------------------------
Venezuela 19.6 26.3 6.7
----------------------------------------------------------------------------------------------------------------
Brazil 14.6 22.7 8.1
----------------------------------------------------------------------------------------------------------------
Memorandum:
All Countries 1,258.2 1,525.5 267.3
----------------------------------------------------------------------------------------------------------------
China's Share of Total (Percent) 8.6 13.8 38.5
----------------------------------------------------------------------------------------------------------------
Source: Congressional Budget Office based on data from the Bureau of the Census.
Note: Numbers are customs-insurance-freight values of general imports.

Some of the largest categories (in terms of value) of U.S. imports
from China are various kinds of electronic equipment (for example,
computers and audio and video equipment), toys, footwear, and
semiconductors (see Table 5). The identity of the 10 largest categories
of imports from China has changed very little in the past two years.

Table 5. The 10 Largest Categories of U.S. Imports of Goods from China
in 2004
------------------------------------------------------------------------
In Billions of As a Percentage
Product Category a Dollars of Total
------------------------------------------------------------------------
Computer Equipment 30.3 14.4
------------------------------------------------------------------------
Audio and Video Equipment 13.0 6.2
------------------------------------------------------------------------
Dolls, Toys, and Games 13.0 6.2
------------------------------------------------------------------------
Footwear 11.8 5.6
------------------------------------------------------------------------
Semiconductors and Other 10.4 4.9
Electronic Components
------------------------------------------------------------------------
Household and Institutional 9.6 4.6
Furniture
------------------------------------------------------------------------
Women's and Girls' Apparel 6.8 3.2
------------------------------------------------------------------------
Radio and Television Broadcasting 6.2 2.9
and Wireless Communications
Equipment
------------------------------------------------------------------------
Other Manufactured Commodities 6.2 2.9
------------------------------------------------------------------------
Commercial and Service-Industry 5.1 2.4
Machinery
------------------------------------------------------------------------
Memorandum:
All Product Categories 210.5 100
------------------------------------------------------------------------
Source: Congressional Budget Office based on data from the Bureau of the
Census.
Note: Numbers are customs-insurance-freight values of general imports.
a Product categories correspond to five-digit codes of the North
American Industrial Classification System.

Not all of the U.S. imports from China represent lost U.S.
production. A significant share of imports from China appears to
replace imports from other countries. For example, the U.S.
International Trade Commission (ITC), observed in testimony before this
Committee that China's rising share of U.S. imports of both electrical
and nonelectrical machinery from 1990 through 2002 coincided with a
fall in Japan's import share in those same goods.\9\ In analyzing
changes in total imports to the United States from 2000 to 2002, the
ITC found that China's increase in imports to the United States was
largely offset by declines in imports to the United States by Japan,
Taiwan, Singapore, Korea, and other Asian nations. Movement of the
final assembly of manufactured goods from those other Asian countries
to take advantage of lower labor costs facilitated China's apparent
displacement of other Asian nations' imports in the U.S. market.
---------------------------------------------------------------------------
\9\ Statement of Robert A. Rogowsky, Director of Operations, U.S.
International Trade Commission, before the House Committee on Ways and
Means (October 30, 2003), p. 10.
---------------------------------------------------------------------------
The Possible Effects of Imports from China on Employment in Particular
U.S. Industries
Manufacturing employment in the United States declined by about 3
million jobs (or about 17 percent) between early 2000 and early 2004
and remains close to its recent low point. The bulk of the decline
reflects the recession and the subsequent slow recovery in the demand
for manufactured goods, as well as continued rapid growth in
productivity within U.S. manufacturing and a long-term decline in the
manufacturing sector as a share of total employment.\10\ A decline in
employment in any particular sector, such as manufacturing, does not
necessarily mean lower employment in the economy as a whole; employment
in many sectors has, in fact, expanded over the past two years.
Nevertheless, job losses are likely to be costly for individual workers
who need to find new jobs.
---------------------------------------------------------------------------
\10\ Congressional Budget Office, What Accounts for the Decline in
Manufacturing Employment? (February 18, 2004).
---------------------------------------------------------------------------
From 2000 to 2004, the overall import-penetration ratio for
manufactured goods from all countries, including China, rose from 22.6
percent to 24.6 percent.\11\ Other things being equal, that increase
might have been expected to directly reduce manufacturing employment in
the short run by between 2 percent and 3 percent--a small fraction of
the 17 percent decline that actually occurred. Surprisingly, however,
little evidence links higher import penetration directly to the loss of
jobs. There is little difference between the job losses among
industries that experienced particularly large increases in import
penetration in that period and those where increases were smaller. (The
general increase in imports of goods can be tied to an increase in the
foreign exchange value of the dollar in the late 1990s, which reduced
the price competitiveness of U.S. goods in world markets. The dollar
has since fallen against a number of currencies of the major
industrialized nations, leading to expectations of greater U.S. exports
to those nations and a slowing of imports.)
---------------------------------------------------------------------------
\11\ Statement of Robert A. Rogowsky, Director of Operations, U.S.
International Trade Commission, before the House Committee on Ways and
Means (October 30, 2003), p. 10.
---------------------------------------------------------------------------
Nevertheless, some industries probably were affected more by
imports, including those from China, than the manufacturing sector as a
whole was. Above-average declines in employment occurred in several
industries with particularly large increases in the share of domestic
demand accounted for by Chinese imports, including those for textile
mill products, apparel, leather and allied products, computer and
electronic products, and electrical equipment and appliances. By
contrast, in furniture and fixtures, where the import-penetration ratio
for Chinese goods also rose (from 5.9 percent to 12.9 percent), job
losses were slightly below average.
Two interesting cases are the computer and electronics industry and
the apparel industry. Imports of computers and electronic equipment
from China increased by a factor of about 2\1/2\ between 2000 and 2004,
and the import-penetration ratio for such goods from China rose from
4.3 percent to 11.1 percent. Meanwhile, employment in that industry
declined by about 430,000 jobs (27 percent) between early 2001 and mid-
2003 and has been roughly constant since then. However, the penetration
ratio for imports from all countries was virtually unchanged,
suggesting that imports from China were largely replacing imports from
other sources. And much of the earlier drop in employment can be traced
to the large boom in the late 1990s and the subsequent decline in
businesses' investment in computers and telecommunications equipment,
rather than to increases in imports.
Imports of apparel from China have also risen significantly in the
past several years, from $8.7 billion in 2000 to $9.8 billion in 2002
and $13.9 billion in 2004. That rise was accompanied by a decline in
employment of nearly 200,000 jobs (37 percent) between the second
quarter of 2000 and the second quarter of 2003 and an additional 50,000
jobs (16 percent) by the first quarter of 2005. Employment in the
closely related sectors for textiles and fabrics and textile mill
products also experienced above-average employment declines both during
the recession and since 2003. But those declines appear to represent a
continuation of a long-standing trend: employment in the apparel sector
had already fallen by 400,000 jobs, or by more than 40 percent, between
1992 and 2000 (see Figure 2).
Figure 2. Employment in the U.S. Apparel and Textiles Industries, 1990
to 2004

(Thousands of workers)

[GRAPHIC] [TIFF OMITTED] 23921A.012

Sources: Congressional Budget Office; Department of Labor, Bureau
of Labor Statistics.

Any simple correlation of declines in employment with increased
imports from China could be misleading, however. Such calculations do
not account for the extent to which imports from China displaced
imports from other countries. They also do not account for the
contributions of demand changes to job gains or losses in particular
industries.
Recent Developments in the Markets for Petroleum, Intellectual
Property, and Textiles and Apparel
Currently, attention is focused on China's growing role as a
consumer of petroleum and other commodities and of intellectual
property, including both creative products and technologies. In the
markets for textiles and apparel, debate has intensified about China's
increased share of world exports and U.S. imports--particularly since
protections against those goods were dropped at the beginning of the
year as part of China's entry into the World Trade Organization (WTO).
Petroleum and Other Commodity Markets
Increased demand for a broad range of important raw materials that
trade in world markets is a global phenomenon. Fast economic growth in
China is a contributor. The commodities for which growth in China's
imports appears to be greatest are crude oil and petroleum products
(including petrochemicals), iron and raw steel, other metals (including
copper, aluminum, and magnesium), wood and paper pulp, and fibers
(including cotton, wool, and synthetics).
The fixed business investment that is accompanying China's rapid
urbanization partly accounts for the nation's rising demand for basic
commodities. To support the construction of buildings and roads, China
has become the world's largest consumer of steel and cement. To help
support the electrification of the country, China also has become the
world's largest consumer of copper. However, much of the new demand for
raw materials also supports new domestic consumer demand. Developments
in consumer markets provide some indication of the fundamental nature
of the changes under way in China and of reasons why the demand for
resources will continue to grow.
Significant changes in China's transportation sector have shifted
the country from being a net exporter of crude oil as recently as 1992
to being the second largest importer last year (after the United
States). From 1998 to 2004, China accounted for more than 25 percent of
the total increase in world demand for oil. (In contrast, the United
States accounted for only 17 percent of the global increase in
petroleum use over that period.) Currently, China's oil consumption is
over 6.5 million barrels a day, or about 8 percent of world use.
Coincident with the global increase in demand for oil, which
accelerated in 2004, world oil prices have doubled in the past year
(from $28 a barrel in January 2004 to about $55 today) and have more
than tripled since January 2002 (when the price was only $17).
With more people in China owning and using automobiles, the upward
trend in oil demand and prices probably will continue. At the end of
2004, China's stock of motor vehicles for civilian use stood at 27.4
million vehicles, up from 16.1 million in 2000. New vehicle sales in
China were about 4.3 million in 2004 (including 2.3 million passenger
cars), and they are expected to surpass sales in Japan by 2008.
Extensive road construction that increases the total length of the
country's highway system by about 30,000 miles each year (including
over 2,500 miles of new expressways and several important new inter-
regional arteries) supports the growing demand for automobiles and
crude oil. In addition, China is investing in new petroleum refineries
to help with the transition from a product mix dominated by industrial
raw materials and kerosene to one dominated by gasoline and diesel
fuel.
To support China's efforts to raise its share of the world oil
market, the central government in recent years has ordered the
consolidation of a long list of small companies involved in oil
production, importation, transport, processing, and distribution into a
few large vertically integrated firms with the goal that they compete
with the other major oil companies of the world. Those new firms have
been directed to help secure China's access to oil assets abroad
through a range of joint ventures and long-term contracts. (The most
important of those new world players are the Chinese National Petroleum
Corporation, or CNPC, and the China Petroleum and Chemical Corporation,
or Sinopec.)
The U.S. and world markets already are adjusting to higher prices
on both the supply and demand sides, developing new sources of crude
oil and new substitutes for it, as well as more-energy-efficient
technologies. In this country, oil and gas drilling has increased by a
total of about 50 percent over the past two years (in terms of both the
number of active rigs and feet drilled). The economic prospects of oil
fields in remote regions worldwide have improved. Backstop technologies
such as tar sands and gas-to-liquids conversion are more profitable,
too. On the demand side, high oil prices give businesses and consumers
an incentive to switch to vehicles that are more fuel-efficient or to
otherwise change their driving habits. That process may be under way
already, with demand for large SUVs (sport utility vehicles) having
dropped sharply since the end of 2004 and new hybrid vehicles coming to
the market.
Following the major oil price increases of the 1970s, consumers and
businesses in the United States made many advances that resulted in a
large decline in the amount of energy needed to produce a dollar of
output. Comparably large improvements in energy efficiency in the
United States may be difficult in the future, but opportunities still
exist. And there is great potential in China and other fast-developing
regions of the world to make large improvements.
In the near term, however, all of those responses may not help to
ease price pressures. For example, new drilling has not yet slowed the
decline in domestic production, and changing preferences for new cars
will not significantly affect total gasoline demand for years to come.
However, new sources of energy and major changes in energy consumption
are likely to occur soonest if investors and consumers expect oil
prices to remain high, and those changes will help to curb further
price increases.
The increase in the price of oil could slow the momentum of global
growth because consumers who have to pay higher prices for gasoline
have less to spend on purchases of other goods and services from
domestic producers. The resulting slowing of spending could have
reverberating effects in the short run, slowing both production of
nonoil goods and services and, possibly, capital investment outside the
oil sector. The International Monetary Fund, in its recent World
Economic Outlook, forecast that global growth would slow by about 0.7
percentage points to 0.8 percentage points in the 2005-2006 period
compared with that in 2004, in part because of the rise in petroleum
prices.
Although the impact on U.S. growth is not very large at current
prices, it could be more significant if prices rise substantially
higher than they currently are. That possibility cannot be ruled out:
oil prices are highly variable, and forecasts of those prices
notoriously unreliable. At the end of 2003, for example, few people
expected prices to rise much above $30 per barrel.
Intellectual Property Markets
Infringement of intellectual property in China is a pressing
concern for U.S. holders of patents, copyrights, and trademarks. For
example, although estimates of the market value of infringing (or
``pirated'') products are subject to numerous qualifications, the
International Intellectual Property Alliances (IIPA) calculates that
sales lost to pirated movies, music, software, and books in China
totaled $2.5 billion in 2004. Economic losses to U.S. copyright owners
from pirated works in China have remained at or above 90 percent since
2000. Reflecting those concerns, the United States Trade Representative
negotiated specific commitments from China during a meeting of the
Joint Commission on Commerce and Trade on April 7, 2004, and has
scheduled a special review of China's progress in fulfilling those
commitments for early 2005.
However, greater enforcement of the rights of U.S. intellectual
property owners in China faces several near-term obstacles. First, the
estimated $2.5 billion in lost sales of copyrighted works from piracy
in China is a relatively small amount when compared with the $34.7
billion in exports.\12\ As a result, efforts by the United States to
protect its intellectual property could, in the event of retaliatory
measures by China, be damaging to U.S. trade more broadly. Second, the
digitization of creative works has made engaging in piracy easier--
through unauthorized redistribution over the Internet and illicit
manufacturing of CD-ROM (facilitated by sharp declines in the cost of
CD-stamping equipment). As a result, copyright infringement is a
challenge not just for China, but for other countries with similarly
lagging institutions for intellectual property enforcement.\13\ For
example, the IIPA places Russia second behind China in copyright
infringement, with estimated losses to U.S. copyright owners of $1.7
billion in 2004.
---------------------------------------------------------------------------
\12\ The estimate of $2.5 billion in sales lost to copyright
infringement in China does not take into account the impact of patent
and trademark violations.
\13\ Congressional Budget Office, Copyright Issues in Digital Media
(August 2004).
---------------------------------------------------------------------------
For the longer term, China has recently committed to strengthening
its intellectual property laws and enforcement and, as its regulatory
regime improves and the amount of intellectual property originating
domestically increases, China should have increasing ability and
incentive to protect U.S. intellectual property. China now successfully
competes with U.S. and other producers on world markets for high-tech
goods. As the importance to China of having its own patents respected
abroad increases, so too should its efforts to enforce the intellectual
property rights of foreigners in its own markets.\14\
---------------------------------------------------------------------------
\14\ See Hal R. Varian, ``Copying and Copyrighting,'' mimeo (March
29, 2005), available at www.sims. berkeley.edu/hal/Papers/2004/
copying-and-copyright.pdf.
---------------------------------------------------------------------------
Textile and Apparel Markets
After trade protections eased in 2001 with China's entry into the
World Trade Organization, the value of Chinese exports of textiles and
apparel to the United States increased by 49 percent between 2002 and
2004, from about $12.2 billion to over $18.2 billion.\15\ Preliminary
data for the first three months of 2005 indicate another large increase
in China's exports of textiles and apparel to the United States as a
consequence of lifting the remaining trade protections at the beginning
of this year. Those developments in bilateral trade in textiles and
apparel between the United States and China are part of a larger and
longer-running increase in the share of U.S. textile and apparel
consumption accounted for by imports (see Figure 3).
---------------------------------------------------------------------------
\15\ U.S. Census Bureau, Foreign Trade Division.
---------------------------------------------------------------------------
Figure 3. U.S. Net Imports in Textiles and Apparel, 1961 to 2003

(Percentage of U.S. market)

[GRAPHIC] [TIFF OMITTED] 23921A.013

Source: Congressional Budget Office based on data about trade and
industry shipments from the Department of Commerce, Bureau of the
Census and Bureau of Economic Analysis.
Notes: Net imports equals imports minus exports. The U.S. market is
equal to apparent consumption, which is domestic industry shipments
plus imports minus exports. Exports are measured as the free-alongside-
ship values of domestic exports. Imports are measured as the landed-
duty-paid value of imports for consumption.
The breaks between 1997 and 1998 are a consequence of the change
from the Standard Industrial Classification system to the North
American Industrial Classification System.

An assessment released by the International Trade Commission (ITC)
in early 2004 points out that in 2002, the average cost per operator-
hour in the textile industry (for spinning and weaving, specifically)
in China's coastal region was $0.69. Costs for major East Asian
producers--South Korea, Taiwan, and Hong Kong--were 8 to 10 times
higher. Wages were lower in other South Asian countries, but
productivity was also lower, granting Chinese producers a unit-cost
advantage. In comparison to sources of U.S. imports in the Western
Hemisphere--including Mexico, Guatemala, and El Salvador--China had a
smaller but still substantial advantage. In summarizing its outlook for
the U.S. textile and apparel markets, the ITC concluded that China
``would become the `supplier of choice' for many U.S. importers . . .
because of its ability to produce almost any type of textile and
apparel article at any quality level at competitive prices.'' \16\
---------------------------------------------------------------------------
\16\ U.S. International Trade Commission, Textiles and Apparel:
Assessment of the Competitiveness of Certain Foreign Suppliers to the
U.S. Market (January 2004), pp. E3
---------------------------------------------------------------------------
Over the next several months, the Committee for the Implementation
of Textile Agreements, an interagency group including one
representative each from the Office of the Special Trade Representative
and the Departments of Commerce, State, the Treasury, and Labor may
conclude that the safeguards included in the agreement to accept China
into the WTO ought to be put in place to constrain the growth of
specific Chinese textile and apparel products imported to the United
States. Yet, after the resulting pause in the growth of Chinese
imports, the cost advantage enjoyed by Chinese producers will probably
allow Chinese imports to displace both the imports of other nations and
domestic production in the U.S. market.
Regardless of whether safeguards that slow the growth of Chinese
imports are activated, further contraction of the U.S. textile and
apparel industries is likely. Policies currently in effect that provide
assistance, including cash grants, training support, and tax credits
for health insurance and wage insurance, may ease the continuing
transition of workers and communities out of textile manufacturing and
into other economic activities.\17\ Current policy also recognizes,
however, the ultimate benefits of allowing markets to function and the
location of production to be determined by cost. In the future, the
scenario of a shifting cost advantage, economic dislocation, and
overall economic gain, which is occurring in textile and apparel
markets, is likely to play out in a number of markets as the world
economy adapts to the addition of the labor forces of China, India, and
other South Asian countries.
---------------------------------------------------------------------------
\17\ In fiscal year 2004, almost 30 percent of the cases certified
for trade adjustment assistance were in the textile and apparel
industry.

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

Mr. SHAW. Thank you.
Mr. McCrery?
Mr. MCCRERY. Thank you, Mr. Chairman.
Dr. Holtz-Eakin, your testimony seems to downplay the
impact of trade with China on our economy in general and on our
manufacturing base in this country. Is that a fair summary of
your statement?
Mr. HOLTZ-EAKIN. I think it is fair to say that we believe
the overall impact is smaller than simple measures such as the
fraction of imported goods that come from China, that the
economics are more subtle than that, and often the overall
impacts are less than the statistics might indicate.
Mr. MCCRERY. Can you review for us the general health of
the manufacturing sector in this country? Compare it to years
past, for example?
Mr. HOLTZ-EAKIN. Health in any industry is a
multidimensional item. Measured by employment, health in the
manufacturing industry would appear to be declining. However,
measured by the productivity of an industry, the manufacturing
sector is extraordinarily robust. Those are mirror images of
one another. Manufacturing has largely maintained its share in
the value of U.S. output by increases in productivity which do
in fact free up resources for use elsewhere in the economy, and
we have seen a steady transition of that type. The third
measure would be measures such as profitability and return on
investment. There we have experienced a real shift over the
past several years. This past recession was largely a recession
characterized by declines in business investment the hurt
manufacturers directly. It was characterized by slow global
growth and that hurts exports of manufactured goods directly.
We have seen reversals on both fronts to some extent in the
past several years. So, I would say the report card is short of
straight A's, but one which would not indicate failing grades
either.
Mr. MCCRERY. What about as a share of our GDP,
manufacturing activity?
Mr. HOLTZ-EAKIN. Share of value added? I don't have the
number off the top of my head but it has been relatively steady
over a period in which, employment has declined.
Mr. MCCRERY. Do you have any numbers on the top of your
head about exports from the manufacturing sector?
Mr. HOLTZ-EAKIN. We have those. They are available, and if
I could grab my cheat sheets I would get them for you, but
certainly the manufacturers are central exporters for the
United States, the dominant form of exports at the moment. I
think most observers would anticipate that exports of services
will increase going forward. Services are a source of American
comparative advantage, but at the moment manufacturers are the
heart of the export industry.
Mr. MCCRERY. Would you recommend any measures that the
Administration might take in its negotiations or talks with
China vis-a-vis the trade issues or currency issues?
Mr. HOLTZ-EAKIN. As you know, I am statutorily barred from
making policy recommendations, so I will dance carefully around
that question and try to say what good economists think would
be sensible for any Administration. I think most economists
would agree that it would be unwise to choose any array of
policies which was specifically discriminatory against China,
such as an across-the-board tariff or quota on a particular
country. It would be better to bring any trading partner into
the broad set of trade agreements and the legal environment
that characterizes all trading parties so it was a level
playing field. I think some of the hot button issues in China
have to do with protection of intellectual property. It is
important to make the playing field level there as with other
trading partners. Those are fruitful steps to make sure that
future trade is one which is beneficial to all, and that is the
goal.
Mr. MCCRERY. Just to be clear to people who may be watching
today's hearing, you are not a member of the Administration,
are you?
Mr. HOLTZ-EAKIN. No. I work for the Congress and different
in that way.
Mr. MCCRERY. You are the head of the Congressional Budget
Office and you were appointed in a bipartisan fashion, isn't
that right?
Mr. HOLTZ-EAKIN. I am a joint appointment of the Speaker of
the House and the President pro tempore of the Senate for a 4-
year term.
Mr. MCCRERY. It has been. Thank you.
Mr. SHAW. Mr. Rangel?
Mr. RANGEL. The President and Speaker of the House are both
Republicans, but we always have enjoyed your good attempts to
be bipartisan, and it is appreciated around here. So, as far as
you are concerned we don't have a major problem with this
deficit with China?
Mr. HOLTZ-EAKIN. I believe that our efforts should be
focused on the overall balance of the current account, not on
any particular source.
Mr. RANGEL. I think that some people believe that if we
support and pass CAFTA that that might in some way protect our
hemispheres against the explosion of exports of Chinese
textiles. Have you explored whether or not CAFTA would hurt or
help with this large deficit we have with China?
Mr. HOLTZ-EAKIN. We have not done any specific work on
CAFTA, although we would certainly be willing to work with you
on that if you would like.
Mr. RANGEL. So, as far as United States having a policy in
dealing with China from a policy point of view you don't see
any need for a change?
Mr. HOLTZ-EAKIN. I won't overstate my awareness of the
details of industry-specific negotiations, the regulatory
environment, product standards, protection for intellectual
property. Those are all important items. To the extent that we
are happy with the state of play, then that is a judgment that
you can make. If not, then those are areas where certainly
further work would be useful. My comments in my written
testimony are focused largely on the broad aggregates and the
notion that somehow you could easily subtract the deficit with
China and have the total come down. That is highly unlikely.
Mr. RANGEL. As it relates to a manufacturing base where you
found a decline in employment, have you found that many of the
things that we have been able to do well, that we have foreign
countries doing it and that our base of having exports to be
able to compete with our imports seems to be dramatically
decreasing in terms of things that we do well? Are you
satisfied with our manufacturing base as it relates to the
future of America, not just the deficit, the type of things
that we are importing that we used to export? Is that within
the CBO jurisdiction? Did you look at that?
Mr. HOLTZ-EAKIN. What we have tried to understand better
were the links between the patterns of international trade and
any specific declines in employment and industries, and----
Mr. RANGEL. Leave employment alone. I am just talking about
from a national security point of view certain countries should
be independent in terms of what they are able to manufacture.
There has been some concern among many Americans that
foreigners are doing this and we are becoming more and more
dependent on their abilities as we find it cheaper to import
than to export, manufacture ourselves.
Mr. HOLTZ-EAKIN. Simply, we haven't explored the national
security dimensions of this problem. We have only looked at the
economics. There is no particular economic entity that is
entirely self-reliant, so the question is the degree to which
it is more efficient to bring things in from the outside as
opposed to do everything yourself. That is not a security
issue. That is an economic pursuit of advantage.
Mr. RANGEL. If indeed China is becoming a second largest
creditor of the United States and has built up a navy that may
be considered by some as superior to ours, and we are talking
about them promising to invade Taiwan and make it a part of
China. All the other stuff doesn't mean anything if national
security is not included in the study, if we can't defend
ourselves against communists, then the deficit doesn't really
mean that much. Did you take a little look at that or should it
be requested? How do we handle that?
Mr. HOLTZ-EAKIN. If you would be interested in our views on
the broader array beyond the trade linkages, certainly we can
talk about that. We didn't look at it for purposes of this
hearing.
Mr. RANGEL. I yield the balance of my time.
Mr. SHAW. Mr. Camp.
Mr. CAMP. Thank you, Mr. Chairman. I appreciate that. I
actually would like to associate myself with Mr. Levin's
remarks. I think that there is the perception and reality that
we haven't done enough with regard to China, particularly on
the currency issue. I want to just take a little bit of a
different tack with regard to auto manufacturers and
particularly auto parts manufacturers especially in Michigan.
We continue to lose market share to tens of millions of dollars
each year to Chinese counterfeit auto parts and components, and
we are losing jobs because of the counterfeit parts that are
being sold far below market price. Mr. Freeman, what do you
think is the appropriate remedy to stop this type of practice
that has continued for far too long?
Mr. FREEMAN. It is a multi-part answer to your question.
The first answer is that we need to work more closely with our
manufacturers to make sure that they are seeking and achieving
their rights within China. There is an existing legal regime
which a number of U.S. companies are increasingly taking
advantage of and increasing receiving results through, but we
don't think that the existing legal regime in China is adequate
to deliver the results that our industries really need to make
sure that their rights are secured. So, we need to make sure
that we continue to work with our Chinese counterparts, not
only to ensure that they have the structural requirements to
deal with the problem, but that also they have the legislative
requirements, that they change the legal regime to actually put
in place better laws than they have on the books. Finally, we
need to make sure--well, second, I guess, we need to make sure
that we are working very actively with our Customs Department
and Customs Departments of like-minded WTO members to ensure
that at a minimum we limit the problem of counterfeits to China
so that we are not seeing, as we currently are, a variety of
counterfeits, auto parts and others, being sent into third
markets. These, as you probably are aware, in many cases are
not simply counterfeit but present significant health and
safety risks to the people that, the unwitting consumers that
get a handle on them. So, that is a critical issue.
Finally, we really need to make sure that we have our legal
ducks in a row with respect to WTO, and we need to make sure
that we continue to work with industry to develop the kind of
data on Chinese counterfeiting and piracy to make sure that we
can proceed with the most appropriate WTO strategy. As you may
be aware, we initiated at the beginning of this year an out-of-
cycle review under Special 301, which sought data from our
industry. We did receive a variety of submissions from both
individual companies and trade associations representing
thousands of other companies, to try to give us the kind of
background that we need to understand whether or not what we
have is an actionable WTO case. So, we will come out with that
report at the end of the month, and look forward to working
with Congress to make sure that we are approaching WTO remedies
as appropriate and----
Mr. CAMP. The estimate is 210,000 jobs since 1995 to
counterfeit parts worldwide, not just China, $12 billion a year
to the industry alone. The time for reports is over. We would
like to see some action on this area. Then if you move into the
agricultural area, for example, with regard to apples. We have
a similar situation where there has been no action, and the
flood of cheap imports of apple concentrate and fresh apples
that are really undercutting the livelihood of Americans. So, I
guess I would just echo the comments of some of my colleagues
that not enough is being done, and I think that we are going to
need to see some action as soon as possible. Thank you, Mr.
Chairman.
Mr. SHAW. Mr. Cardin.
Mr. CARDIN. Thank you, Mr. Chairman.
Mr. SHAW. Immediately after your questions, we will recess.
Mr. CARDIN. Let me just underscore the point on the
intellectual property rights and piracy. Since the WTO session,
we have been moving in the wrong direction. It used to be more
entertainment type products. Now, we're seeing manufactured
products. I think Mr. Levin and Mr. Camp's point that we have
to aggressively enforce the laws on piracy, and as Mr. Rangel
pointed out, part of that is with the government itself in the
use of its product.
I just really want to make I guess one major point on the
currency issue. If I listen to your testimony, I would think
that perhaps the U.S. dollar will be getting stronger, because
the economy is going so well. So, maybe our trade strategy
should be to lock at 78 cents the exchange rate between the
dollar and the euro, because, therefore, as the dollar goes up
in value, we will get a discounted price internationally on our
exported products. Now, I don't think anyone of the three of
you would recommend that policy for this country, and, in fact,
it would be WTO illegal. Yet we sit back and let the Chinese
currency be fixed and not float. We know that it provides a
discount for their products in our market. How much it is we
can argue. For some industries, it is different. It could be as
high as 40 percent.
Now, in the 1990s, the Chinese officials indicated they
were considering making the currency fully convertible by 2000.
Now, it is 2005. The Vice Governor of the People's Bank of
China recently said that, well, that China has had 8,000 years
of history. One year, 3 years, 5 years or 10 years for our
Chinese that is just a twinkling of the eye. My point is that
we can sit back and 10 years from now, we are going to be the
same position. I understand the complexity, Dr. Forbes, you
recognize about allowing it to float. They certainly could
devalue. We know that. They could change their exchange rate.
They could some things now to show that they are serious about
an accurate value of their currency for international trade,
and I just want to express the frustration we are finding by
many of the Members of Congress. We need action. We need
action. It is not--those who have lost their jobs because of
unfair trade practices, whether it is piracy or the wrong
exchange rates, they are not sitting back saying gee, nothing
is wrong with this. So, we need action, and, Mr. Chairman, I
thank you for the courtesy of allowing me to raise these issues
before we have to go into recess.
Chairman THOMAS. When the Committee returns, if anyone on
the panel wishes to reply to Mr. Cardin's questions, we have
two and a half minutes left on his time. We now have to go into
recess for two votes that are on the floor, and we will
reconvene immediately following those votes.
[Recess.]
Chairman THOMAS. [Presiding.] Okay, if our guests would
take their seats and the panelists return. As you see, there is
another vote that has been called, but we do have time for Mr.
English to inquire. Mr. English?
Mr. ENGLISH. I want to thank you, Mr. Chairman, for the
opportunity. First of all, Dr. Forbes, in your testimony, you
point to the truism that if a trade deficit is suddenly
reduced, that is to say that the reduction would clearly need
to be replaced by an increased deficit with other nations and
an increase of national savings or a decrease in national
investment, certainly--is Dr. Forbes here? In that case, I
wonder, Mr. Freeman, in your testimony you mentioned USTR's
strong willingness to use the most effective tools at your
disposal, including our trade remedy laws to address China's
illegal trade practices. I recognize that this Administration
has utilized some of the tools made available to Congress while
denying to invoke others. What is frustrating to many of us in
Northwestern Pennsylvania is that after a unanimous ruling by
the ITC in the section 421 case was rejected by the
Administration. I was wondering what are some of the economic
factors that the Administration examined in making--what would
you examine in making the decision to accept a 421 Petition?
Mr. FREEMAN. Well, the first and foremost is to make sure
that any import relief that was provided through 421 actually
benefited the producers in question. In the case of at least of
the cases of 421 investigations that would be looked at. It was
pretty clear that there was no likely benefit to the producers,
and what would is simply that there would either be a direct
shift in imports from a third-party country or there was at
least one case in which the importer would simply refuse to do
business with the petitioner in question. I think the key
factor really is to make sure that import relief is effective.
It is difficult I know to look at these and recognize that
there is producer that is out there that is hurting that you
want to benefit. The key is to find ways to do that. In these
cases, 421 would not have resulted in that result. The ITC, of
course, in looking at whether or not there is market disruption
in the case of a 421, doesn't look at the economic impact. They
simply look at ceteris paribus. If the market conditions stayed
the same, what relief would benefit the producer in question,
the petitioner in question? In the cases that we looked at, the
market conditions would not have stayed the same, and,
therefore, there would not have been a benefit or a perceived
benefit.
Mr. ENGLISH. May I gently suggest I am not sure the
petitioners shared your view that they would not in any way
benefit. Dr. Forbes, since you are back, given that you have
testified with regard to the bad effect, potential effects,
when a trade deficit is suddenly reduced, I wonder if you would
comment on the possible consequences to the United States if we
continue to run a trade deficit which is now clearly tipping
over 6 percent of GDP. I cannot think of a single example in
history of a country that has successfully managed to continue
to grow and remain healthy while running a trade deficit in the
range of six percent of GDP. Are you aware of any examples that
I may be unaware of?
Ms. FORBES. I apologize for missing your question earlier.
Actually, when you look at trade deficits--trade deficits are
very difficult to understand. There is a whole host of factors
that cause trade deficits. So, when you talk about reducing a
current account deficit, you do need to look at why it is being
reduced. Some reasons why current account deficits are reduced
are actually signs of weakness.
Mr. ENGLISH. I recognize that. I would also, though, go to
the specific point--that a trade deficit is. Can you think of
any examples of a country which has successfully run a trade
deficit over time in the range of 6 percent of GDP?
Ms. FORBES. I don't know any off the top of my head, but I
do know some similar examples. Right now, Australia has a trade
deficit comparable to ours, and Australia is growing very
strongly. Greece has a trade deficit larger than ours.
Australia has run a large trade deficit greater than----
Mr. ENGLISH. Larger than 6 percent of GDP?
Ms. FORBES. Well, greater than 3 percent of GDP for over 20
years, every year, except for one----
Mr. ENGLISH. This is 6 percent, not 3 percent. Would you
say there is a quantitative difference?
Ms. FORBES. Yes. Obviously, 6 percent is greater than 3
percent.
[The information follows:]

May 3, 2005
Representative Phil English
1410 Longworth HOB
Washington, DC 20515

Dear Representative English:

In my testimony before the House Committee on Ways and Means on
April 14, you asked if I was aware of ``a single example in history of
a country that has successfully managed to continue to grow and remain
healthy while running a trade deficit in the range of 6 percent of
GDP.'' I was not able to answer your question at the time, but have
since been able to review the data. There are actually several examples
of countries that have run current account deficits around 6 percent of
GDP (or higher) and been able to grow and remain healthy. A few
examples are below, with all supporting data from the International
Monetary Fund.

1. Greece had a current account deficit of 6 percent of GDP or
greater from 2000 through 2003 and managed to grow over this period by
more than or close to 4 percent annually.
2. Iceland had a current account deficit of 6.9 percent of GDP in
1998, 7.0 percent in 1999, and 10.1 percent in 2000. Iceland grew at a
rate of 5.5 percent in 1998, 4.2 percent in 1999 and 5.7 percent in
2000. In addition, Iceland is projected to run a current account
deficit of 10.1 percent of GDP this year while growing by 5.7 percent.
3. New Zealand had a current account deficit of 5.9 percent of GDP
in 1996 and grew at a rate of 4 percent that year. In 1999, New Zealand
had a current account deficit of 6.2 percent of GDP and grew by 4.3
percent. In 2004, New Zealand had a current account deficit of 6.2
percent of GDP and grew by 5 percent.
4. Australia had a current account deficit of 5.9 percent of GDP
in 2003 and grew by 3.4 percent that year. Australia also had a current
account deficit of 6.4 percent of GDP in 2004 and grew 3.2 percent that
year.
5. Portugal ran a current account deficit of 5.7 percent of GDP in
1997, 6.9 percent in 1998, 8.5 percent in 1999, and 10.4 percent in
2000 while growing by 4 percent in 1997, 4.6 percent in 1998, 3.8
percent in 1999, and 3.4 percent in 2000.

Sincerely,
Kristin J. Forbes
Member, Council of Economic Advisers

Mr. ENGLISH. Okay. You had also testified that you would be
reluctant to see the United States impose across-the-board
tariffs on China on goods brought in from China, and I wonder,
given that China has distorted its currency so as potentially
some estimates suggest that distortion could be as much as 40
percent relative to where the market would place it. How would
you distinguish an across-the-board--my time expired.
Chairman THOMAS. The gentleman's time has expired, and I
would ask the witnesses that as Members--the Chair would
appreciate written responses because we make them available to
all Members because, as you will notice during the day, it is
extremely difficult to have a long hearing and not only have
all the Members in attendance, but the witnesses as well
periodically. The gentleman from Massachusetts wish to inquire?
Mr. NEAL. I do. Thank you, Mr. Chairman, and thank you for
holding the hearing, Mr. Chairman. You did indicate some months
ago you would do this, and you have done the follow up on it.
Dr. Forbes, recently in Springfield, Danaher Tool, the
Craftsman tool maker?
Ms. FORBES. Yes.
Mr. NEAL. You know that great rack?
Ms. FORBES. Actually, we have a good family friend who
works at Danaher, so I know the company well.
Mr. NEAL. Well, they used to work at Danaher. Danaher is
closing--and 330 jobs. Now, Danaher was operating on three
shifts a day, 7 days a week--330 jobs. Now, those jobs are
going to Arkansas and to Texas job. How long can this go on
when we are talking about $11 an hour for employees?
Ms. FORBES. Well, when companies decide where to locate,
they look at a whole host of factors, not just the cost of
labor. While other countries such as China may have cheaper
labor costs, the U.S. offers a whole host of other advantages
and reasons why companies would want to come to the U.S.
Mr. NEAL. Sears requires that that hand tool be made in
America. The difficulty of this argument and what I am trying
to get to is as long as this currency issue remains resistant
to answer, it strikes me that we are going to have more of
these situations. Those are the people that frequent the VFW
halls, they are veterans, they are terrific people. You can't
explain to them that the Chinese continue to undervalue their
currency and that they have done work with a great product, but
they are losing their jobs.
Ms. FORBES. We are very sympathetic to when workers lose
their jobs, and that is why I discussed briefly in my comments
why the Administration has put a priority on improving training
programs to help people who are faced with that challenge. More
importantly, as I also said in my testimony, many of the
challenges your workers currently face are not just from trade
with China. Even if China's exchange rate was revalued, even by
the large numbers being thrown around, and we imported less
from China in response, that does not mean the jobs would come
back to the U.S. We would be likely to instead increase imports
from other countries, especially other Asian countries.
Mr. NEAL. Let me try another perspective on this then,
Doctor. Just your initial reaction to a machine tool
manufacturer that is conducting three shifts a day for seven
days a week and they are non-competitive? How do you respond to
that? This has gone on with this plant now for years. Seven
days a week, three shifts a day, but they are non competitive
at $11 an hour.
Ms. FORBES. I have met with some people who have faced
similar challenges, and it is an incredibly difficult
situation. That is why we think it is very important to improve
our job training programs so workers such as that can attain
new skills and new technologies so that they can compete in the
global economy in new areas.
Mr. NEAL. One last comment and I do thank you for your
testimony. One problem with retraining and I think Members on
the other side--for the 17 years I have been here and before
that is really a hoax. You are retraining people for what,
lower wages? Retraining people that have been to Iraq or they
have been to Vietnam or retraining them for lower wages at 57
or 58-years-old? We are going to retrain them? It just does not
work. Or let me put it this way it hasn't worked, and the
Danaher information is something I am going to send you some
information and hopefully you will take at look at it, perhaps
respond to me.
Ms. FORBES. Just a comment. We do realize that our job
training programs could be improved, and the President has
actually been working to try to introduce some new initiatives
and try to strengthen our job training programs because of some
of the shortcomings. That is why he had proposed, for example,
personal reemployment accounts, which are a new proposal that
would give someone who loses their job a certain chunk of money
that they can then use as they see best to try to help them
prepare to get a new job. They could use it for training. They
could use it to move to a new location. They could use it to
cover health care expenses, child care expenses. So, that is
one experiment to try to improve our job training programs.
Also the President has announced a new community college
initiative to try to strengthen training through community
colleges, which is one job training program that as proven more
successful in the past than others. So, we fully appreciate
that our programs can be improved, and that is why we are
trying to work with different approaches and are trying to see
what works best so that we will be better prepared to handle
some of these very difficult situations.
Mr. NEAL. Thank you. Thanks, Mr. Chairman.
Chairman THOMAS. I thank the gentleman, although the Chair
is a little bit perplexed and perhaps I didn't hear the entire
point of the Gentleman from Massachusetts. I understand that
the tool company is required by the purchaser to have made in
U.S.A. products. Your concern was that the company was moving
from Massachusetts to Arkansas or Texas?
Mr. NEAL. Yes. I think in the bigger picture, Mr. Chairman,
that the pressure on these companies now because of when they
were such large conglomerates and they make all different sorts
of products, I think the pressure on them now to drive down
price because of international competition hampers severely
their ability in a plant where again these folks have year
after year won the Sears Excellence Award.
Chairman THOMAS. I understand that, but to a certain extent
you may have to look at where the plant is. It is in the same
State that was once a center of the textile industry. It is in
the same State that was once the center of the shoed industry.
At some point perhaps the good citizens of Massachusetts will
pick up the drift, that there is going to be an area which
attracts work that is already at one location either because of
lower wages, better quality of life just in terms of where you
live. I understand the point the gentleman is trying to make,
but if his concern is that Arkansas and Texas is threatening
Massachusetts' wellbeing, when we have a hearing on China.
Mr. NEAL. No. Let me say, Mr. Chairman, I believe it is
international forces that are pressuring places like Danaher,
and that what was suggested to me by the head of Danaher Hand
Tool, in fact. Let me go beyond that. The quality of life in
Massachusetts is extraordinarily high. I think everybody would
agree with that.
Chairman THOMAS. There is no question it is high, and also
are the taxes.
Mr. NEAL. Also, Mr. Chairman, I would also point out that
we have always had a great and thriving middle class in
Massachusetts, in large measure due to the unionized work force
of many of those hand tool companies.
Chairman THOMAS. That there are states that don't require
unionization, and, therefore, attractive to certain labor
groups.
Mr. NEAL. That may be, Mr. Chairman. There is another point
I think that has to be emphasized and that is that we have a
broad middle class across this country because often times
unionized work forces were able to successfully negotiate.
Chairman THOMAS. I think there are a number of factors that
are associated with that, and I don't want to get into a
parallel discussion here anymore than we have. I think it is
useful, and that is the Chairman is interested in unfair
competition. If we are going to define competition as unfair
wherever it is and however it competes, then I think we are
going to have a fundamental problem in terms of a reassessment
of who we are. We like to say that if it were a level playing
field, we can compete with anyone. One of the reasons I wanted
to hold this hearing is the Gentleman complimented me on is
that I do think we face an unprecedented situation of events
associated with China. Never, in my understanding, of both
human history and economics have you in such a short period of
time presented such a massive expanse in the world labor force
at such a high quality level in such a small world in which you
can communicate technology and designs so quickly that they are
able to offer a level of competition which fundamentally
challenges not just the United States, but every industrialized
country; and that the worst thing we can do at this point in
the Chair's opinion is to get parochial in terms of a company
moving from Massachusetts to Texas, because I am concerned
about the survival of economies around the world, especially
initially in those that deal in textiles, the entire economy
rather than a narrow segment.
I know the Gentleman did not mean to do that, but what I am
trying to do is elevate this Committee's discussion about--and
I hesitate to use the word the threat of China--but if you look
at it in terms of a potential direct threat to the economic
engine of the United States, the greatest economic engine the
world has ever seen, we have some issues that we have never had
to deal with so fundamentally before. I want to at least see
where we can go there, and I understand people want to make
points as we go along, and I have no objection to that. I
haven't been here for a while, and everybody else has been
speaking, so I wanted to get back on the record. That is a
joke.
Mr. NEAL. I dare say I have never seen that challenged
here, Mr. Chairman.
Chairman THOMAS. That is a joke. If we don't figure this
out in a relatively short period of time, beginning with
textiles, but washing across major complex, technological
devices like automobiles, we are going to be in a whole more
trouble than we think we are in.
Mr. NEAL. That's precisely my point, Mr. Chairman. Thank
you.
Chairman THOMAS. I am glad I made your point. The
Gentlewoman from Connecticut.
Mrs. JOHNSON OF CONNECTICUT. Thank you, Mr. Chairman, and I
am sorry that I missed the testimony of some of you, but I do
want to bring to your attention the 2004 USTI Report on China's
WTO Compliance. I just returned from a trip to China, and I am
very discouraged by this report that basically says they are
backsliding. We are not continuing to make the progress we were
making. In fact, in 2004, we had to increasingly focus on
China's effort to resort to policies that would limit market
access by non-Chinese origin goods and that aim to extract
technology and intellectual property from foreign rights
holders.
They go on to say prime examples of these industrial
policies in 2004 include China's discriminatory semi-conductor
VAT policies, Chinese standards policies--I won't go into the
detail, because I don't want to take the time--their
procurement policies that now mandate purchase of Chinese
produced software, the whole array of steps that they have
taken to coerce technology transfer or to force the exclusion
of foreign-made goods. Now, we have been so focused on
correcting or stopping these backward steps in compliance that
we are not working with China aggressively on the intellectual
property rights issue. When I was over there, it became clear
that they are very concerned about the growth in inequality,
and so they are going to mandate on the small communities a K
through 9 educational program and some other benefits, but they
do not have a system like ours that flows Federal revenues down
to these communities as far as I could make out, and I don't
see the motivation for any local official to close down a
counterfeiting operation when that local official needs the
taxes of that person and the jobs of that person to make good
on the mandates coming from the Federal level. I don't see us
talking to them about that, and when it really got down to it,
the Premier said well, we were going to have a national
education program about this.
All the incentives in their society are against compliance
with intellectual property rights. We instead of focusing on
that, working with them on that, finding a way to toughen up on
that, which is a fundamental problem, it is a kind of
competition we cannot survive. We are busy turning back
initiatives by the Chinese that are blatant violations of the
WTO. So, particularly Mr. Freeman, what are we doing? Do we
even understand that the incentives for compliance are at the
base community level all against us, and as it was described to
us when we were over there, pirating is just endemic.
Corruption is endemic. My belief is that the tensions around
trade issues now between the United States and China, but when
you look at next year's figures and the way they are going, it
is going to be Europe, too--are really going to cause, have an
impact, on global growth and, thereby, on the wellbeing of the
people I represent. So, what are you doing on intellectual
property rights compliance?
Mr. FREEMAN. Well, Congressman Johnson, you have very
effectively and coherently laid out precisely the problem.
There really is in China the problem with intellectual property
rights enforcement and piracy is rampant precisely because
there are communities in China that are trying to fill jobs
that are worried about the transition from command economy to a
market economy. There is a market-oriented economy. There is a
dramatic incentive to find jobs wherever they may come from. If
that involves piracy, so be it, because we are going to find
jobs for these people doing whatever is possible. The thing
that we have been trying to do is work on three different
levels with respect to intellectual property. One level I think
is directly on point with that is you have to make sure the
Chinese government, that Beijing, understands that they need to
exercise the political will nationally to address the problem.
Mrs. JOHNSON OF CONNECTICUT. Our time is about to expire,
and you and I both know how hard it is going to be for the
Chinese government to exert the political will even if they
have it, because it is a big country, and it is hard. We could
force them to cut their tariffs of 10 percent on filtering
machinery, 43 percent on automobiles, of domestic on domestic
appliances, on 15 percent of machine tools. Since they are not
complying and unable to comply with those they could open their
markets to our goods, because that is the crowning insult when
jobs get taken from manufacturers in my district and if they
ship something to China, there is a 15 percent tariff on top of
their higher costs. So, we have got to get far more aggressive
is my message to you.
Mr. FREEMAN. I couldn't agree more, and I think that the
key factor here is if China believes that and continues to want
to do business in this market and export to this market, they
need to understand that they are going to have to allow our
companies to exercise our comparative advantage in their market
on intellectual property, on manufactured goods, and on
agriculture and other issues. So, I look forward to continuing
to working with you.
Chairman THOMAS. The Chair thanks the Gentleman for his
statement, but wonders when that press release will be
forthcoming form the United States Trade Representative's
Office so that we will have a firm understanding that we are in
agreement. That was a rhetorical question. I don't want to get
you in any hot water. Does the Gentleman from California, Mr.
Thompson, wish to inquire?
Mr. THOMPSON. Thank you, Mr. Chairman, and I want to thank
the panelists. I want to pick where Mrs. Johnson left off on
the problems with the counterfeiting and take it a to a
different level or another level, and that is the costs that we
incur, not just the costs because we're losing out on the
manufacturing, but the House Judiciary Committee just passed
legislation that would increase enforcement against those who
are counterfeiting.
This all comes at a cost. I was with Ms. Johnson in China
on the trip she just talked about, and the Ambassador, the U.S.
Ambassador to China said that he can't walk outside of his
house without being approached by counterfeiters selling DVDs,
and you can buy a stack of them for less than anyone of us can
pay in this country. So, it seems to me that we need to be much
more aggressive, and you guys need to be much more aggressive
to bring about the crackdown in this area. It seems as though
there is not much being done on a problem that everybody agrees
is inappropriate, against all the rules of the trade agreements
and the WTO and something that we clearly know where to find
the problem, and we are dealing with a government that I guess
it is probably an understatement to say that they are somewhat
authoritarian. If they want to stop something from happening,
they can clearly stop it from happening. As was mentioned,
there is very little incentive on the local level to put small
I guess entrepreneurs for lack of a better term out of work.
So, it is going to have to come because of a heavy
influence from the Administration, and that is what we need.
That is what we need to see. Those are costs that are--the
enforcement costs and such--are costs that we do not see. There
are other areas where we are experiencing costs that are rarely
talked about, the increasing level of mercury pollution in this
country as a result of air currents from China. This is a
country that is moving toward more automobiles. They are
pushing our pollution costs through the roof. They are
consuming two million barrels of oil more today than they had
been, and that is pushing our oil costs through the roof. They
are consuming steel and cement at an unprecedented pace, which
is costing our contractors and our construction projects a lot
of money. Again, these are all costs that rarely get talked
about, and the Administration has got to do something to
intercede and recognizing, as was mentioned before, the
importance of China as a trading partner, but we need to make
sure that it is done in a more fair manner. Then the other
thing--and I do not want to be accused of being parochial. Do
you happen to know what na pa he gu means in Chinese?
Mr. FREEMAN. Perhaps my Chinese is not as good as yours. If
you had a native speaker, you would be in real trouble.
Na pa he gu. I am not sure what----
Mr. THOMPSON. It means Napa Valley.
Mr. FREEMAN. Oh, na pa he gu. Oh, okay.
Mr. THOMPSON. That is a district that is within the
district that I represent. There is a wine company in Beijing
that is producing wine with the label Na Pa He Gu, which means
Napa Valley. If there was ever a blatant violation of
everything that we acknowledged as law, rules, regulations, and
protocol, that is it. If we can't step in to stop that from
happening--we really need a more aggressive position on behalf
of this Administration to address these issues. Their wine is
not made in the Napa Valley, by the way. The quality is a
little low--a little less.
Chairman THOMAS. I thank the Gentleman. Does the Gentleman
from Illinois wish to inquire?
Mr. WELLER. Thank you, Mr. Chairman, and I commend you for
having this important hearing today as we closely watch China's
WTO commitments and how we, of course, monitor and, of course,
enforce trade disputes with China, particularly in the areas of
IPR. I am going to take this opportunity to be like my
colleague parochial. I want to draw attention with a question
but also share some information regarding a company that is
located in a district that I represent, which has a decades
long battle with fraud by Chinese competitors, particularly
unscrupulous shippers and chemical producers that are looking
to dump what is called potassium permanganate on the United
States market.
Carus Chemicals, a family-run business in the LaSalle-Peru
area, goes back several generator. It has been an innovator in
specialty chemical products. Carus Chemicals is the sole
remaining U.S. domestic producer of potassium permanganate, a
chemical that we use for water treatment, environmental
remediation, and other purposes. For over the last two decades,
the Commerce Department has had in place an anti-dumping duty
order against unfairly traded potassium permanganate from
China. Over the past several years, the Chinese producer has
pushed for reviews of its anti-dumping orders. The evidence
presented in these anti-dumping orders was materially false,
misleading, and included forged documents, business licenses,
and false document of unsafe tested shipments in containers
which were labeled as toys and parts, not hazardous chemicals.
It is important to note that the anti-dumping orders have
stayed in place, but Carus Chemical has had to expend precious
time and resources to fight these utterly fraudulent cases. The
other issue affecting this company is the customs and border
protection report, which noted that that there is $633,291.99
in uncollected anti-dumping duties under the Chinese potassium
permanganate order in fiscal year 2004. Carus Chemical has
heard of indications that the Chinese importer may have
defaulted on its payment obligations to CBP, and that at least
one surety company may be seeking to avoid payment obligations
under the customs bonds. These duties should be collected. I
want to follow up with the CBP to inquire on the status of the
collection of these duties. Mr. Chairman, I have a letter,
which has been shared with me outlining these issues by Carus
Chemical and with unanimous consent, I would like to insert it
into the record.
Chairman THOMAS. Without objection.
[The information follows:]
April 13, 2005
Hon. Jerry Weller
108 Cannon House Office Building
Washington, DC 20515

Dear Mr. Weller:

On behalf of Carus Corporation and our 200 Illinois Valley
employees, we are writing to identify a number of important
international trade issues that should be considered by the Committee
on Ways & Means as it examines U.S. economic relations with China and
China's role in the world economy. As we have discussed in the past, a
vital component of U.S.-- China trade relations is assuring that U.S.
trade laws will continue to defend Carus and other U.S. manufacturers
from the effects of unfair dumping by Chinese and other foreign
exporters.
Our small company is the sole U.S. producer of potassium
permanganate, a chemical with important applications, including water
treatment and environmental remediation. We have faced unfair dumping
and outright fraud by Chinese competitors for over 20 years. As a
result, Carus has a keen interest in the strong enforcement of
effective U.S. antidumping (``AD'') laws against unfair imports from
China.
In particular, we would urge the following specific steps to assure
that U.S. manufacturers can compete against unfair Chinese imports:
First, we urge the Committee to support and quickly enact WTO-legal
legislation to suspend the posting of bonds for AD duty deposits for
imports from ``new shippers'' and to require the usual cash deposits in
such cases. This legislation unanimously passed the Senate in the 108th
Congress (as S. 2991). New shipper bonds have been used in a number of
AD cases by unscrupulous exporters from China to flood the U.S. market
with dumped imports and to avoid payment of any duties eventually
imposed by the Commerce Department. In our recent reviews, for example,
the Chinese new shipper and importer Groupstars made substantial sales
to the United States at dumped prices and appears to have disappeared
after losing the cases, thereby avoiding the effects of the duty and
leaving Customs and Border Protection (``CBP'') to proceed against the
customs bonds. This is of great concern to Carus, in view of CBP's
inability in FY 2004 to collect some $260 million in AD duties,
including duties on new shipper imports under bond. It is critical that
Congress suspend new shipper bonding until it can assure that duties
can be collected and new shipper bonding abuses can be stopped.
Second, the Committee should take all necessary steps to assure
that CBP does a better job of collecting outstanding AD duties,
particularly on unfair imports from China. In its most recent report,
CBP reported that there were $643,291.99 in uncollected AD duties in FY
2004 under the order (A-570-001) governing potassium permanganate
imports from China. The inability to collect these duties in FY 2004 is
difficult to understand-- the underlying cases were concluded in. 2003
and these new shipper imports should have been secured by single entry
customs bonds. We would be pleased to provide you and your staff with
whatever additional information you may require to inquire about the
status of CBP's collection efforts in our case. We urge the Congress to
press for improvement in this process.
Finally, Congress should not repeal the Continued Dumping and
Subsidy Offset Act (``CDSOA''). As you know, the CDSOA authorizes firms
that have been injured by unfair foreign trade practices to petition
CBP for payments that can be employed to enhance the firm's
competitiveness and aid its employees. Tho CDSOA is a powerful tool in
the fight against unfair trade practices by foreign firms, particularly
for small firms like Carus. In a recent series of AD reviews, Carus has
faced extensive fraudulent conduct by Chinese respondents. Although
Carus eventually prevailed in these reviews, this effort required Cams
to incur extraordinary legal and other expenses approaching one million
dollars. Much of this expense involved analysis and investigation that
the U.S. Commerce Department was either incapable or unwilling to
perform. As you can imagine, these extensive costs placed a significant
financial burden on Carus.
Carus has received CDSOA disbursements for FY 2003 and 2004 and,
based on past Chinese dumping, hopes to receive an additional CDSOA
disbursement in December 2005. These funds are critical to Carus--they
offset some of the extraordinary costs that fraud by Chinese parties in
recent trade cases have imposed on our firm and can help assure that
Cams and its employees can continue to compete effectively in a world
market dominated by unfairly traded foreign chemicals.
Carus appreciates your longstanding help and support in assuring
that our trade laws will protect Carus and other U.S. producers against
unfair trading practices and fraud by unscrupulous Chinese parties. We
would welcome opportunities to work with you to assure that our
Nation's unfair trade laws are effective and fully enforced.
Again, on behalf of Carus Corp. and our Illinois Valley employees,
thank you for your continuing efforts in support of fair and fraud-free
trade.

Sincerely,
Aziz I. Asphahani
President

Mr. WELLER. Thank you, Mr. Chairman. I would like to ask
the panelists for your thoughts on this issue, any
recommendations on how we can improve the trade situation for
companies such as Carris Chemical that face a continuous push
from unscrupulous Chinese competitors and to ensure that anti-
dumping duties are paid in full? I look to the panelists,
particularly the Special Trade Representative's Office.
Mr. FREEMAN. Congressman Weller, as you know, and without
trying to cop out on this, anti-dumping orders are administered
by the Commerce Department. I would certainly be very happy to
get together with your constituent and try to make sure that we
can do all we can to see that their interests are taken care
of. So, I would invite communication with your office and ours
to see that happens.
Mr. WELLER. I appreciate that, and, Ms. Forbes, you are on
the President's Council of Economic Advisors. Here is a
company. It is a domestic producer. It is family business. It
has been here for generations, and obviously they are being
hurt by the situation, and, of course, it could potentially
cost the jobs from a major employer in my district. What are
your thoughts and how can we resolve this in a fair way and
ensure China honors its agreements?
Ms. FORBES. I don't know the details other than what you
just outlined of your situation, but I do know for a number of
companies that we meet with what we find is most productive and
the most helpful is actually to focus on what we can do in the
U.S. at home to improve the competitiveness of operating in the
U.S. So, that means things like making the tax relief
permanent, passing a comprehensive energy bill to ensure an
affordable and reliable energy supply, passing legislation to
reduce health care costs, tort reform to reduce the cost of
doing business----
Mr. WELLER. Ms., and I, of course, support that agenda, but
today we are talking about a company that is endangered by
unscrupulous importers willing to falsify information in order
to bring a product to compete with a domestic producer, and
specifically what is your response to that?
Ms. FORBES. Well, for those sorts of issues, then it is
important to use our trade laws and use the WTO to address
these sorts of issues if possible and enforce our trade laws.
Again, for the specific details, I will--I think USTR and the
Commerce Department is more adept at answering those specific
questions.
Mr. WELLER. Well, thank you, Mr. Chairman. I would like
very much to work with you and your staff in assisting this
company in my district. Thank you for the opportunity.
Chairman THOMAS. I thank the Gentleman and any Member who
has specific examples I think it is always helpful to make sure
that we have an accurate factual record so that we can provide
specific examples rather than hypotheticals as we are dealing
with these trade issues. I think the Gentleman. Does the
Gentleman from California, Mr. Becerra, wish to inquire?
Mr. BECERRA. Yes, Mr. Chairman. I don't know, Mr. Chairman,
if Mr. Emanuel from Illinois should go first, though.
Chairman THOMAS. I tell the Gentleman the Chair called the
Gentleman from California. If he wishes not to----
Mr. BECERRA. No. I will take the time, and I hope the----
Chairman THOMAS. Okay.
Mr. BECERRA. --the Gentleman----
Chairman THOMAS. Okay. I will bear the burden of dealing
with the Gentleman from Illinois.
Mr. BECERRA. Thank you, Mr. Chairman. It could be a big
one. Thank you all for your time and for being here for such a
long time and being very patient about your testimony here. I
guess everyone is expressing the same concerns. Obviously,
coming from Los Angeles, I have deep concerns about the fact
that there is so much piracy, so much violation of intellectual
property laws--the film, the recording industries, our high
tech industries. We're just losing billions, so I won't go into
that a whole lot more. Let me ask, give me the most concrete
that you believe at USTR, Mr. Freeman, that we are doing to try
to prevent China from continuing to have piracy so dominate the
market when it come to the sale and transaction and
distribution of our products?
Mr. FREEMAN. Well, I wish there was one silver bullet, and
there isn't unfortunately.
Mr. BECERRA. Okay. Just give me one, because I know we
could talk for more than my 5 minutes just about what we are
trying to do. Give me the one best thing that we are doing.
Mr. FREEMAN. The key thing that we can do is make sure that
China actually proceeds by putting the people that are
criminals in jail.
Mr. BECERRA. What are doing to make sure that China puts
those folks behind bars?
Mr. FREEMAN. Last, year, what we did was ensured that China
revised its judicial interpretations to make clear to
prosecutors in China that here are the steps that they should
use and here are the thresholds that they should use to put
people in jail.
Mr. BECERRA. Okay. My understanding is I know that
Congressman Sanders said the average wage in China is about 30
some odd cents an hour compared to our $21.45 a hour when you
include benefits, average wage. My understanding is in their
industrial heartland, where you expect higher wages, they are
still averaging no more than about 60, 64 cents an hour. What
are we doing to try to make sure that China does not continue
producing products that we are buying by hiring folks--some
would say they are compelling them to work--for 30 to 60 cents
an hour?
Mr. FREEMAN. I don't think we are getting in that level of
detail in terms of trying to set wage rates in China.
Mr. BECERRA. Why not?
Mr. FREEMAN. What I will say is that one of the things that
is clearly happening, particularly in the coast in the areas
that have had low wage rates or you have seen very, very
difficult and some would say horrifying labor conditions, that
you have actually seen labor prices increase. You have actually
seen the ability for----
Mr. BECERRA. Let me ask you this: When will we reach the
point where we can have a competitive relationship on trade
with China where it is based on our natural comparative
advantages. We have got a lot of particular resources so we
will be able to manufacture goods based on those resources more
than China would. China can do something more than can because
of a natural comparative advantage. It is not natural to have
an advantage on wages that are so disparate. Unless we try to
do something to if not encourage certainly compel China to move
forward and pay folks a decent wage, how can our workers ever
compete in producing that widget compared to the Chinese?
Mr. FREEMAN. Well, Dr. Forbes can probably address relative
efficiencies better than I can. I will say that we feel very
comfortable that our economy is the most productive and
efficient in the world, and we are fairly competitive in China.
We are just trying to make sure that our natural advantages are
able to be applied in China and not be subjected to the kind of
government interference which is reducing our competitiveness.
Mr. BECERRA. So far, we have a trade deficit with China
that continues to grow into the atmosphere. We have lost some
500,000 jobs in the textile and apparel manufacturing industry
in the last 4 years since January 2001. We have gone from about
a million jobs to about 675,000 jobs in textile and apparel
manufacturing. What are we doing to try to stop the
hemorrhaging there?
Mr. FREEMAN. Well, as you know, in 1995, the previous
Administration negotiated the Agreement on Textiles and
Clothing, which had a 10-year system by which quotas in
textiles would be phased out, and we just passed that period.
One of the key things that the previous Administration
negotiated, because China was not a member of the WTO when the
ATC was originally negotiated, was a special textile safeguard
which allows us to put in place breaks on textile imports in
the event that our textile markets are disrupted. We have been
employing those safeguards. The Chinese government has told us
that perhaps we have been engaging too aggressively. We don't
think so. We will do what we can to make sure that we provide
the space for our textile industry to transition.
Mr. BECERRA. I appreciate the testimony, Mr. Chairman. I
know my time has expired, but I must tell that----
Chairman THOMAS. The Gentleman's time has expired.
Mr. BECERRA. --when we hear the statistic that for every
six ships that come from China and unload products here, only
one of those six ships returns to China with American products
to unload in China. That is a problem. When you realize that if
this statistic is correct the five out of the 10 fastest
growing U.S. exports to China from 2001 to 2003 were waste
products, like recyclable plastic, metals, aluminum, fiber and
paper, we have got work to do. Thank you, Mr. Chairman.
Chairman THOMAS. The Chair wants to make sure that the
record is as complete as possible, and the Chair, in part,
brought up the question of counterfeiting early on in the
hearing. The Chair is not sure where China at the current time
stands in terms of its ranking as major counterfeiters. I don't
want to go through a list of countries that have been number
one on the list, some of them frankly in Europe. There are
others. Is this of a new magnitude in counterfeiting or is it
simply akin to what has occurred and continues to occur in
other major countries? Do we have a feeling for the magnitude
of this?
Mr. FREEMAN. I would tend to agree with you that is it
unprecedented in human history. Where it ranks in terms of our
overall priorities right now is----
Chairman THOMAS. No, with other countries. I guess I could
mention India. Historically, Italy was a spot that was
difficult, and it has gotten much better recently. I am
hesitant to mention other countries, but I will if I have to.
Do you monitor that sort of thing? Is China number one in this
area as well as in another of other ones as they continue to
grow?
Mr. FREEMAN. Well, as you probably know, we do come out
with a Special 301 report at the end of the month which will
give a full answer to that question so I don't want to pre-
guess that. I will say in terms of----
Chairman THOMAS. Oh, nobody is watching. Go ahead.
Mr. FREEMAN. I will say that that certainly--intellectual
property rights in China is at the top of our list in terms of
what we are doing with China, and it certainly ranks among the
very top few priorities for the Administration.
Chairman THOMAS. I don't want our Members to overstate the
case if, in fact, it is not the case. I believe it is, and we
look forward to your report, because it is so fundamental to
one of the last bastions that we can hang on to. If they take
away the physical stuff, if they are now also plagiarizing the
mental, there is not a whole lot left. Does the Gentleman from
Florida, the Trade Chairman, wish to inquire?
Mr. SHAW. To follow up on the Chairman's remarks with
regard to counterfeiting, how much of the counterfeiting is
actually imported into the United States and what are we doing
about it?
Mr. FREEMAN. We are doing a fair amount. The issue right
now is there are increasing numbers of counterfeit goods that
are coming into this country. I think they are up 47 percent
last year over the previous year. I know customs is working
very actively to do something about it. Last year, the
Administration initiated something called the Strategy
Targeting Organized Piracy, which was specifically targeted at
dealing with the export problem of intellectual property
rights, not just goods that are infringing on intellectual
property rights not just from China, but with China obviously
being a major exporter of IPR infringing goods. China is
clearly a key focus of STOP. So, the key there is to try to
make sure that we are all organized as the administration
between Customs, between Homeland Security generally, between
USTR, between Commerce to make sure that we are dealing with
the problem as aggressively as we can.
Mr. SHAW. I would bet you a lunch that we could walk up to
Pennsylvania Avenue and buy a $50 Rolex.
Mr. FREEMAN. I won't take that bet.
Mr. SHAW. Thank you. I think that we need to start more
enforcement in our ports and what not, and the shippers should
have some liability for these type of things so when they
knowingly take these counterfeit goods and bring them into the
United States. The Chairman has remarked that the Chinese
government is actually buying a lot of the counterfeit goods
and using them to run their government. We are allowing them to
be sold under our nose, so we have a certain amount of
responsibility. Dr. Forbes, I was very impressed with your
testimony in pointing out that actually for the Pacific Rim
that the imports have not grown; that the China is sort of
eating Japan's lunch, and that seems to be where the problem
seems to be, and if you look at the Treasury bills that are
owned by foreign interests, I think Japan is probably way above
the top of the pile on that. Would you comment on that?
Ms. FORBES. Yes. Actually, I know the numbers. Japan's
reserve holdings are above $800 billion. China's are now about
$640 billion dollars. So, Japan does hold a larger amount of
foreign reserve holdings than China.
Mr. SHAW. In my opening remarks, I mentioned the problem of
visas. Now, I know that is not anybody's responsibility and
certainly a member of this panel, but have you heard complaints
about that? I have. That this has become an impediment to our
exports, that Germany and some of the European countries they
can very quickly supply visas which would allow prospective
purchasers to come over and review the machines and to train
their workers to operate them. That there's a real problem in
getting that done here in the United States. Quite frankly, you
lose a sale by that time it takes to get a visa. Would any of
you all care to comment on that or have you heard those
complaints before?
Ms. FORBES. We have certainly heard many complaints like
that, and improving the visa procedure has been an important
priority. Our State Department has been working very actively
on that. I will also say from a broader economic viewpoint, we
have also done some analysis to try to understand if there is a
specific barrier in China against U.S. exports or is there
something specific that makes it harder for the U.S. to
compete? Based on all the broad economic analysis we have done,
we really can't find evidence of that. We find that the U.S.
has actually been quite successful competing in China's market.
U.S. exports to China have grown by 15 percent between 2000 and
2004. That is much faster export growth than we have seen
anywhere else in the world. Yes, the U.S. does run a large
trade deficit with China, but it runs a large trade deficit
with most countries in the world. At least from a purely
macroeconomic viewpoint, it is very hard to find evidence of
any special discrimination in China against U.S. exports. I
think the visa issue is a very serious one, and, if anything,
that might be more likely to complicate trade in the future,
but at least so far we haven't seen in the macroeconomic data
evidence that that is a significant factor.
Mr. SHAW. Thank you. I yield back my time.
Chairman THOMAS. I thank the Gentleman. Does the Gentleman
from California, Mr. Herger, wish to inquire?
Mr. HERGER. Yes. Thank you very much, Mr. Chairman, for
calling this hearing on this very important issue of trade with
China, bilateral trade, and I think our panelists--I represent
one of the richest agricultural districts in the Nation, the
northern Sacramento Valley of Northern California. Mr. Freeman,
I have two questions I would like to pose. I supported bringing
China into the WTO because I believe the commitments China has
made are crucial to our market access as we move forward, both
for U.S. agriculture and other export-oriented industries.
However, as you well know, the key is holding China's feet to
the fire and making sure they live up to their commitments. My
understanding is that while China has made great strides in WTO
compliance, they have also learned from some of our other
trading partners how to erect barriers to U.S. goods that
supposedly meet WTO rules. SPS standards and manipulation of
import licensing are some examples.
Could you identify for me what U.S. products, particularly
agricultural commodities, have been most impacted by these non-
tariff barriers? Question number two, and as a follow up, I
have heard from honey producers as well as almond producers in
my district about the problems customs is having collecting
anti-dumping duties on dumped Chinese honey because of the
current bonding requirements. These Chinese imports at below
market prices are driving down the cost of honey and making it
more difficult for honey producers to provide the pollination
which is critical for Californians' almond crops and other
crops. I understand that Chairman Thomas is working with
customs to address this problem and other customs issues
related to bonding requirements, and I would be interested to
hear your views on this issue as well.
Mr. FREEMAN. Thank you, Congressman Herger. With respect to
the latter issue, I will have to come back to you on that. I
will go back to my customs colleagues and seek better
information from them. It is not an area within my expertise,
but I certainly would want to know more and do what we can to
make sure your questions are answered. With respect to your
broader question about SPS and other measures that the Chinese
government has used to make difficult our market access, market
access for our agricultural producers and commodities. That has
been a major problem, and it is something we have been working
on extraordinarily hard for the past few years, since WTO
accession.
There have been a number of non-tariff barriers, levers,
that Chinese quarantine officials have used which seem to
always take place at times when their harvests are taking
place. So, for example, when our soybean exports are ready to
hit the shores, there seems to be a new scientific issue or
quasi-scientific issue which is preventing them from being
imported. We have seen a number of different regulatory
contractual issues, licensing issues which have not been either
scientific or particularly transparent. We have seen a number
of things which are Catch-22 in nature with respect to import
licensing. You can't get a license unless you have a contract,
but, of course, you can't get a contract, unless you have a
license, and requiring the two makes doing business with China
very difficult. It is a very good market for U.S. agriculture,
particularly for land-intensive agriculture like soybeans,
cotton, wheat, and others, but the key really is to make sure
it is a foreseeable market, and right now it is still far away
from that. The regulatory process in China is far too opaque
for us to make sure that on a year on year basis that we know
market conditions changing as they do that we will be able to
get our product to market. So, that has been a key function of
our efforts over the last few years.
Mr. HERGER. Well, I thank you, and again this is very
important obviously; and I think it is important that we do
keep--when we make these agreements we want to make sure that
we enforce them. That is what I always hear is that we don't
mind being competitive as long as we are playing on a level
playing field and one in which we are all obeying the rules,
and so obviously this is very important. I want to reemphasize
this. Thank you, Mr. Chairman.
Chairman THOMAS. I thank the Gentleman. Does the Gentleman
from North Dakota wish to inquire?
Mr. POMEROY. I do, Mr. Chairman. Thank you. I will direct
some inquiries to one of the charts the witnesses offered.
These charts show import trends and trade imbalance trends
through '04. I am wondering if we were to continue to chart
based on the data we have in the first quarter of '05 where
would our trend lines go? So, let us take the first one,
imports as a percent of GDP. Where would we be looking at how
we are coming into '05?
Ms. FORBES. Well, if we were to extend that graph, we would
actually see a continuation of basically the patterns that have
just happened recently since about the middle of '04. We would
see on the bottom, the red line----
Mr. POMEROY. Like this one?
Ms. FORBES. Probably not quite that steeply, but we would--
yes, we would see imports going up.
Mr. POMEROY. Actually a serious question. Have we seen that
trend line leveling off a bit or have we seen fro the first
quarter--my understanding is this year's data shows an even
accelerated level of imbalance.
Ms. FORBES. We have seen imports--so we have also actually
seen both numbers accelerating. The key point in this graph is
yes, exports are accelerating.
Mr. POMEROY. How does that leave us on the net? Are we
better than '04?
Ms. FORBES. No. Our trade surplus has been increasing this
year.
Mr. POMEROY. Our trade?
Ms. FORBES. Trade deficit. I am sorry.
Mr. POMEROY. So, we are actually losing ground. We are
exporting more, but we are importing more yet?
Ms. FORBES. Importing more. The key point of this is even
though--yes, the line would be increasing.
Mr. POMEROY. All right. Let us talk about the China trend
line. How are we doing on that one in the first quarter?
Ms. FORBES. That line also would be increasing.
Mr. POMEROY. At what rate would that be increasing do you
think. Would that also be accelerating? Is it I level or?
Ms. FORBES. It probably has accelerated slightly since the
beginning of 2005.
Mr. POMEROY. The Wall Street Journal reports on April 1st
that we have seen a surge in textiles among--and I don't
whether that--I would expect textiles because of the absence of
tariffs. The tariffs that went away in the trade deal were
perhaps the most dramatic in terms of the surge. Do you have an
opinion on that?
Ms. FORBES. You are--textile imports have increased between
January and February. The growth did slow in March. Again, you
don't want to make too much of any single month's data. I do
want to get back to key point of this graph even though imports
have gone up, that black line, even though that trend has
accelerated recently and even though imports from China, the
red line, have accelerated, the unemployment rate in the U.S.
has fallen.
Mr. POMEROY. Wait. Wait. Wait. Wait. Wait. Wait----
Ms. FORBES. As imports have gone up over time----
Mr. POMEROY. Wait. Wait. Wait. Excuse me, ma'am. We will
ask the Secretary of Labor about unemployment rates. You are
here to talk about trade with China. From what I hear you
saying is China exports to the United States are increasing and
the gap in terms of the trade relationship between the country
is increasing; in other words, we are continuing to import more
from China than we are selling. Is that correct?
Ms. FORBES. That is correct.
Mr. POMEROY. I would like to offer this Wall Street Journal
article into the record, and it says some things I would like
you to respond to.
[The information follows:]
Associated Pres
April 1, 2005
China Textile, Clothing Imports To U.S. Up Sharply--U.S. Govt
WASHINGTON (AP)--Preliminary Commerce Department data show that
imports of textiles and apparel from China are up sharply in the first
three months of this year after global quotas were lifted.
The data, released Friday, showed that textile and apparel imports
from China totaled the equivalent of 2.86 billion square meters, up
62.5% from the equivalent of 1.76 billion square meters imported during
the corresponding 3 months of 2004.
For different product categories, the increase in imports was even
more striking, according to the Commerce Department data.
It said that 78.3 million cotton knit shirts had been imported from
China during the first 3 months of the year, an increase of 1,258% from
the same period a year ago. The report said that 74.1 million cotton
trousers had been imported in the first quarter this year, an increase
of 1,521%.
Officials of the textile industry said the new report provided
strong evidence of their claims that the surge in Chinese imports is
disrupting the U.S. market. The industry is pushing the government to
restore quotas on imports of textiles and clothing from China, saying
failure to act will cost thousands of U.S. jobs.
The quotas, in place for more than three decades, were lifted at
the beginning of this year.
``Already 17,200 U.S. textile and apparel manufacturing jobs have
been lost in 2005. These job losses will be just the tip of the iceberg
unless the U.S. Government immediately self-initiates safeguards,''
said Auggie Tantillo, executive director of the American Manufacturing
Trade Action Coalition, an industry trade group.
The industry is lobbying the Bush Administration to file its own
cases to put in place quotas that would limit increases in various
categories of Chinese textile imports to 7.5% this year, compared with
the level of shipments in the previous 12 months.
``The release of preliminary data clearly demonstrates that the
U.S. market is being disrupted as a result of imports from China,''
said Cass Johnson, president of the National Council of Textile
Organizations, another industry group.
Friday's release of data on imports marked the first time the
government has published preliminary data on textile shipments in
advance of its monthly trade report.
Commerce Secretary Carlos Gutierrez announced a week ago he would
begin accelerated releases of data to help government policy-makers and
the industry keep track of textile imports.
The report showed that while shipments from China were surging,
other countries who had enjoyed quotas to ship to the U.S. were now
seeing decreases in their sales. Shipments of cotton trousers from
Mexico fell by 5.24% in the first 3 months of the year, the report
said.

Mr. POMEROY. Seventy eight point three million cotton knit
shirts have been imported from China during the first 3 months
of the year, an increase of 1,258 percent. Is that correct?
Ms. FORBES. To the best of my knowledge, yes.
Mr. POMEROY. All right. Is that in.
Ms. FORBES. I believe that USTR could also follow up on
this, but USTR is investigating these types of cases.
Mr. POMEROY. Isn't that something Treasury has an opinion
on?
Ms. FORBES. Well, yes, USTR is the lead agency in this. I
actually work for the White House, not the Treasury Department.
Mr. POMEROY. You work for the White House. Oh, that is even
better yet.
Chairman THOMAS. To remind the Gentleman. She is on the
Council of Economic Advisors.
Mr. POMEROY. That is perfect, because I am wondering if the
White House would view a 1,258 percent increase in imports as a
surge?
Ms. FORBES. Yes, we would.
Mr. POMEROY. Would the White House then direct the
executive branch to respond to the surge, because I understand
we do have surge protection and surge response capability?
Mr. FREEMAN. As you probably know, the President has
delegated responsibility for enforcement of textile trade to a
Committee of--it is called SETA, which is----
Mr. POMEROY. The President has delegated responsibility for
textile trade to a Committee.
Mr. FREEMAN. Enforcement of----
Mr. POMEROY. Now, I am asking if a 1,258 increase is a
surge and if the White House--and the answer was yes. The White
House believes it is a surge. I then asked if the White House
has directed a response, and not a study, not a referral, a
response. We have got surge protection under our law, and by
golly where I come from 1,258-percent increase in 3 months is a
hell of a surge. What is being done about it?
Mr. FREEMAN. The answer is that we have initiated the
safeguard investigations that shall look to put in place
safeguards if it is successful. So, I think we are doing
everything possible to address that situation, sir.
Chairman THOMAS. The Gentleman's time has expired.
Mr. POMEROY. I thank the Gentleman.
Chairman THOMAS. The Chair recalls one of the standards of
an administrative approach is that you can delegate authority
but not responsibility, otherwise known as the buck stops here
for the President. The Chair is looking at the clock, and I
know additional Members wish to inquire and obviously they have
the right to do so. We have a second panel, and the Chair would
protect the Members who have not yet had a chance to inquire as
being the first inquirers on the next panel. That is simply an
offer that is being made, and the Chair doesn't know whether
anyone will take the Chair up on the offer, but the Chair would
now recognize the Gentleman from Kentucky, Mr. Lewis if he
wishes to inquire.
Mr. LEWIS OF KENTUCKY. Thank you, Mr. Chairman. Just a
quick question. It is my understanding there is 300 million
tobacco users in China. I want to ask Mr. Freeman where are we
at on market access for tobacco, American tobacco products in
China?
Mr. FREEMAN. I would have to get back to you on that, sir.
I don't know the specifics of tobacco trade with China.
Mr. LEWIS OF KENTUCKY. Okay. If you can do that, I would
appreciate it. Thank you. That is all, Mr. Chairman.
Chairman THOMAS. Does the Gentlewoman from Ohio wish to
inquire?
Mrs. TUBBS JONES. I am going to take you up on your offer,
Mr. Chairman.
Chairman THOMAS. Thank you very much. The Gentleman from
Wisconsin? The Gentleman from Georgia? Colorado? The
Gentlewoman from Pennsylvania?
Ms. HART. As much as I would like to take you up on your
offer, Mr. Chairman, I will be brief. I am sorry I haven't
heard all the testimony, but because you are the folks who I
think can help us, I have to inquire of you, because the next
panel can't help me. My concern is that we have been--we the
United States--have been great soldiers and great team mates to
everybody as far as trade. A lot my colleagues have very
eloquently expressed a lot of the concerns that I have so I am
not going to rehash them regarding specific industries. I would
like it--and I am not sure which of you can do this--it is
probably Mr. Freeman or Dr. Forbes. Can you characterize for me
what our next move will be as far as working together with the
EU in the WTO regarding our problems that I think we are now
sharing with the EU. Can either of you just address that kind
of quickly?
Mr. FREEMAN. The bottom line is that we are increasingly
working very closely with not just the EU, but with Japan and
other trading partners to make sure that issues that we share
with respect to China--and I am particularly concerned about
market access issues and intellectual property rights
enforcement--work for the other WTO members. This is taking--we
are spending a significant amount of time actually consulting
with the EU and with Japan trying to find cooperative
approaches to deal with the issue in China, make sure that not
only are we working in China together with other WTO members
and in Geneva with other WTO members on these issues, but also
that we find ways to put together cooperative programs that
look at enforcement through multilateral measures. So, it is a
new enterprise, if you will, with respect to China to join
together in the multilateral community, but it is one that we
are putting a lot of emphasis on these days, and one that I am
very hopeful will yield results in a short order.
Ms. FORBES. If I could follow up on the issue of China's
exchange rate, this is one we also have been working on with
our European neighbors as well as countries around the world.
For example, we have been working through the G7 process with
other developed countries, and the G7 finance ministers have
issued statements urging China to move to a more flexible
exchange rate regime. Recently, senior officials in the U.K.,
Korea, and Japan have publicly made statements urging China to
move to a more flexible exchange rate. Germany--the President
of Germany yesterday just mentioned this issue publicly. The
IMF we have been working with, with the other members of Europe
and other members of the IMF to encourage China to move to a
more flexible exchange rate, and even the Asian Development
Bank. The new President of the Asian Development Bank, in his
first press conference, publicly urged China to move to a more
flexible exchange rate. So, we have really been working
multilaterally with our major trading partners as well as
through multilateral organizations in our effort to get China
to move to more flexibility.
Ms. HART. I will leave you with one thought and that is
that obviously I look at this from an American's point of view.
I think many of us believe that the WTO has sort of victimized
the United States in a lot of cases, and they don't seem to be
as interested in enforcing their rules against others. I just
would urge us to make sure that that isn't the case. I yield
back. Thank you, Mr. Chairman.
Chairman THOMAS. I thank the Gentlewoman. Does the
Gentleman from Illinois wish to inquire or reserve his spot for
the next panel? I thank the Gentleman. The Chair wants to thank
the panel, especially for your indulgence as we had to carry
out the businesses of the day with votes. This is a very broad
based subject. We will analyze testimony that has been given.
Dr. Holtz-Eakin is on a shorter chain than some of you folk. We
will certainly have him back. I think Members may be interested
in having an additional hearing, in which perhaps we can focus
some of the issues based upon developments between now and when
we have the hearing, and look forward to hopefully your
participation again.
One of the difficulties with these hearings is that we have
one person come and then another person comes, and we don't get
continuity. My hope is based upon Members' comments that this
panel was a good one and we would hope that we could have
continuity as we perhaps explore areas with a bit more
specificity. The Chair thanks you again for your participation.
The Chair would now ask Robert Wilkey, President of the Fisher-
Barton Company, to come forward. He will be speaking on behalf
of the National Association of Manufacturers. Jay Berman who is
the Chief Executive Officer Emeritus for the Recording Industry
Association of America; Robert Weil, II, who is Chairman and
Chief Executive Officer of Weil Brothers Cotton Company, and he
is Vice President of the National Cotton Council. Myron
Brilliant is Vice President for East Asia, and he will be here
for the U.S. Chamber of Commerce. Alex Gregory, President and
Chief Executive Officer of YKK Corporation of America--they
make zippers--Marietta, Georgia. Robert Stevenson, Chief
Executive Officer, East Machine Company, Buffalo, New York.
David Spence, Managing Director for Regulatory Affairs Legal
Department here for the Federal Express Corporation.
The Chair wants to thank all of you for your extreme
patience. This is an important issue and we are anxious to hear
for the record people who as they say are where the rubber
meets the road. The Chair will indicate that any written
testimony you may have will be made a part of the record and
that beginning on my left with Mr. Wilkey, we will move down
the panel. The Chair urges you to observe the lights. Green
says you are good. Yellow gives you a minute. Red says we would
appreciate it if you would sum up so that we can move through
the panel and have you available for questions. With that, Mr.
Wilkey. You need to press the button on the microphone to
activate it.

STATEMENT OF RICHARD WILKEY, PRESIDENT, FISHER-BARTON COMPANY,
ON BEHALF OF THE NATIONAL ASSOCIATION OF MANUFACTURERS

Mr. WILKEY. Thank and good afternoon, Mr. Chairman and the
Members of the Committee. My name is Dick Wilkey. I am
President Fisher-Barton, a manufacturer of components for OEMs
in the lawn and garden and agricultural industries. We have 500
employees in five plants. Four in Wisconsin and one in South
Carolina. I am pleased to testify today on behalf of the
National Association of Manufacturers. As vice chairman of the
National Association of Manufacturers' China Policy
Subcommittee, I have participated in the development of the
2005 China Trade Agenda that included a vigorous discussion and
resulted in a consensus from both small and large NAM-member
companies.
The fact that we developed a specific China policy separate
from our overall trade policy shows how important this is to
our 14,000 members. Mr. Chairman and Members of the Committee,
I am here to tell you that manufacturing in the United States
is in serious trouble, and we must address the China issue. We
are in favor free and fair trade. The NAM seeks a positive and
balanced trading relationship with China that reflects market
forces as closely as possible. Without doubt, China has emerged
as a leading world economy, yet we are treating them like a
Third World country while they are cleaning our clocks. China
is no longer a poor cousin. Many companies see prices of
Chinese products so low that it is impossible to compete.
Others see their customers moving to China and cannot find new
ones to replace them. It is hard to find fault with moves off
shore. You get labor for $4 a day. Our health care cost alone
is $4 an hour. It looks like raw materials may be subsidized.
The kicker is that after all this China has a currency
advantage of up to 40 percent.
The fundamentals are simply out of whack. I have seen this
with my own company. We have lost customers who have moved
their production to China, and I may lose more. There is no way
of knowing how many more companies are in the process of making
this move. It is my view that what we are seeing today is only
the tip of the iceberg. It is my experience that once the
assembly of a product goes to China, it affects all of us in
the supply chain because it is highly unlikely that the parts
will continue to be sourced back here in the United States. I
have a friend that makes electronic parts. They make 1,200,000
parts an hour, a huge number. There is virtually no labor in
it. Their problem is that much of the electronics industry has
moved away. They lost their market in spite of their superior
technology.
We can overcome China's low-wage advantage through
innovation and use of technology. My company is producing 20 to
30 percent more product with fewer employees than we did three
or 4 years ago. We make parts without touching them. U.S.
manufacturers can and will compete with China, but only with
fair rules. We should not have to deal with subsidized
production or deliberate currency undervaluation and our
government is telling us that there is nothing they can do to
see that the international rules are enforced. In 2004, the
bilateral trade deficit with China was about $160 billion, the
largest with any country. For the same period this year, the
deficit has increased 47 percent and is on track to reach $240
billion.
The NAM believes that trade must be market-based without
government interference. In China, we are seeing serious
problems with currency undervaluation, possible widespread
subsidization of industry, and the failure to implement its
responsibilities under the WTO to prevent product
counterfeiting and piracy. There is no doubt China is one of
the largest trade forces in the world, but it is called trade
because it is the exchange of goods and services. We buy from
China, but to a great degree instead of their buying our goods
and services, China buys our Treasury bills in order to keep
its currency cheap and its exports under priced. The NAM
believes that eliminating the severe Yuan undervaluation is
essential to creating a more balanced and sustainable trade
flow. Would a considerably stronger Chinese Yuan have
beneficial effects? You bet it would for a lot of U.S.
companies. We call on the Treasury Department and the IMF to
cite China for currency manipulation.
In addition, there are concerns that China's industrial
development may benefit from a wide array of government
subsidies. The NAM supports a bill to address the problem that
was introduced last month by Congressmen English and Davis. We
hope that the Committee will look favorably on this
legislation. China has become the world's epicenter of
counterfeiting, costing U.S. companies billions of dollars,
thousands of jobs, and threatening consumer health and safety.
The NAM has recommended to USTR that the Administration develop
a WTO case ideally in conjunction with EU, Canada, Japan and
other countries whose countries are suffering from what NAM
President John Engler calls China's grand larceny on a massive
scale.
In addition, we believe that our government must launch a
new and massive export program targeting China. The issues that
I have outlined today are having serious negative effects on
our manufacturing in this country. What about defense products?
What we have an obligation to see that America's manufacturing
base stays strong. We can do that within the rules of the
international trading system, but we must not be timid in the
insistence that those rules are in force. We know that free
trade properly administered benefits all of us. We must see to
it that the consensus for free trade is maintained in this
country. We look to the Administration and Congress to see to
it that China plays by the rules and that the system works. Mr.
Chairman and Members of the Committee, give us a level playing
field and with our innovative work force, entrepreneurial
spirit, we will thrive and grow our economy. Thank you.
[The prepared statement of Mr. Wilkey follows:]
Statement of Richard Wilkey, President, Fisher-Barton Co., Watertown,
WI, on behalf of the National Association of Manufacturers
Good afternoon Mr. Chairman and members of the Committee. Thank you
for giving me the opportunity to participate in this panel. My name is
Dick Wilkey, and I am president of Fisher Barton Inc., a small
manufacturer of components for the lawn and garden and agricultural
industries. We are located in Watertown, Wisconsin. I am pleased to
testify today on behalf of the National Association of Manufacturers
(NAM) at this hearing regarding U. S.-China Economic Relations and
China's Role in the World Economy.
The National Association of Manufacturers is the nation's largest
industry trade association, representing small and large manufacturers
in every industrial sector and in all 50 states. As vice-chairman of
NAM's China Policy Subcommittee, I oversaw the development of our 2005
China Trade Agenda that included vigorous participation from both small
and large NAM member companies. The fact that we developed a separate
China policy is an indication of its importance to NAM members. The
entire agenda is available at www.nam.org/trade.
No other trade subject comes close to commanding the attention that
China is getting from NAM companies. China is simultaneously the
greatest concern of many of our import-competing members and the
fastest-growing global market for many exporters large and small and
for companies that operate internationally. The fastest growing economy
in the world, China has emerged within a short span of two decades as a
strong international competitor in a wide range of manufactured
products and a key market for U.S manufactured exports.
More recently, China has also gained prominence as a huge consumer
of industrial raw materials, with demand so large that it has
significantly boosted world prices of important inputs such as steel
and copper scrap, iron ore and coke used in steel production. It is not
surprising then, that U.S. manufacturers pay close attention to China's
trade and economic policies, and how they affect not only bilateral
trade and investment, but the entire global marketplace.
Trade generally, and with China specifically, has to be put in the
context of a recovery in many sectors of the U.S. manufacturing economy
over the past 18 months. But, despite this recovery, a number of
manufacturing sectors that have borne the brunt of China's emergence as
an industrial power have continued to lose revenue and jobs. Thus the
China challenge not only continues to be at the center of the NAM's
trade agenda, but also is central to how U.S. manufacturing defines its
own future.
The NAM seeks a positive and balanced trading relationship with
China that reflects market forces as closely as possible. China as a
participant in the global market is a fact of life. At some point,
China will become the world's second largest economy. We as American
manufacturers must take advantage of the opportunities offered by the
large, emerging market in China, as well as be adaptive and innovative
to maintain our competitiveness globally.
In this vein, it is important to note that while the rapidly-rising
trade imbalance with China is a growing factor affecting U.S.
manufacturing production and employment, it is not the only factor.
Domestic costs like health care and litigation costs, slowly-recovering
U.S. exports, dollar overvaluation with Asian currencies and regulatory
pressures are also at work. China should not be viewed as a
``scapegoat'' and an excuse for not tackling the other problems.
Nonetheless, the China currency situation, subsidization and other
factors feeding our deficit with China must be addressed.
China's emergence as a leading world economy has meant significant
new opportunities for many NAM members, including increased export and
investment. However, these opportunities are not fully realized by all
NAM members. These companies see prices of Chinese products so low that
it is difficult for them to see how they can compete. Others see their
customers moving to China and cannot find new ones to replace them.
I have seen this in my own company. As I said, we are a small
manufacturer with 500 employees and five plants, four in Wisconsin and
one in South Carolina. Our customers are large manufacturers of
agricultural and lawn and garden equipment. I have lost customers who
have moved their production to China and I may lose more.
Shifting production is a process that takes time. For most
companies, it takes at least a year. First you have to find several
sources for the product, get quotes, have tools built to manufacture
your product, have samples made and sent to the United States for
inspection and approval. Only then will a company begin buying from the
supplier in China. It is my experience that once even assembly of a
product goes to China, it affects all of us in the supply chain because
it is highly unlikely that parts will continue to be sourced back here
in the United States.
There is no way of knowing how many companies are in the process of
making this move. It is my view that what we are seeing today is just
the tip of the iceberg. We've also lost business to China because
higher raw materials costs seem to have little impact on Chinese
prices. The most important material in our production is steel. Steel
is a capital-intensive industry and labor is not as important a factor
as it once was in overall final cost. The price paid by a Chinese
manufacturer should be roughly the same.
We can overcome the low wage advantage through innovation and use
of technology. At Fisher-Barton, we are producing 20-30% more product
with fewer people than we did 3-4 years ago. We make parts without
touching them. In order to hold onto our business we have become more
productive. Our customers also have to insist on greater efficiency in
order for them to remain competitive. The skills required to work with
this technology are more complex and we pay more for them. So there are
still good jobs in American manufacturing that we want to preserve.
I must tell you that I have seen many companies around me driven
out of business and some of them were my customers. Not all of these
companies were dinosaurs--a number of them had made significant
investments in technology and modern business methods to remain
competitive. They had done all the right things, but were still faced
with an environment in which the deck was stacked against them with
regard to China.
There is no doubt that China is one of the largest trade forces in
the world. But it is called ``trade'' because it is the exchange of
goods and services. We buy from China, but to a great degree, instead
of buying our goods and services, China is buying our Treasury bills in
order to keep its currency cheap and its exports under-priced.
The NAM believes that trade must be market-based, without
government interference. In China, we are seeing problems with currency
undervaluation, wide-spread subsidization of industry and the failure
to implement its responsibilities under the WTO to protect intellectual
property and prevent product counterfeiting and piracy. As we developed
our China Trade Agenda, these emerged as the most serious issues in our
trading relationship with China, the three C's: currency,
countervailing duties and counterfeiting.
Along these lines, the NAM is looking for ways to address these
issues, working within established trade rules and our WTO and other
international commitments. It is essential that we have a rules-based
system that is adhered to and enforced.
Revaluation of the Chinese Yuan To Reflect Economic Fundamentals
China devalued its currency by about 30 percent in 1994 and has
maintained that value for the last ten years--despite a huge increase
in production capability, productivity, quality, production range,
foreign direct investment inflows, and other factors that would
normally be expected to cause a currency to appreciate. Economists
estimate that the yuan is undervalued by as much as 40 percent. This
undervaluation effectively taxes U.S. exports and subsidizes imports
from China, exacerbating the growing bilateral trade deficit.
In 2004, the bilateral trade deficit with China was about $160
billion, the largest with any country and, at growth rates of the last
few years, will almost triple in five years. (See Chart 1 attached) The
latest data show the deficit growing even more rapidly. Data for Jan.
and Feb. 2005 indicate a 47% increase in the U.S. deficit with China
over the same months in 2004. If this rate of growth continues, our
trade deficit with China could reach an astonishing $240 billion by the
end of 2005. Furthermore, the undervalued yuan makes foreign investment
in productive capacity in China cheaper and more attractive, thus
encouraging the migration of investment to China.
The degree of upward pressure that the yuan would feel is amply
indicated in the amount of reserves that the Chinese government has to
accumulate to maintain its artificial peg. Foreign exchange reserve
accumulation has been accelerating. Reserves grew a phenomenal $200
billion last year--to a total accumulation of $640 billion, or 40
percent of China's entire annual output of goods and services. That is
an enormous amount to have in Treasury securities earning a couple of
percentage points when China could be using those funds internally to
build up the poorer parts of its economic infrastructure and stimulate
domestic-led growth. Moreover, the $200 billion that China added to its
reserves in 2004 significantly exceeded China's entire increase in GDP
that year. Yet China has no choice but to continue this huge reserve
buildup so long as it insists on maintaining a sharply undervalued
currency.
It should be noted that, while a currency peg per se does not
contravene International Monetary Fund (IMF) requirements, IMF Article
IV proscribes ``manipulation of exchange rates to gain unfair
competitive advantage over other members--and this includes protracted
large-scale intervention in one direction in the exchange market.''
With foreign currency reserves of $640 billion, China's action is
clearly incompatible with the intent of IMF Article IV.
The NAM believes that eliminating the severely undervalued yuan is
essential to creating more balanced and sustainable trade flows. A
revaluation of the yuan to reflect underlying economic fundamentals
would also create more favorable conditions within Asia, enabling other
countries to free their currencies to better reflect market conditions.
These multiple currency misalignments artificially depress U.S. exports
to a substantial portion of the world and reduce the competitiveness of
U.S.-based manufacturing in the U.S. market.
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. China could take
several actions immediately, including unpegging the yuan from the
dollar and relating it instead to a basket of major trading partner
currencies, establishing a large band around its current rate, and
moving its peg upward.
Would a considerably stronger Chinese yuan have beneficial effects?
Many NAM member companies have indicated that a 20 percent or more
price shift would change the competitive situation dramatically. Others
say their problems go beyond that. Some commentators state that Chinese
wages are so low that no amount of appreciation would make a
difference. Labor costs, however, are only one factor in the production
process. In fact, production worker wages and benefits are only 11
percent of the cost of U.S. manufactured goods, on average. An exchange
rate reflecting market forces would shift the competitive equation so
that some Chinese industries would remain extremely competitive, while
others would find their artificial advantage diluted. U.S exports would
also grow more rapidly, helping to bring about a more sustainable trade
position.
China's action in sustained one-way purchases of dollars to
maintain its peg are inconsistent both with its obligations in the IMF
to avoid currency action for purposes of gaining a trade advantage, as
well as with its obligations in the WTO to avoid frustrating trade
liberalization through exchange rate action and to avoid subsidization
of exports or impairment of trade benefits.
We are aware of the efforts made by the Administration to raise the
visibility of this issue and engage the Chinese government in working
towards a market-determined currency and we appreciate those efforts.
Unfortunately, after more than 18 months, there has been no movement in
the value of the currency. Although we have seen the beginning of
internal reforms of the banking and financial sectors in China, there
has been no movement of the currency. If we wait for China to take
every action required to reform its closed capital system and banking
system riddled with non-performing loans before we see any change in
their currency valuation, we will be here a long time from now having
the same discussion. And, Mr. Chairman, we will have seen the
unnecessary loss of many more of our companies and jobs, not from
natural economic forces and shifts, but solely because China's has
refused to live up to its international commitments.
The NAM urges the Administration to work with China and other
countries to resolve this problem and thus avoid the dangers that
misaligned exchange rates pose to the United States, China, Asia and
the global financial system. Additionally, we are pressing the Treasury
Department to recognize currency manipulation in its semi-annual report
to Congress. It has declined to do so in earlier reports, but we
believe China's massive currency purchases in 2004 clearly fall within
the definition of manipulation. We also believe the Treasury Department
should urge the International Monetary Fund to exercise its
surveillance authority over exchange rates. We hope this will result in
positive action but, if it does not, the IMF should be prepared to cite
China under Article IV if progress is not made in consultations.
Last week, the introduction of Schumer-Graham legislation in the
Senate, which the NAM opposed, indicated the level of frustration with
the Chinese failure to take steps to bring their currency closer to its
market value. I should note that the NAM opposed the amendment not
because we do not believe this is an issue of critical importance. In
fact, we were the first organization to raise this issue and we
continue to make it a top priority, but any action taken must be done
within WTO rules.
Application of Countervailing Duty Laws to China
The NAM hears from some companies that the price of competing
Chinese imports is below their cost of raw materials. There are
concerns that China's industrial development may benefit from a wide
array of government policies that, in effect, result in subsidies.
These include: government bank lending to enterprises without
creditworthiness, export-based tax incentives, and the discriminatory
application of tax rates and rebates.
The subsidization of manufacturing by the Chinese government
extends beyond what might be considered normal bounds to include the
acquisition of raw materials. An NAM member in the copper industry
tells us that exports of copper and brass scrap to China have increased
about 50% a year for several years, fueled in large part by a special
subsidy of 30% of the VAT tax applied by the Chinese government to
imports of scrap. This subsidy is given to the scrap consumer to invest
in upgrading facilities. This subsidy amounts to about 7 cents a pound
of the copper content in a market where the successful bidder may be
determined by a margin of a quarter cent.
The WTO Subsidies and Countervailing Measures (SCM) agreement
allows countervailing import duties to offset such subsidies. In fact,
China's WTO accession agreement specifically outlines the process for
assessing subsidies in China. A good deal of time was spent by former
USTR Barshefsky negotiating this language.
In Beijing in September 2003, former Commerce Secretary Evans said,
``There is simply no valid economic justification for many of the loans
currently being extended to unprofitable businesses in China. Non-
performing loans to state-run companies are a form of government
subsidy.'' However, since 1984, the Commerce Department has not applied
countervailing duties against imports from non-market economy countries
such as China.
The NAM supports reversal of the Commerce Department's 1984
decision in light of the SCM Agreement and the terms of China's
accession to the WTO, and supports legislation that was introduced last
month in the House by Congressmen English and Davis (H.R.1216) and in
the Senate by Senators Collins and Bayh (S.593). We hope that the
committee will look favorably on this legislation.
With regard to the bill introduced last week by Congressmen Hunter
and Ryan (H.R. 1498) that would make currency a countervailable
subsidy, NAM needs to do further analysis of the bill. We won't take a
position until our trade committee has digested it and expressed its
views.
Strengthening and Enforcement of Intellectual Property Laws
Next to the exchange rate, the most serious problem NAM members
have with China is its failure to curb intellectual property theft--
particularly copyright piracy and product counterfeiting. China has
become the world's epicenter of counterfeiting, costing U.S. companies
billions of dollars and thousands of legitimate jobs, and threatening
consumer health and safety. Because of this, our members have pressed
us to do more, and the NAM, with the U.S.Chamber currently co-chairs
the Coalition Against Counterfeiting and Piracy (CACP).
Despite bilateral and multilateral agreements with China to protect
intellectual property rights, China's record of enforcement has been
inadequate and seriously flawed. China has been taking positive steps;
the laws are better, and there at least is a higher degree of official
attention to the enforcement of those laws at the central government
level. But it is enforcement that counts and China seriously fails in
that regard. It is each WTO member's obligation to provide effective
protection for intellectual property.
In spite of these official efforts, it is the general view that
product and trademark counterfeiting and copyright piracy is not
getting better, but worse. An inability or unwillingness to protect
intellectual property strikes at the core of American competitiveness.
If the products of our innovation and research and development are
stolen, there will be little we can do to maintain our industrial base.
As a result, the NAM, in its submission to the USTR on the Special
301 out-of-cycle review of China, recommended that the Administration
designate China a Priority Foreign Country and commence development of
a WTO case, ideally in conjunction with the EU, Canada, Japan and
countries whose companies are also suffering from what NAM President
John Engler calls China's ``grand larceny on a massive scale.'' We need
to see the law enforced, with counterfeiters thrown in jail and the
volume of counterfeiting significantly reduced. It is time to deal
decisively with this problem.
U.S.-China Trade Deficit and Effect on Manufacturing
There is no doubt that China exerts the largest bilateral trade
effect on manufacturing. In 2004, we had a trade deficit in
manufactured goods of $490 billion. Two-thirds of that total is with
Asia and 34% is with China. (See Chart 2 attached.) The surge in
Chinese imports has been a serious problem in many sectors and
anecdotal evidence indicates that there are underlying factors already
discussed that we cannot afford to ignore. In addition, Chinese
production has exerted a downward pressure on prices at a time when
costs are rising. Companies cannot pass on those costs because of the
so-called ``China price,'' recently featured in a leading business
weekly.
However, while China poses a very serious problem for many U.S.
manufacturers, a problem that is growing rapidly, it is important to
understand that China trade is not the only--or even the major--factor
responsible for costing American manufacturing the three million jobs
that have been lost since 2000.
Many factors went into that job loss. In fact, during the 2000-2003
period, when we lost those three million jobs, the most significant
trade factor affecting employment was not China, but was the fall in
our global exports. The U.S. manufacturing goods trade deficit worsened
by $90 billion during those three years, but $70 billion of that
decline came from falling exports, and only $20 billion of the increase
in the deficit came from rising imports. Additionally, it should be
noted that not all of the increase in imports from China has been
displacing U.S. production. A significant proportion, particularly in
computer and electronics imports, appears to have displaced other Asian
country exports to the United States.
Nevertheless, it is clear that the largest trade challenge facing a
growing range of U.S. manufacturers today is China. It is no
exaggeration to say that for many U.S. companies their top three trade
concerns are: 1. China; 2. China; and 3. China. The trade gap with
China has widened considerably in recent years and particularly in
recent months. Given all these factors, addressing our trade deficit
with China is an imperative, but we must do so within international
rules.
Development of Significant Export Promotion Effort Targeting China
In looking for positive ways to alleviate this imbalance, promoting
the more rapid growth of U.S. exports to China certainly should be
emphasized. The NAM believes there is substantial potential for Chinese
economic growth to lead to a corresponding growth in the U.S.
manufacturing economy. But that potential is far from realization.
Of the $560 billion of goods China imported in 2004, only 8 percent
were from the United States, including agricultural products. In
contrast, the European Union (EU) and Japan have been significantly
more successful selling into the Chinese market. (See Chart 3
attached.)
Many manufacturers are taking advantage of China's rapid economic
growth to sell more of their products there. In fact, for some member
companies, China is their most important foreign market for increasing
export sales. However, China remains a difficult place to do business
and small and medium-sized companies, even those successful in other
foreign markets, often have difficulty entering the Chinese market and
developing profitable business relationships.
To help U.S. manufacturers reach their export potential in China, a
new and greatly expanded export promotion initiative is needed. Current
U.S. Government export promotion programs offer useful assistance but
are not on the scale needed to make a sufficient difference in overall
export trends. The U.S. Government and private sector must work
together to launch a more ambitious program that provides more on-the-
ground assistance in China and more trade outreach to potential U.S.
exporters. A complete outline of NAM recommendations for this program
can be found in the 2005 NAM China Trade Agenda. Our goal should be to
achieve at least one-third growth in our exports to China each year.
This would triple our exports in four years and quadruple them in five.
To implement a program of this scale, the NAM will seek to obtain a
doubling of the Commerce Department's China-specific trade promotion
budget for FY2006.
Standards and Regulatory Market Access Barriers
In foreign markets around the world, standards and technical
regulations as well as procedures established for conformity assessment
have emerged as increasingly important market access barriers for U.S.
manufacturers. In China we have seen disturbing developments that
standards and technical requirements are being deliberately used to
limit market access of foreign products and give Chinese producers
unfair advantage. And these concerns need more attention.
China has been active in promoting standards in a number of
information technology areas, for example, wireless encryption
standards (WAPI), radio frequency identification tagging (RFID),
Internet protocols and its own microprocessors. This indicates that the
Chinese government has a longer-term plan to encourage the use of
Chinese products and technology, particularly in high-technology
sectors where the U.S. has competitive advantages, by gaining wide
acceptance of domestically-developed standards.
U.S. manufacturers also face other market-access problems resulting
from technical and regulatory requirements established by government
authorities, and from costly and burdensome conformity assessment
procedures. The process for approving new chemical products, for
examples, is slow and unpredictable. Duplicate testing to meet
overlapping technical requirements are common in a wide range of
products, including medical equipment, personal care products, mobile
phones and consumer electronic products.
We also hear frequent complaints about the application of
requirements for a ``China Compulsory Certification'' (CCC) mark on 130
categories of products, such as appliances, electric motors and
machinery, and information technology equipment. Only Chinese companies
are authorized to certify conformity to the standards, and inspection
of foreign factories is required. U.S. testing companies, such as
Underwriters Laboratories and Intertek, cannot provide these services
in China. The CCC process is costly, time-consuming and complicated,
particularly for small manufacturers and producers of components.
As part of its WTO obligations, China has become a party to the WTO
Technical Barriers to Trade (TBT) Agreement, which establishes
disciplines aimed at preventing countries from using standards and
technical requirements as trade barriers. The U.S. Government needs to
work with the business community to ensure that China lives up to both
the letter and spirit of this agreement and its commitments to open the
Chinese market to foreign products and companies. We are concerned that
China is not doing enough to meet is obligations in this area.
Conclusion
Mr. Chairman, let me reiterate that the NAM wants a strong economic
relationship with China that provides mutual benefits. Now in its
fourth year of WTO membership, China has made progress in opening
markets and adhering to international rules, but the benefits of the
relationship still remain heavily one-sided in China's favor.
Manufacturers continue to face an unlevel playing field that works to
limit U.S. exports to China and gives Chinese products unfair
advantages in the United States.
Many U.S. manufacturers can and will deal with the fact of China's
low wages and lack of worker benefits through innovation and
technology. But what is not fair and what we should not have to deal
with is subsidized production or deliberate currency undervaluation and
our government telling us there's nothing they can do to see that
international rules are enforced.
We do not have five years or ten years to solve this problem. The
issues I have outlined today are having a serious and negative effect
on manufacturing in this country. We have an obligation to see that
America's manufacturing base stays strong. We can do that within the
rules of the international trading system. But we must not be timid in
the insistence that those rules be enforced. Without enforcement when
major trading partners egregiously violate these rules, many will lose
faith in the efficacy of the system. We know that free trade properly
administered benefits all of us. We must see to it that the consensus
for free trade is maintained in this country. We look to the
Administration and Congress to see to it that China plays by the rules
and the system works.
Thank you, Mr. Chairman.

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[GRAPHIC] [TIFF OMITTED] 23921A.016

Chairman THOMAS. Thank you very much. Speaking of
counterfeiting. Mr. Berman?

STATEMENT OF JAY BERMAN, CHIEF EXECUTIVE OFFICER EMERITUS,
INTERNATIONAL FEDERATION OF PHONOGRAM INDUSTRIES, ON BEHALF OR
THE RECORDING INDUSTRY OF AMERICA

Mr. BERMAN. Thank you, Mr. Chairman. Let me start by
answering the question that you posed to the previous panel,
which I actually don't believe was answered and that where
China ranks in the hierarchy of bad guys. It ranks number one.
It has not ranked number one. In the three and half years since
it has joined the WTO, it hasn't improved. That is the answer
to your question. Mr. Chairman, thank you for--and Members of
the Committee. Thank you for the opportunity to appear here
today to discuss China's intellectual property regime, its
current enforcement policies or to be more precise the lack of
enforcement.
Let me start by going directly to the conclusion of my
written testimony about the current state of affairs in China.
While there has been some progress in terms of administrative
and legal structure for enforcement and modernization of
China's copyright law, not surprisingly this has produced very
little in the way of results for expanded commercial
opportunities for U.S. record companies. The reason simply is
the lack of a credible sustained deterrent enforcement policy
and the continued existence of market access barriers.
I say that, Mr. Chairman, notwithstanding the marked
increase in sporadic rating of pirate operations and the actual
seizure of hundreds of millions--hundreds of millions--of
pirate discs. Why? The Chinese have made a conscious choice to
rely exclusively on administrative sanctions. That means lots
of inspections, lots of seizures, and if the pirate hasn't
already been tipped off about the raid and fled the scene
possibly a fine. China's organized crime gangs, the
manufacturers, and distributors behind the face of poor street
vendors consider these periodic seizures and fines as a mere
cost of doing business. Indeed even with the destruction of
product and the payment of fines, it is still a highly
profitable business, particularly since the pirate is back on
the street the next day.
Until China imposes truly deterrent criminal penalties for
copyright piracy, nothing is really going to change for U.S.
companies. China will remain in violation of its WTO
obligations under Articles 41 and Articles 61, and it will have
failed to fulfill its commitment to the United States under the
U.S.-China Joint Commission on Commerce and Trade, known as the
JCCT. The challenge for American industry and for the U.S.
government is how to get the Chinese to actually live up to
their promises. A second point in addition to the question of
piracy and enforcement is that continued existence of market
access barriers to U.S. entertainment companies. These trading
barriers make it difficult for U.S. companies to realize the
true commercial potential of the Chinese market. This is most
definitely an underdeveloped, underserved market with vast
potential for America's entertainment companies.
Unfortunately, it may well stay that way by design of the
Chinese authorities. In light of the tremendous imbalance in
U.S.-China trade, it is a matte of critical importance that
America's most competitive industries, its intellectual
property industries, be afforded a more level playing field.
Let me cite one of these barriers, for example. Censorship. It
is ironic but the irony seems to have been lost on China that
excluding or delaying a U.S. work for political, cultural, or
social reasons does not in any way affect the ability of
pirates to have that same work on the street and available in
large quantities very quickly after its U.S. debut. The fact
that U.S. record companies cannot publish or release a
recording in China without the permission of a state-owned
publishing company and that we cannot operate through wholly
owned companies manufacturing, distribution, or retailing
operations artificially segments the market and makes it
extraordinarily difficult to grow the market for U.S.
recordings. The current system in China does not work. In fact,
it cannot work, and it is designed to achieve precisely that
result.
Unless the U.S. uses each and every option available to it,
we will face this situation we do today for the foreseeable
future, an overwhelmingly pirate market with limited
opportunity for the legitimate U.S. companies. As I noted in my
written testimony, we strongly support the initiation of WTO
consultations with China on this matter. We were told that the
great benefit of bringing China into the WTO was to bind it to
the rule of international law. It is time to test that with
respect to China's longstanding willingness to tolerate piracy.
Thank you.
[The prepared statement of Mr. Berman follows:]
Statement of Jay Berman, Chief Executive Officer Emeritus,
International Federation of Phonogram Industries, on behalf of the
Recording Industry Association of America
Mr. Chairman and Members of the Committee, my name is Jay Berman
and I am Chairman Emeritus of IFPI, and formerly served as Chairman and
CEO of both IFPI and RIAA. I have been deeply involved in working to
address piracy in China for nearly two decades, and I greatly
appreciate the opportunity to appear before you today on behalf of the
Recording Industry Association of America to discuss U.S. economic
relations with China and the music industry's perspective on China's
implementation of its WTO accession commitments. I will add, at the
request of MPAA, some comments about the problems affecting the motion
picture industry's ability to conduct business in China.
Before beginning to address the substance, I want to first
highlight the excellent work that has been done, and is being done, by
the Administration in attempting to tackle the piracy problem in China.
USTR and the entire executive branch team has been vigilant, creative
and relentless. The fact that China maintains unreasonable practices
with respect to market access and piracy is something for which the
Chinese Government is uniquely accountable. USTR, the Department of
Commerce, the State Department, the U.S. Embassy in Beijing, and other
executive branch agencies have demonstrated tremendous resolve in
attempting to persuade the Chinese Government to address these
practices, and their continued efforts are greatly appreciated by
America's copyright industries.
International markets are vital to our companies and our creative
talent. Exports and other foreign sales account for over fifty percent
of the revenues of America's record industry. This strong export base
sustains and creates American jobs. The core copyright industries--
including music, movies, software and videogames--account for
approximately six percent of U.S. GDP. The United States possesses a
strong comparative advantage in the creation and sale of entertainment
products.
However, America's creative industries are under attack. Piracy has
grown in recent years with the advance of digital technology that
facilitates both physical and online piracy. Indeed, this is especially
so in China where high levels of piracy in conjunction with market
access barriers plague our industry The combined effect of China's
massive piracy and rigid market access restrictions severely limits our
ability to take advantage of our industries' comparative advantage in
China at the same time that China's exports of other products surge
into the United States. It is unfair and no longer tolerable that
extremely competitive U.S. businesses are effectively banned from
operating on fair and non-discriminatory terms in China.
As I will elaborate below, China's intellectual property laws have
some deficiencies, but even more important is their failure to enforce
those laws effectively. We thank you Mr. Chairman and the Committee for
holding this important hearing, and welcome this opportunity to explore
mechanisms for ensuring China's compliance with its WTO and bilateral
obligations to the United States.
Our Problems in China

Last year, despite China's various bilateral and multilateral
commitments to the United States, the record industry lost over $200
million in China to pirate sales. 85% of the sound recordings sold in
China were pirated. This means an astounding 17 of every 20 sound
recordings sold in China are sold by pirates. Our colleagues in the
motion picture industry face an even grimmer picture. They inform us
that they lost $280 million to piracy in China last year, a 95% piracy
rate.
There are five significant and related problems in China:

1. China is swamped with pirated recordings and motion pictures
because the penalties imposed on pirates are simply ineffective.
Chinese authorities might raid a manufacturing facility, a warehouse or
a retail store and seize the pirate product, but the resulting penalty,
if any, is generally just a small fine. Pirates are entrepreneurs who
see raids and seizures as a cost of doing business and the occasional
interruptions are built into the business model. The penalties do not
deter or punish or incapacitate the thieves.
2. China is a net exporter of our music and movies. The pirates
produce the copies in China, and then export to the surrounding
countries and beyond. MPAA tells us that Chinese pirated DVDs have been
seized in the United States, the United Kingdom, Australia, Hong Kong,
Sweden, Thailand, and the United Arab Emirates. Exports of pirated
music sound recordings have been found in several Southeast Asian
countries. This practice had stopped after the 1995/96 trade agreements
with the U.S., but resumed about three years ago and has been an
increasing problem ever since, especially in the case of motion
pictures.
3. Market access and investment barriers prevent our members from
serving the Chinese market in a timely manner. As a result, legitimate
product gets to the consumer weeks or months after the pirates have
successfully exploited our products. Thus, a solution to piracy
requires relief from the barriers we face just to enter the Chinese
market. Until China closes this exclusive window of opportunity for the
pirates to offer our products to Chinese consumers while we are barred
from doing so, efforts to combat piracy will not succeed. We understand
the cultural sensitivities of Chinese society, and do not intend to
challenge the maintenance of fair, timely and transparent censorship
regulations. However, it is essential that any such censorship
regulations do not operate as a disguised barrier to entry, and that
they do not result in commercially prejudicial delays in securing
approval for release of products. Interestingly, the Chinese Government
doesn't appear to be too troubled by the avalanche of piratical
products for which no censorship approval has been secured, suggesting
that present rules limiting the scope of market access have little to
do with cultural sensitivities.
4. Given present imbalances in our trading relationship, it is
time for the U.S. government to insist that China expand the
opportunities for U.S. businesses to operate in China in sectors where
the United States is competitive--particularly in the music and film
sectors. We permit access for Chinese enterprises to operate in the
United States. As stated in the introduction of my testimony, it is
unfair and no longer tolerable that extremely competitive U.S.
businesses are effectively banned from operating on fair and non-
discriminatory terms in China.
5. Internet piracy is growing rapidly in China. Many websites
offer the unauthorized downloading of music files, some for a financial
charge, others for free. Certain China-based ISPs have become online
``warehouses'' for international pirate syndicates. Many of the legal
deficiencies that enable physical piracy to flourish in China plague
the on-line environment as well.

Demand for American musical recordings and filmed entertainment in
China is enormous, as evidenced by the massive piracy of our products
across China. The result has been a colossal lost opportunity for
American writers, performers and record and movie producers to benefit
from the fast growing Chinese society and economy. To put this in
economic terms, the United States has a tremendous ``comparative
advantage'' in creating and producing entertainment products that we
want to make available to China's citizens. But we are unable to do so
as result of the continuing piracy and market access restrictions
described in my testimony.
Frankly, Chinese writers, performers and producers--indeed Chinese
culture more generally--is undermined by the massive Chinese piracy of
their own music recordings and filmed entertainment. China's culture is
also harmed by the market access restrictions China maintains which
seriously restricts the ability of our world-class companies to bring
to our modern recording technologies and distribution techniques to the
delivery of music recordings and filmed entertainment products in
China.
Chinese Law and Treaty Obligations

The entertainment industries have a long history of working with
the Congress and the Administration to protect and defend this uniquely
successful sector of the U.S. economy. We very much appreciate the
efforts of this Committee as well as the dedicated officials within the
various agencies. As a result of a lot of hard work, today the U.S.
copyright industries can look to three primary mechanisms for
protecting intellectual property in China--a 1995 bilateral agreement,
the WTO and JCCT.
I personally worked very closely with the Office of the U.S. Trade
Representative on the intellectual property negotiations with China in
1995 and 1996 pursuant to Section 301 investigations. Those efforts
resulted in bilateral agreements that obligated China to: 1) close
factories producing pirated CDs, and 2) stop the exports of pirate CDs
that were causing catastrophic disruption of our global markets and
other actions.
These 1995 and 1996 agreements were largely successful, and the
Chinese government closed many of these plants and halted the
exportation of pirate products. However, we are concerned that
exportation of piratical goods is once again on the rise, and our hopes
that China's self interest in being a significant player in world trade
and the information society would lead to a significant reduction of
piracy across the board have not yet been fulfilled.
China's Commitments in the WTO's Agreement on Trade-Related
Intellectual Property Rights--aka the ``TRIPS'' agreement

The WTO's TRIPS Agreement is basically divided into two parts: (1)
substantive norms (e.g. what rules must be in a copyright law) and (2)
requirements that members enforce the law and provide remedies that are
adequate to deter further infringements of these norms. China is not in
compliance on a number of counts, particularly as regards effective
enforcement.
For example, the enforcement section of TRIPS--Article 41--states
that ``members shall ensure that enforcement procedures . . . are
available under their law so as to permit effective actions against any
infringement . . . covered by this Agreement, including expeditious
remedies . . . which constitute a deterrent to further infringements.''
China's excessive reliance upon administrative sanctions in the form of
the seizure of infringing product and, if the guilty party doesn't
flee, the imposition of small fines, do not deter further
infringements.
China also fails to comply with Article 61 of the TRIPS Agreement,
which specifically requires that criminal penalties ``be applied in
cases of willful trademark counterfeiting or copyright piracy on a
commercial scale.'' China has conducted few prosecutions and made very
few convictions for copyright piracy. China has persisted in defining
``commercial scale'' through the use of complicated numerical
thresholds and ambiguous definitions which, despite the new Chinese
``judicial interpretation'' described below, make it highly unlikely
any pirate will face criminal penalties.
Moreover, the remedies provided in China's criminal code are only
available in those instances where the pirate is making a profit.
Ironic, isn't it, that the concern is the pirate's profitability and
not the fate of the legitimate business. In addition, the profit test
is actually more difficult to meet than the commercial scale
requirement. For example, someone intentionally posting online a single
copy of a copyrighted recording on the internet without authorization,
will cause serious economic harm on a commercial scale if that
recording or motion picture is downloaded over and over again. It would
not, however, meet China's ``for profit'' test. In addition, a
``profit'' test violates the TRIPS Agreement.
China's Commitments in the U.S.-China Joint Commission on
Commerce and Trade--the ``JCCT''

In April 2004 during a meeting of the U.S.-China Joint Commission
on Commerce and Trade--the JCCT--China made several potentially
important commitments to improve intellectual property enforcement.

First and foremost, China committed to ``significantly
reduce IPR infringement levels''. Under any measure, this has not
happened. The legitimate market, while it has improved somewhat over
the past year, is still under siege. Piracy is down from an astounding
90% to about 85% in sound recordings. Piracy of motion pictures remains
at 95%.
China also committed to increase penalties for IPR
violations by taking the following actions by the end of 2004:

--increase the scope of IPR violations subject to criminal
investigation and criminal penalties;
--apply criminal sanctions to the import, export, storage and
distribution of pirate product;
--apply criminal sanctions to online piracy;

One reason why piracy and counterfeiting have remained so high for
so long is that China almost never criminally prosecutes anyone for
committing these acts, no matter how extensive the piracy or
counterfeiting may be. An important outcome of the JCCT was China's
commitment to revise substantially its ``judicial interpretation''
governing application of its criminal code to copyright piracy--and to
trademark counterfeiting--so that criminal prosecutions and convictions
would more readily occur against these acts.
As mentioned, China has long relied upon a complex system of
numerical thresholds and ambiguous definitions for deciding when to
criminally prosecute and convict for copyright piracy and trademark
counterfeiting. We have long advocated that China abolish this system,
or at least simplify and substantially lower these thresholds.
China did issue a new judicial interpretation in December 2004 that
does reduce many of these thresholds. However, China has maintained its
complicated and ambiguous definitions that leave us uncertain as to
whether criminal prosecutions and convictions are any more likely now
than in the past. Vice Premier Wu Yi, who is responsible for IPR and
led the Chinese JCCT delegation, may be serious about bringing about a
significant reduction in piracy, but the police, prosecutors and
criminal judges still seem to regard IPR violations as activities that
do not merit their serious attention..

As part of the JCCT China agreed to mount a nationwide
enforcement campaign to stop the production of pirate product and
punish violators.

A one year campaign was launched last September that resulted in
noticeable increases in the number of inspections and product seizures.
However, the usual remedies are being still applied--product is seized
and modest administrative fines are sometimes levied. Not only is this
campaign ineffective, it is set to expire in September!

Improve the protection of electronic data by ratifying
the WIPO Internet Treaties as quickly as possible. To date, while there
have been some promising public announcements about China's intention
to ratify the Treaties, there has been no demonstrable progress on
this, and this legal issue must be viewed against a background that has
witnessed a proliferation of sites offering unauthorized recordings.
Increase customs enforcement actions against imports and
exports of pirate products and provide easier remedies for rights
holders to secure effective enforcement at the border. Again, there is
no indication that is underway.
Our Recommendation

China's current reliance on the threat of administrative
inspections, seizures and modest fines does not work. China's criminal
enforcement authorities are not seriously involved in intellectual
property enforcement. Unless this changes, we foresee unacceptably high
rates of copyright piracy in China for years to come.
At its own initiative, the U.S. Government is conducting a Special
301 ``out-of-cycle review'' of China's compliance with its obligations
to the United States under the 1995 bilateral agreement, the WTO and
JCCT. It is impossible to conceive that USTR could conclude anything
other than that China is not in compliance with these important
obligations.
Given that China is now in the WTO, the U.S. government is no
longer free to unilaterally impose the type of sanctions that worked in
the mid-1990s. Options available to the U.S. appear to be (a)
initiating a WTO dispute settlement case; (b) placing China on one of
the Special 301 lists (priority foreign country, priority watch list,
watch list); (c) imposing some form of trade sanction that is
consistent with our WTO obligations and/or (d) more discussions in the
JCCT and elsewhere.
The U.S. recording industry, joined by its sister organizations in
other copyright sectors, strongly recommends that the U.S. government
request initiation of consultations with China in the WTO over China's
failure to comply with its obligations to provide deterrent remedies
and criminal sanctions against willful copyright piracy, as required by
the TRIPS Agreement. USTR should also use any and all other pressure
points available to it to press our concerns on this matter. This
includes bringing into the WTO process other countries whose companies
are suffering from this scourge. China must come to realize that the
United States--and hopefully other countries--will not tolerate the
continued piracy of our products.
Market Access Restrictions

My testimony to this point focuses specifically on China's massive
copyright piracy and the damage this causes American and Chinese
legitimate performers and producers of sound recordings and motion
pictures. However, solving China's piracy problem will also require
significantly improved market opportunities for our industry and other
U.S. copyright industries, so that we can conduct the full range of
commercial activities that are integral to our businesses.
U.S. record companies' possess great expertise in developing and
recording new artists, and distributing, promoting, and advertising
their recordings so that the public is aware of them. RIAA member
companies work with local talent to refine and enhance their skills and
market their new sound recordings to local consumers. That is what we
do. Today China severely limits the ability of American record
companies to engage in developing, recording and distributing the music
of Chinese performers, and in fully participating in developing the
Chinese marketplace.
This is done in a number of ways:
Content Regulation and Review:

(1) Chinese government officials are required to review the content
of foreign-produced sound recordings before their release. Domestically
produced Chinese sound recordings face no such oversight process. Of
course, pirated product--be it domestic or foreign--is not censored
either and thus has free reign of the Chinese market while our
legitimate products are tied up in the Censorship Office. China should
at minimum terminate this discriminatory process between imported and
domestically produced product.
(2) Censorship offices are understaffed, causing long delays in the
distribution of new recordings. In recent months, we have seen some
improvement and a new recording takes an average of two weeks to be
approved. But that still gives the pirates a crucial two week head
start over the legitimate retail channels. The best result would be for
censorship to be industry-administered, as it is in most other
countries. If this is not an acceptable option, the Chinese should be
encouraged to find some other mechanism that allows legitimate music to
be marketed in a timely manner.
Producing and publishing sound recordings in China:

Another onerous restriction requires that a sound recording be
released through an approved ``publishing'' company if it is to be
brought to market. Currently only state-owned firms are approved to
publish sound recordings. China should end this discrimination and
approve foreign-owned record publishing companies.
Further, production companies (even wholly-owned Chinese ones) may
not engage in replicating, distributing or retailing sound recordings.
The extra layers eliminates synergies and needlessly cripples the
process of producing and marketing legitimate product in an integrated
manner. China should permit the integrated publishing, production and
marketing of sound recordings and allow such companies to have foreign
investors.
In addition, U.S. record companies may market non-Chinese sound
recordings only by (1) licensing a Chinese company to produce the
recordings in China or (2) importing finished sound recording carriers
(CDs) through the China National Publications Import and Export Control
(CNPIEC). China should permit U.S. companies to manufacture, publish
and market their own recordings in China and to import directly
finished products.
Distributing sound recordings:

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

On the film side, you have probably heard that China only allows
the distribution of twenty imported films per year. In addition, MPAA
states that China maintains a state enforced monopoly on the import of
foreign films. Only a small number of Chinese companies are permitted
to distribute imported films. These barriers result in long lag times
between the worldwide release of a film and its debut in China; last
summer, that lag time reached three months--a period when the films
were widely available in China, but only in pirate format!
Conclusion

Sound recording and film piracy in China remains rampant. Much more
needs to be done by China in order for it to meet its bilateral and
multilateral enforcement obligations to fight piracy. In addition, it
is time for the Chinese government to acknowledge the nexus between
meaningful market access and the ability to effectively fight piracy.
Piracy cannot be defeated or effectively deterred by enforcement
alone--it must be accompanied by market-opening measures. The
continuous vacuum left by China's closed market will always be promptly
filled by pirates. We urge the United States--and the rest of the
international trading community--to bring greater pressure on China
through the WTO and other processes to much more effectively combat the
rampant piracy in China and to open the Chinese market to our
legitimate products. Congress should deliver a clear message to the
Chinese Government--that they cannot expect to continue to exploit
their wares in the United States while maintaining practices that
effectively prevent the entry of our most competitive industries.
Present Chinese policy contributes to an imbalance of trade by severely
restricting our economic opportunities in sectors where we are most
competitive. This must not be allowed to continue. It has already gone
on for far too long.

Mr. SHAW. [Presiding.] Our next witness is Robert S. Weil,
II. He is the Chairman and Chief Executive Officer of Weil
Brothers Cotton Co. in Montgomery, Alabama, and Vice President
of the National Cotton Council. Mr. Weil?

STATEMENT OF ROBERT S. WEIL, II, CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, WEIL BROTHERS COTTON COMPANY, MONTGOMERY, ALABAMA, AND
VICE PRESIDENT, NATIONAL COTTON COUNCIL

Mr. WEIL. Thank you, Mr. Chairman. In addition to that, my
company has been merchandising and exporting U.S. cotton for
127 years. With changing trade patterns dictated by WTO, the
lapse of the multi-fiber agreement, various free trade
agreements, and the changes within China, the landscape of
trade with China has been altered profoundly. As a result the
U.S. cotton industry is exporting substantial quantities of
cotton to China, and must continue to grow this important
relationship. With its rate of increase in cotton production,
consumption, and export of textile goods into the world
markets, China is the dominant force in the world cotton
market.
I will focus my testimony on four main areas. One, access
to China's market. Two, ability to enter into contracts. Three,
issues of quality. Four, evolving terms of trade. My written
testimony details our concerns with China's implementation of
its tariff rate quota commitments, particularly the distinction
it draws between private mills and the processing trade.
Essentially, the processing trade category is not true
market access, as required by the terms of the U.S.-China WTO
Accession Agreement. A dedicated effort by industry and the
U.S. government has improved this situation, but not solved it
completely. However, China's growing need for cotton fiber has
caused it to increase its import quota above WTO requirements,
relieving the need for immediate changes. We continue to
monitor this issue along with the U.S. government. Initially,
there was significant confusion within the U.S. cotton
merchandising sector concerning the legal authority of any
specific cotton textile mill in China to enter into a contract.
Overall, however, China has loosed up on the ability of mills
to contract. However, these same mills have a steep learning
curve and don't always appreciate the sanctity of their
contractual commitments. In short, Chinese business culture and
ethics differ from western business culture and ethics, which
is based on English law.
Since trading margins are based on certainty of completion
of contract--that is, the assessment of risk--it is critical to
the whole of the U.S. cotton industry from the producer through
the ginner and warehouseman to shipper that these differences
be bridged satisfactorily. As our cotton exports to China have
grown, China's mills have begun to raise quality issues with
U.S. cotton. These complaints stem from a number of factors,
namely fundamental differences in the way cotton is harvested
and ginned in the two countries, a lack of understanding of
those differences, and inconsistency in China's classification
system, which remains primarily a manual system. China has
recently announced an ambitious plan to transform its system to
instrument classification. We commend China for this effort,
and we will continue to work with them and the USDA specialist
to help it develop a consistent workable classification system.
Finally, our recent experience in China shows a critical
need for improvement of the rules that govern terms of trade.
Quality complaints are not handled equitably. Contract sanctity
is not readily enforced, and negative price movements can cause
significant cancelation of contracts. We currently do not have
a lot of faith in the Chinese dispute settlement system. We
believe that in order to quickly improve these issues, China
should look to internationally recognized bodies that have
developed terms of trade over an extended period of time and
use their experience. These organizations, such as the
International Cotton Association, could help China revise its
outdated and one sided purchase contracts and help reform rules
governing the settlement of contractual disputes.
Interestingly, the National Cotton Council recently hosted
an intern from the China Cotton Association to assist their
understanding of our business systems and our terms of trade.
The National Cotton Council intends to send an intern to China
this year to work with the China Cotton Association in an
effort to continue this exchange of information.
There are few international relationships more complicated
or dynamic than that of U.S. Cotton and China. The U.S. cotton
industry is exporting an ever increasing quantity of cotton
fiber to China. At the same time, our longstanding customer,
the U.S. textile industry, continues to erode financially in
the face of competition from textile imports, and there is no
more competitive textile and apparel manufacturer in the world
than China. It is imperative that the U.S. cotton industry
continue to cultivate China as a good customer of our fiber. I
am certain this will happen, and despite the bumps in the road,
I am convinced we will sell more cotton to China in the years
ahead. Thank you, sir, for allowing us to testify today.
[The prepared statement of Mr. Weil follows:]
Statement of Robert S. Weil, II, Chairman and Chief Executive Officer,
Weil Brothers Cotton Company, Montgomery, AL, and Vice President,
National Cotton Council
Mr. Chairman, I would like to thank you and the members of this
committee for inviting me here today to discuss trade with China. My
name is Robert Weil. I am the Chairman and CEO of Weil Brothers Cotton
Company, located in Montgomery, Alabama. Weil Brothers has been
merchandising and exporting U.S. cotton for 127 years. We sell cotton
all over the world. I am also Vice President of the National Cotton
Council of America and have been a member of an Agricultural Technical
Advisory Committee in this Administration as well as the two previous
ones.
My testimony today focuses on a cotton merchant's perspective of
doing business with China; how our business has grown; how we have
worked to develop that business; and how we hope our business
relationship will evolve.
There are few international trading relationships more complicated
or dynamic than that of U.S. cotton and China. The U.S. cotton industry
is exporting an ever-increasing quantity of cotton fiber to China. At
the same time, our long-standing customer, the U.S. textile industry,
continues to erode financially in the face of competition from textile
imports --and there is no more competitive textile and apparel
manufacturer in the world than China.
A few numbers demonstrate the dynamic nature of this trading
relationship:

In 1998, China imposed a quota on cotton imports and
imported 359,000 bales of cotton from the world. In 2002, China
announced the first tariff-rate quota allocation in keeping with its
WTO accession agreement. In that marketing year, China imported 3.1
million bales of cotton from the world and 234,000 bales from the
United States, a total amount roughly equivalent to its tariff rate
quota.
We are still recording sales for the 2004 marketing year.
So far, China has about 2 million bales in commitments from the U.S.
and is expected to import up to 8 million bales from all sources. It
also produced a record 29 million bales of cotton in calendar year 2004
and exported almost $55 billion dollars of total textile and apparel
products, an increase of 50% since 2002. The projections developed for
the 2005 USDA Ag Outlook show China importing 14 and one-half million
bales for the 2005 marketing year--an increase of more than 6 million
bales over 2004.
This growth should be taken in context with the demise of
the U.S. textile industry. In the 1998 crop year, the U.S. still
maintained double-digit mill use of cotton. In that year, the U.S. and
China combined to register 29 million bales of mill use. As we enter
2005, a scant 7 years removed from 1998, it is projected that China
alone will spin about 41 million bales of cotton in its mills--12
million bales over the combined total of the U.S. and China in 1998.
Meanwhile, U.S. mill use has fallen to around 6 million bales a year,
40% below the rates that existed throughout the 1990s. I know that this
committee is very familiar with the economic situation confronting the
U.S. textile industry and the need for appropriate measures to ensure
its survival.

The numbers I have recited show very clearly that the United States
has a new, very important customer, China. The U.S. cotton industry is
currently exporting substantial quantities of cotton to China, and
China must continue as an important customer. With its rate of increase
in cotton production, cotton mill use and cotton purchasing, China is
the dominant force in world cotton. If you ask me or any other merchant
around the world about the direction of the cotton market, our first
question will be ``what will China do?'' I have attached to my
testimony an analysis of China cotton production taken from the
Economic Outlook report developed by the Economic Services department
of the National Cotton Council in January of this year for further
background in this area.
Mr. Chairman, I will focus my testimony today on four main areas:
1) access to China's market; 2) ability to enter into contracts; 3)
issues related to cotton quality; and 4) evolving terms of trade.
Market Access--Implementation of the Tarrif Rate Quota
After being shut out of the China market in 1998, the U.S. cotton
industry welcomed the WTO accession agreement and China's commitment to
establish a tariff rate quota of over 3 million bales. While China
announced that quota fairly promptly in February 2002, the National
Cotton Council raised serious concerns with the way in which the
People's Republic of China was implementing its commitments. Our
primary objection has been China's allocation of a significant portion
of the cotton TRQ to the ``processing trade.'' By allocating quota to
the processing trade, China is requiring that apparel made from that
cotton be re-exported. Essentially, the processing trade category is
not true market access as required by the terms of the U.S.--China WTO
accession agreement.
As a result of our concerns, the U.S. Trade Representative's Office
and USDA's Foreign Agricultural Service (FAS) conducted numerous
discussions with China officials in an attempt to get China to modify
its implementation of the tariff rate quota (TRQ) for cotton. In 2003
China announced revisions to its regulations that simplified the
process and improved matters, but did not eliminate the processing
trade distinction.
However, other events in U.S.--China cotton fiber trade have
overtaken implementation issues. China has grown to be the largest
importer of U.S. cotton in the world; it has increased its import quota
above WTO requirements; and it is expected to continue to purchase
imports well in excess of its WTO commitments. This level of trade with
China is beneficial to the U.S. cotton industry and relieves the
immediacy regarding changes in China's tariff rate quota
implementation.
Despite this beneficial trade, the United States and the U.S.
cotton industry must remain vigilant and continue to push for reform in
the TRQ system. Should internal pressures to purchase foreign cotton
subside within China, this private/processing trade distinction could
once again become a significant barrier to U.S. exports.
Finally, I should note that specific terms of implementation are
not the only means by which China can influence imports. The government
of China can still exert a significant amount of influence over the
availability of credit to importers. By tightening up on credit, China
can (and has) quickly cause imports to subside.
Ability to Enter into Contracts
Initially, there was significant confusion within the U.S. cotton
merchandizing sector concerning the ability of any specific cotton
textile mill in China to enter into a contract directly and on their
own behalf with a foreign merchant. The accession agreement called for
a phase-in of the legal ability of companies to enter into business
contracts, but the status of that phase-in and the legal status of
individual companies was not very clear.
Overall, however, China has loosened up on the ability of mills to
contract and appears to be moving forward with this aspect of their
commitments. However, those mills are new to doing business this way.
They have a steep learning curve and don't always appreciate the
sanctity of their contractual commitments. I will discuss this a bit
more when I discuss the evolving terms of trade.
Quality Issues
As our cotton exports to China have grown, China's mills have begun
to raise quality issues with U.S. cotton. These complaints stem from a
number of factors.
First, cotton produced in China is hand-picked and ginned using
much older technologies. The result is a different bale of cotton. U.S.
cotton has different characteristics as it is machine-harvested and
ginned in modern gins, the result of higher implicit labor and capital
costs in the U.S.
As a result of these differences, we believe Chinese mills often
over-penalize U.S. qualities. They seem to have more trouble spinning
U.S. cotton than do mills in other parts of the world. We don't think
this is because U.S. cotton is of inferior quality, but because of the
differences mentioned above.
Further, all cotton in China, whether produced domestically or
imported is still classed manually, which can produce inconsistencies.
For example, a cotton sample sent to Shanghai might receive a different
grade from one sent to Oingdao.
In 2003 the China Fiber Inspection Bureau (CFIB) announced an
ambitious plan to transform the current manual classification system to
an instrument based system. The plan is to be completed in 5 years
beginning in August 2005. The plan proposed use of High Volume
Instrument (HVI) inspection on all Chinese cotton bales with primary
emphasis on use of rapid instrumentation testing similar to that used
by the U.S. CFIB currently operates 172 classification facilities or
inspection bureaus across China that together class all of the 25-30
million cotton bales produced in China each year. Many details are yet
to be resolved.
Mr. Chairman, I commend China's efforts to reform its
classification system and we will monitor their efforts closely. It is
in the best interest of the U.S. if China adopts standards and testing
protocols consistent with those we currently use. China's
classification reforms coincide with activities by several other non-
U.S. cotton producing and consuming countries to consider adoption of
new standards that could be significantly different than the
longstanding U.S. system. Though we don't believe such a shift is
likely, it would complicate our export efforts significantly should it
occur.
Reliable standards are essential for orderly export and marketing
of U.S. cotton. Experts from USDA's Agricultural Marketing Service
(AMS), FAS, and Agricultural Research Service (ARS) have partnered with
Cotton Incorporated and the National Cotton Council to provide
technical advice, consultation and assistance to the CFIB. This
collaborative effort helps to ensure China grading standards, protocols
and parameters are based on sound engineering, scientific and
statistical principles consistent with U.S.. In 2004 the U.S. was host
to two CFIB technical delegations; furthermore the U.S. team met with
the CIFB in Beijing to further the technical collaboration. Additional
discussions are planned for later this year with a follow up visit of
CFIB technologists to the U.S. The delegation will spend up to one week
in intensive technical discussions with the USDA's AMS, ARS and
industry.
Evolving Terms of Trade
Contract disputes are the unfortunate result of new market
participants, inconsistent quality classification systems, and volatile
markets. Our recent experience in China shows a critical need for an
improvement of the rules that govern the terms of trade. Quality
complaints are not handled equitably. Contract sanctity is not readily
enforced and negative price movements can cause significant
cancellations of contracts. We currently do not have a lot of faith in
the Chinese dispute settlement system.
Chinese business culture and ethics differ from Western business
culture and ethics (that based on English Law). Since trading margins
are based on certainty of completion of contract, i.e., the assessment
of risk, it is critical to the whole of the U.S. cotton industry from
the producer through the ginner and the warehouseman to the shipper
that these differences be bridged satisfactorily.
To this end, the U.S. merchandizing community has had meetings with
the Department of Agriculture, the Trade Representative's Office, the
State Department and the Commerce Department. We have met with U.S.
officials both in the U.S. and in China. They have been most helpful to
us, but they have been divided in their recommendations on ways to
improve the trade situation existing within China. Likewise, we have
met with government officials in China and representatives of their
major trade associations. Again, we have heard different advice from
almost all quarters.
Our main problem in dealing with terms of trade in China is not the
presence of a big, monolithic government that is intent on thwarting
our efforts. Rather, our difficulty seems to stem from an inability to
find a common purpose or analysis either within the U.S. or among China
officials.
We believe that in order to quickly improve enforceability of
contracts, solve quality differences, and improve other critical
components of the terms of trade, China should look to internationally
recognized bodies that have developed terms of trade over an extended
period of time and use their experience. These organizations, such as
the International Cotton Association (formerly the Liverpool Cotton
Association) could help China revise its outdated and one-sided
purchase contracts and help reform rules governing the settlement of
contractual disputes.
Interestingly, the National Cotton Council recently hosted an
intern from the China Cotton Association to assist their understanding
of our business systems and our terms of trade. The National Cotton
Council intends to send an intern to China this year to work with the
China Cotton Association in an effort to continue this exchange of
information.
Conclusion
While the entry of China into the World Trade Organization
coincided with renewed cotton purchases by China, it is my opinion that
securing a tariff-rate quota was not the primary reason for the
increase in trade activity. China's ever-increasing mill use of cotton
is driving its demand for cotton well beyond its current TRQ. China is
the dominant factor in the world cotton and textile markets. It is
imperative that the U.S. cotton industry continue to cultivate China as
a good customer of our fiber. I am certain that this will happen and,
despite the bumps in the road, I am convinced we will sell more cotton
to China in the years ahead.

ATTACHMENT A--TESTIMONY OF ROBERT WEIL, II

Excerpt from National Cotton Council Annual Economic Report--2005 China
Cotton Production
The People's Republic of China continues to be the dominant factor
driving the world cotton market. China remains the world's largest
cotton producer with an estimated 2004 crop of 29.00 million bales.
This year's crop is roughly 6.70 million bales higher than last
season's crop mainly due to much improved weather conditions throughout
the growing season. Other factors include an increase in planted acres
for the 2004 crop year. USDA's latest estimates indicate an 11.50%
increase over 2003, putting acreage at the highest level since 1992.
Xinjiang remains the dominant cotton-producing province followed by
Hebei and Shandong. Among the leading cotton-producing provinces, Hebei
has the highest growth rate, in terms of planted acres, at about 30.0%,
followed by Shandong (19.0%). In the Yangtze River Reaches, except
Anhui, where very low yields last year prompted farmers to reduce
rather than increase planted area, others are to increase with the
highest being Jiangsu at 23.6%. In the Northwest, the growth in planted
acres averaged roughly 8.6%.
Improved production practices also played a role in China's
increased production. Seedling transplanting was used on 95.0% of the
planted area and the use of plastic film as a cover reached 44.0%. In
Xinjiang's state-run Production and Construction Corp (PCC) farms, high
planting density, standardized varieties planted on a relatively large
scale, together with improved irrigation systems, have reduced water
waste and ensured stable yields. Non-PCC farms, however, produced lower
yields, mainly due to poor field management practices. Regarding seed
variety, transgenic Bt cotton planting continued to expand in China,
however, it remains difficult to predict the real area share of Bt
varieties. Although only officially approved for planting in four
provinces, Bt varieties are, in fact, grown much more widely. As a
result, estimates for Bt cotton acreage vary from as low as 22.4% to
over 70.0%.
In general, the Chinese government took a flexible policy approach
toward cotton production and encouraged production based on the
Ministry of Agriculture's (MOA) Regional Plan for Agriculture Products
announced in February 2003. The plan identified three major cotton
regions with the greatest growth potential and designated them as
primary cotton producing regions. They are: 1.) the Yellow Basin; 2.)
the Yangtze River basin; and 3.) the Northwest region, including
Xinjiang. By 2007, China hopes to reach the following objectives.
First, in the Yellow River Basin, China officials would like to expand
the cotton planting area to 30.00 million mu (roughly 5 million acres)
and production to reach 2.10 million metric tons (MMT) (over 9.50
million bales). This area is targeted to be the main production base
for cotton which produces yarns of 40 counts.
For the Yangtze River Valley, officials plan to expand plantings up
to 15.00 million mu (2.50 million acres) and production up to 1.20 MMT
(5.50 million bales). This area is targeted to be the main production
base for cotton which produces yarns of 50 counts and over and of 20
counts and under. Finally, in the Northwestern Area, planting area is
projected to reach 12.00 million mu (1.90 million acres) with
production goals of 1.20 MMT (5.50 million bales). The area is targeted
to be the main production base for cotton which produces yarns of 32
counts. Given the limited land availability, in the short term, cotton
area is most likely to be relatively stable and remain in line with
MOA's Regional Planning.
Lower cotton prices should lower Chinese acreage in 2005. Grain
supplies have tightened over the past few years in China so there will
be continued efforts by government officials to ensure adequate grain
acreage. As a result, Chinese production is expected to fall to roughly
27.24 million bales in 2005.

Mr. SHAW. Thank you, Mr. Weil. Our next witness is Mr.
Myron--is it Brilliant?
Mr. BRILLIANT. Yes, it is.
Chairman THOMAS. Well, I expect great things of you. Who is
the Vice President of East Asia in the United States Chamber of
Commerce. Mr. Brilliant?

STATEMENT OF MYRON BRILLIANT, VICE PRESIDENT FOR EAST ASIA,
U.S. CHAMBER OF COMMERCE

Mr. BRILLIANT. Thank you, Chairman Shaw and other Members
of this Committee. The U.S. Chamber of Commerce appreciates the
opportunity to appear at this important hearing on U.S.-China
economic relations. The U.S.-China commercial relationship is
of immense and increasing importance to the U.S. Chamber and
the American business community.
As an illustration of our commitment to this relationship,
Tom Donahue, our President and chief executive officer, will
lead a high-level Chamber delegation to China in May to
exchange views with the Chinese leadership and business
leadership on the full range of issues in the commercial
relationship. We note that the U.S.-China trade relationship
has boomed in recent years. In 2004 China was again the third
largest trading partner for the United States, and as pointed
out already, U.S. exports to China have grown by 114 percent
since 2000, five times faster than to any other country.
On the other hand we also recognize that concerns are
rising in many quarters over the U.S. trade deficit with China,
market access concerns, rising competition from Chinese
imports, and Chinese currency regime. To help address these
concerns the U.S. Chamber feels strongly that China must comply
fully and on time with its WTO commitments and diminish the
role of state intervention and industrial policy in designated
strategic sectors of China's economy. While China's continuing
economic emergence presents many challenges for certain
segments of the U.S. economy, the U.S. Chamber of Commerce
continues to believe in the policy of engagement. We were
strong supporters of China's accession to the World Trade
Organization, and this is fostering positive changes in China's
trade and investment regimes.
China has made important progress in key areas,
particularly in tariff reduction, in revising existing laws and
drafting and passing new ones to comply with its WTO
requirements. There are clearly areas where additional progress
is needed. In the interest of time let me just comment on three
specific areas: IPR, standards and government procurement
policy. It remains clear that the protection of intellectual
property which China, according to companies of all sizes,
fails on the whole to meet the standards of effectiveness and
deterrence set out in the World Trade Organization. IPR
violations now severely affect all industries of our economy.
The scope of copyright piracy and counterfeiting in China
including the manufacture, distribution, sale and export of
counterfeit goods has worsened for our member companies over
the years. We acknowledge steps undertaken by the Chinese
government, under the leadership of Vice Premier Wu Yi, to
improve coordination among relevant agencies responsible for IP
protection and enforcement. Yet it is also equally clear that
enforcement of IPR will not be effective until civil,
administrative and criminal penalties are routinely applied to
IPR infringers. The U.S. Chamber is working closely with the
U.S. Administration and the Chinese Government on policy and
capacity building efforts, but we must, must see more
enforcement and customs actions at the provincial and local
levels within China, and we must see China pay for foreign IP
it illegally uses today.
The U.S. Chamber is further concerned about China's use of
discriminatory standards and government procurement practices
that erect barriers to fair competition and are in violation of
its WTO obligations. For instance, China has moved to develop,
adopt and increasingly mandate unique national technology
standards across a wide range of technology products. China's
adoption of the mandatory national technology standards that
are out of step with international standards efforts and don't
consistently respect intellectual property are troubling to
U.S. Chamber members, many of whom have significant investments
in China. Similarly, we are concerned the that government
procurement sector in China may be substantially closed off to
foreign suppliers of goods and services in light of recent
developments. The Chamber feels strongly that China's
implementation of its procurement law should not exclude or
diminish the ability of foreign companies to fully participate
in China's procurement market. We urge the Administration's
continued attention to this important issue.
Finally, let me turn my attention briefly to the issue of
currency. China's status as a large developing economy that is
not yet fully market based posed special challenges to world
trade and financial systems. We believe that no country, no
country should manipulate its currency to gain a competitive
advantage. The U.S. Chamber believes strongly that China should
move to an exchange rate system that allows market forces to
determine the exchange rate of the renminbi, but it should do
so in ways that will not shock their financial system and
result in unintended consequences. China is moving rapidly to
deregulate interest rates, develop a government bond yield
curve and strengthen its banking system. All of these measures
suggest China is preparing the way for a market-driven exchange
rate.
The U.S. Chamber has and will continue to support the
Administration's engagement of the Chinese Government
individual discussions of such matters as currency levels,
trade flows, investment regimes and compliance of international
agreements. While in some circles patience is growing short, we
strongly discourage punitive or unilateralist legislative
approaches such as those that call for WTO unauthorized
assessment of massive tariffs on Chinese exports. Such measures
would not achieve the intended goals. We believe that if the
United States starts unilaterally imposing additional tariffs
when we do not like other governments' policies, imagine the
multitude of circumstances in which other countries could do
the same with enormous consequences for the global economy. In
conclusion, I would note that there are many cases in which
Chinese authorities have worked closely with the U.S. business
community to implement WTO commitments as well as to resolve
disputes that have arisen during the implementation process,
but China must do more. The U.S. Chamber will continue to lend
our strong voice to ensure that China fully adheres to market
principles and WTO disciplines. Thank you for the time and
attention today, Mr. Chairman.
[The prepared statement of Mr. Brilliant follows:]
Statement of Myron Brilliant, Vice President for East Asia, U.S.
Chamber of Commerce
Mr. Chairman, members of the committee, good morning. The U.S.
Chamber appreciates your invitation to appear at this important hearing
today on U.S.-China economic relations.
As the world's largest business representing more than 3 million
members, the U.S. Chamber is keenly aware of both the opportunities and
challenges that the U.S.-China commercial relationship presents to our
companies. Our testimony today will focus on both these opportunities
and challenges as well as identify priority areas where the U.S.
Chamber believes that the People's Republic of China (PRC) government
needs to take further steps in the near term to enhance its own
economic development, bolster its credibility in the global trading
community, and most importantly, address pressing issues in the
bilateral commercial relationship. In particular, China should fully
and consistently implement its World Trade Organization (WTO)
obligations and continue on the path toward a clear and transparent
rules-based regulatory environment that values equally the
contributions of both domestic and foreign companies.
In May, U.S. Chamber President and CEO Thomas Donohue will lead a
senior U.S. business delegation to Beijing for high-level discussions
with China's government and business community. In particular, the
Chamber looks forward to building upon the recent discussions that we
have been having with Chinese officials in Washington, D.C. and to
exchanging views directly with China's leadership on the full range of
issues in the commercial relationship.
On the currency issue, the Chamber wishes to state at the outset
that we believe strongly that China should move as quickly as possible
to an exchange rate system that allows market forces to determine the
exchange rate of the renminbi. But we also believe that legislation in
both the U.S. House of Representatives and U.S. Senate that would
unilaterally retaliate against PRC currency practices by mandating
tariff increases on Chinese products is an ineffective tool to increase
U.S. manufacturing employment and pressure the PRC government to move
in the direction on currency that we all continue to seek. Furthermore,
these proposed measures that would impose WTO-unauthorized tariffs on
PRC exports would legitimize almost certain PRC retaliation against
billions of dollars in U.S. exports to China and would amount to a
steep tax on millions of American consumers.
Before returning to the currency matter at the end of our
testimony, we would first like to address both the opportunities and
challenges that China presents for our members and highlight U.S.
Chamber priority issue areas in the bilateral commercial relationship
for this year.
China as an Opportunity and a Challenge
It is now trite to say that the U.S.-China commercial relationship
is of immense and increasing importance to both the U.S. and Chinese
business communities. U.S.-China trade has boomed in recent years. The
United States ranked second among China's global trading partners in
2004, and China was again the 3rd largest trading partner for the
United States. U.S. exports to China have grown by 114% since 2000--
five times faster than to any other country. In particular, flourishing
U.S. agricultural trade with China is one of many recent success
stories for our exporters. The following statistics are illustrative,
if not breathtaking, in their sheer magnitude:

From 2000 to 2004, U.S. agricultural exports to China
increased approximately 224% from $1.7 billion to $5.5 billion.
Meanwhile, U.S. exports to the rest of the world increased only 4%
during the same period.
Or put another way, from 2000 to 2004, U.S. agricultural
exports to China accounted for approximately 50% of the increase in
total U.S. agricultural exports to the world.
The U.S. in 2004 enjoyed a $3.9 billion agricultural
trade surplus with China.
U.S. cotton exports to China increased by 86% from $769
million in 2003 to more than $1.4 billion in 2004.
Soybean exports to China in 2003 and 2004 constituted the
largest on-record exports of U.S. soybeans to any country.

Year-on-year increases of U.S.-manufactured exports from 2003 to
2004 reveal similar trends: exports of U.S. power generation equipment
increased by 34%; exports of electrical machinery and equipment
increased by 27%; and exports of optics and medical equipment jumped by
more than 30%. These statistics underscore the opportunities that China
offers to U.S. exporters, to investors, and, more broadly, to U.S.
economic development.
In contrast, we also recognize that concerns are rising in many
quarters over the U.S. trade deficit with China, rising competition
from Chinese imports, and concerns about China's currency regime. The
U.S. Chamber feels strongly that China must do significantly more to
comply fully and on time with its WTO commitments in critical areas
such as intellectual property rights (IPR).
We also share the concerns of many over the continuing role of
state intervention in designated strategic sectors of China's economy.
For example, China's continuing inability to establish independent
regulators in the telecommunications and express delivery services
sectors is symptomatic of continuing resistance within the government
to fully divorce itself from key decision making that affects the
commercial environment for both foreign and domestic companies.
And China's post-WTO accession use of industrial policy--including
the use of targeted lending, subsidies, mandated national technology
standards rather than voluntary, industry-led international standards,
discriminatory procurement policies, and potentially, antitrust
policy--to structure the development of strategic sectors is also of
mounting concern.
But while China's continued economic emergence undoubtedly presents
many challenges for certain segments of the U.S. economy, the U.S.
Chamber continues to believe that engagement is preferable to
unilateralism and that the economic and commercial relationship was and
still is the core of our engagement. This core must be nurtured. China
has demonstrated a willingness to work with us, but we need to see
continued, visible progress in the near term.
WTO Implementation
Now in year four of China's WTO implementation, the U.S. Chamber
believes that the process by which the business community in both China
and the United States and their governments are working together to
fully implement China's WTO commitments is fostering positive changes
in China's trade and investment regimes. We agree with the United
States Trade Representative's (USTR's) December 2004 report to
Congress, which stated that China ``deserves due recognition for the
tremendous efforts made to reform its economy to comply with the
requirements of the WTO.'' Moreover, we continue to believe firmly that
engaging China in the rules-based trading system has resulted in
important progress in key areas, particularly in tariff reduction,
revising existing laws and drafting and passing new ones to comply with
its WTO requirements, and educating its officials and companies about
its WTO obligations.
Positive steps by China to implement its outstanding and new WTO
commitments not only improve the Chinese business environment to the
benefit of U.S. and Chinese companies alike, but they also underscore
China's broader credibility in the global trading system. If China
falters in meeting its commitments and its adherence to WTO
disciplines, such as in the areas of intellectual property (IP) and
transparency, there will be ramifications that will constrain the full
potential of this relationship to the detriment of both countries as
well as companies from both countries.
As examples of progress, we note China's early phase-in of trading
rights for wholly foreign-owned companies on July 1, 2004; decisions by
China's insurance and commercial regulators to reduce burdensome
capitalization requirements for foreign investment in the insurance and
trading sectors; and increased transparency in the Ministry of
Commerce's (MOFCOM's) regulatory drafting process. China has also made
progress in addressing a range of problems with the implementation of
its tariff-rate quota (TRQ) system, including poor transparency, delays
in announcing quotas, insignificant and uneconomic quota allocations,
and restrictions on foreign enterprises that are not required of
domestic producers or merchants. As noted at the outset, U.S.
agricultural trade to China is booming, and this reflects, at least in
part, regulatory improvements and enforcement executed by China in
accordance with its WTO commitments.
But despite notable progress in some areas, problems remain in
others, and after more than three years in the WTO, China should work
to eliminate what we termed in our most recent WTO report ``the
cyclical nature of its implementation efforts.'' More specifically,
even as China has made positive regulatory changes that appear to
presage greater market access for foreign companies as specified under
its WTO commitments, China is simultaneously adopting new policies that
undercut these changes in sectors of significant interest to our
members.
China's continuing reliance on high capitalization requirements to
restrict the market access that it promised in its accession agreements
and use of proprietary standards and other industrial policy tools that
discount foreign IPR and shield emerging domestic players from global
competition are examples where China appears is undercutting meaningful
implementation of its WTO commitments. Even as we tout progress in the
area of agriculture, we note that Announcement 73, which was not
properly notified to the WTO and which appears to provide China's
General Administration for Quality Supervision, Inspection and
Quarantine (AQSIQ) with blanket authority to annul or void import
permits in the case of a government-issued warning or ban, remains in
effect. We are concerned, in particular, that Announcement 73 could
result in government-sanctioned defaults on contracts for imported
agricultural products similar to those that occurred in 2004 when a
host of Chinese importers defaulted on soybean contracts on a massive
scale. The U.S. Chamber hopes that China's courts will fully enforce
the forthcoming decisions by arbitration panels in London on those
defaults. Without consistent and enduring improvements in the course
and spirit of implementation, there will be political consequences as
well as a possible souring of business views about the China market.
Equally important, the U.S. Chamber believes that China should
actively adopt measures that open its market in ways that comply with
the spirit of its WTO obligations, even if it is not strictly bound to
do so under its WTO commitments. New PRC policy directives that affect
sectors of strong interest to U.S. Chamber member companies could
greatly limit their ability to provide goods and services in the China
market. These include Decrees 113, 114, 159, and 200 in the area of
construction services, recently released regulations for autos that
classify for tariff purposes imported vehicle components as finished
vehicles, and just-released draft regulations on PRC government
procurement policies for software. At a minimum, China should not adopt
policies that are more restrictive than those in place prior to its WTO
accession, as it has done in the case of construction and engineering
services and as it is threatening to do in the area of government
procurement. In these cases, U.S. goods and service providers face a
rolling back of the market access they have enjoyed.
To further highlight this issue and by way of example, we wish to
call the committee's attention to the distorted playing field on which
U.S. film producers and distributors currently operate in China. In
addition to lax enforcement of IPR, an equally important--and indeed
often related--factor preventing the media and entertainment industry
from realizing its full potential is the range of market access
restrictions that inhibit content providers from building a legitimate
market and satisfying Chinese consumer demand for legitimate product.
Film import quotas, the import monopoly, and release delays for
distribution of approved film and video products create a vacuum filled
by copyright violators. This negatively impacts the entire value chain
of the industry in China, from importation to distribution to
exhibition.
Equally striking, at the same time that the absolute box office
generated by U.S. films in China remains anemic, U.S. companies are
importing PRC films into the United States and other markets and
repatriating considerable revenues to Chinese producers. PRC films have
performed well in the United States, grossing tens of millions of
dollars and benefiting handsomely from strong marketing and wide
distribution arranged by U.S. distributors in our market. Crouching
Tiger Hidden Dragon grossed more than $125 million in the United
States, Hero opened #1 in the United States on its first week of
release and grossed a total over $50 million, and House of Flying
Daggers has generated more than $10 million to date.
In sharp contrast, the total box office generated in China by all
U.S. films last year, of which U.S. companies receive only the
government-determined 13% to 14%, was about $60 million, or only
slightly more than one PRC film (Hero) earned in the United States. To
further put this figure in context, in Hong Kong, which has less than
1% of China's population, the top 10 U.S. films alone generated just
over $25 million in the box office. If this trend continues, it is
possible that the balance of trade could shift in favor of Chinese
films in a sector where U.S. film companies have traditionally enjoyed
a competitive advantage.
The U.S. Chamber is fully engaged in representing the business
interests of our entire membership across the full range of industrial
and services sectors. We wish to focus your attention today on five
priority areas where we believe U.S. companies are continuing to face
difficulties in the China market.
Intellectual Property Rights
Notwithstanding China's agreement to fully comply with Trade
Related Aspects of Intellectual Property Rights (TRIPS) Agreement
obligations upon its accession to the WTO over three years ago, it is
clear that the protection which China is actually providing to
companies of all sizes fails to meet the standards of ``effectiveness''
and ``deterrence'' set out in the TRIPS. IPR violations now severely
affect virtually all industries, from consumer and industrial goods,
medicines, autos and auto parts, food and beverages, and cosmetics to
copyright works, including entertainment and business software, movies,
music, and books. In sum, the scope of counterfeiting and copyright
piracy in China worsened for most of our member companies in 2004, and
we believe that this problem has reached epidemic proportions.
IP violations are not just affecting the PRC market. But China is
the single largest source of counterfeit and pirated products
worldwide, and the failure to control such exports is eroding our
companies' profit margins, diminishing brand value, and, in many cases,
endangering public safety. U.S. Customs statistics showed an increase
of 47% in the value of counterfeit goods seized in the year ending
October 31, 2004. Statistics compiled for 2004 by other governments are
expected to reflect a similar trend.
Increasingly, counterfeiting in China is harming small and medium-
size U.S. businesses, many of which do not even have operations on the
Mainland and must confront a flood of Chinese knockoffs in the U.S.
market or in third-country markets where they export. Smaller companies
clearly have fewer resources to deal with investigations and legal
actions against pirates in China and their middlemen in other
countries, and thus the need for more convincing and proactive
government intervention is becoming increasingly apparent.
The U.S. Chamber was heartened by the promises of Vice Premier Wu
Yi at the April 2004 Joint Commission on Commerce and Trade (JCCT)
meetings on the intention of the Chinese government to significantly
reduce IPR violations. And we acknowledge that the PRC government, at
the central level and under the leadership of Vice Premier Wu Yi and
the Market Order Rectification Office of the Ministry of Commerce, is
taking important and constructive steps to improve coordination among
relevant agencies responsible for IP protection and enforcement.
The U.S. Chamber also notes some recent progress in the Chinese
government's willingness to engage directly with companies and industry
associations in addressing problem cases and cooperating on capacity-
building. In a further positive development, China's Supreme People's
Court and Supreme People's Procuratorate issued a long-awaited Judicial
Interpretation on December 21, 2004. This interpretation included a
number of important changes that can strengthen the deterrent impact
China's criminal enforcement efforts in the IP field.
Regrettably, though, the Judicial Interpretation contains a number
of problems that leave potentially gaping loopholes for infringers, and
industry is closely monitoring their impact. Key examples include the
following:

Unclear methods for calculating case values, including
the lack of standards for valuing semifinished products and raw
materials.
Lack of clarity whether trading companies caught dealing
in fakes can be held criminally liable for counterfeiting and piracy.
Lack of provisions to clarify the conditions under which
vendors and accessories meet the requisite knowledge requirements to be
held criminally liable.
Lack of provisions to criminalize repeat offenses by
smaller-scale infringers.
Whether sound recordings are even covered by the Judicial
Interpretation.
Significantly higher monetary thresholds for enterprises
than for individual persons.

As the U.S. Chamber stated in its fall 2004 report on China's WTO
implementation record, enforcement of IPR will not be effective until
civil, administrative, and criminal penalties are routinely applied to
IPR infringers. While China's government modestly improved its
regulatory environment for IPR protection and carried out raids and
other enforcement actions at the central, local, and provincial levels
in 2004, administrative penalties--mainly limited to fines and
confiscation of fake products--remain too small to create deterrence.
Despite some signs that new efforts are under way and an increased
level of arrests and raids, China has not ``significantly reduced IPR
infringement levels'' as Vice Premier Wu Yi promised at last year's
JCCT meetings.
The U.S. Chamber remains concerned that the limited legal reforms
and enforcement campaigns commenced in 2004 are insufficiently bold,
and that more focused action plans are needed at both the national and
local levels in order to bring counterfeiting and copyright piracy
under control. While it will take time to design and implement such
plans, we do not yet see a commitment on the part of the Chinese to
developing them.
Based on inadequate levels of IPR protection and enforcement in
China and their adverse impact on U.S. economic interests, the U.S.
Chamber recommended earlier this year that the USTR request
consultations with China in the WTO and place China on the Priority
Watch List in its upcoming 2005 Special 301 Report.
The Chamber also believes that the USTR should conduct a second
Special 301 Out-of-Cycle Review for China later this year to assess
China's implementation of the Judicial Interpretation and other
enforcement efforts, including success in adding additional police
resources in regions where this is most needed, in criminalizing
export-related cases, and in introducing new enforcement guidelines
that will significantly boost fines and other penalties imposed by
administrative enforcement authorities.
The Chamber and its members are seeking convincing evidence in 2005
from Chinese authorities that the IPR climate is improving and creating
a climate of deterrence, including through data that confirms a much
more substantial increase in proactive government investigations into
cases, and substantial increases in prosecutions, convictions, and
incarcerations of counterfeiters and copyright pirates.
Aside from liaison with China in the WTO context, the U.S. Chamber
strongly supports the continuing efforts by the U.S. government to
address China's failure to comply with its IPR commitments through the
JCCT, other bilateral forums, and multilateral policy mechanisms.
We are eager to support capacity-building efforts in China this
year at the central and provincial levels and we are now working with
the PRC government to carry out a coordinated IPR educational and
public awareness campaigns. To achieve these goals, we have placed
people in China to identify appropriate opportunities and projects.
The Chamber is also working closely with U.S. and foreign
governments, our corporate members, and counterpart associations,
including with AmCham network in China, to benchmark China's progress
in implementing the new Judicial Interpretation through monitoring the
number of judicial prosecutions, convictions, and jail sentences for IP
crimes in 2005. In addition to monitoring the criminal enforcement, we
will collaborate with these partners to track enforcement by
administrative authorities, including administrative fines,
confiscations of production equipment, export enforcement, and the
success of the government in transferring cases from administrative
enforcers to the police for criminal prosecution.
A reduction in China's piracy and counterfeiting levels in 2005
will ultimately hinge on the political will of local governments, as
well as the national government. Police investigations into new cases
need to be proactive and adequately resourced in order to send a proper
message to criminal networks that are increasingly behind the problem.
The sincerity of China's pronouncements that it is serious about
protecting and enforcing IP rights will further be tested by its
willingness to eliminate loopholes for infringers in existing and new
regulations and to resolve high-profile cases, such as the Pfizer
patent case on Viagra and the General Motors auto case, that impact
domestic and foreign IP owners.
Full protection under PRC law and enforcement of IPR in China as
set forth in China's TRIPS obligations are critical to the interests of
foreign and PRC companies in China, as well as to China's public health
and safety, the integrity and attractiveness of China's investment
regime, and its broader economic development goals. We hope that the
PRC government will accelerate IP enforcement in 2005 by further
enhancing national leadership and dedicating additional capital and
resources. Only through the exercise of even more aggressive measures
will China's IPR protection enforcement regime be effective and
respected.
China's accession to the WTO afforded it an opportunity to sell
increasing quantities in the United States of the products where it has
a comparative advantage. But by tolerating massive counterfeiting and
piracy, China is denying U.S. companies the chance to do the same in
China. Moreover, by tolerating the export of such counterfeits, China
strips our companies of the opportunity to exploit their comparative
advantage--and thus WTO benefits--in third countries as well.
Ultimately, it is essential that China purchase the foreign IP-based
products it is illegally using. That would translate into billions of
dollars of sales and exports by U.S. and other foreign companies and
more accurately reflect the balance of trade between the U.S. and
China.
Distribution
China's full and consistent implementation of its distribution
services obligations is also of critical interest to our members. The
U.S. Chamber applauded China's early phase-in of trading rights for
wholly foreign-owned companies on July 1, 2004. And we had hoped that
MOFCOM would release by December 11, 2004, the date set forth in China
accession commitments, implementing regulations that clarified how new
and existing wholly foreign-owned businesses in China could acquire
distribution rights to allow foreign businesses to begin distribution
services. Regrettably, the U.S. Chamber and its members are still
waiting for China to implement fully and transparently this core
commitment.
We are encouraged that recent discussions in Beijing have yielded
some progress on this matter, and we anticipate that China will act to
remedy its non-compliance soon. But we are distressed that many of the
domestic issues now cited by the PRC government as excuses for slow
implementation--tax, business scope, and zoning--were raised by our
business community with PRC authorities years ago. Unlike most WTO
members, China negotiated phase-in periods to gradually implement its
commitments; other countries that have sought to join the WTO have not
had this luxury. Going forward, the U.S. Chamber expects that China
will address relevant regulatory issues in advance of key implementaion
dates instead of using them as an excuse to delay timely implementaion
and promised market access.
China's market access commitments under the WTO also include its
commitment to permit sales away from a fixed location, which is also
known as direct selling. The implementing regulations, which have not
yet been formally released but which have been shared with several
companies, will not permit direct selling to operate as it does around
the world. The U.S. Chamber has asked the Chinese government to adopt
final regulations that allow directs selling companies to conduct their
operations by paying for both sales and marketing services provided to
the companies by independent contractors as opposed to employees.
Standards
The U.S. Chamber is further concerned about China's use of
discriminatory standards to erect barriers to fair competition and in
violation of its WTO obligations. China's recent performance in this
area has been mixed.
China has moved to develop, adopt, and increasingly mandate unique
national technology standards across a wide range of technology
products. Examples include a mandated encryption standard for wireless
communications devices and the development of unique national standards
for AVS for media/TV, IGRS for connectivity, TD-SCDMA for telecom, and
EVD for recording media. Competition, innovation, and interoperability
are best served by standards developed by market forces.
China's adoption of mandatory national technology standards that
are out of step with international standards efforts and that don't
consistently respect IP are troubling to U.S. Chamber members, many of
whom have made significant investments in China. With its strong
manufacturing capabilities and rapidly growing consumer base, China
will play an increasingly important role in the development of the
Asian and global IT industry.
In particular, the U.S. Chamber believes that compulsory patent
licensing should not be used to resolve patent-infringement issues,
even for China's mandatory national standards. For standards based on
open and voluntary participation to be successful, IPR of patent
holders must be respected, including the right to derive reasonable
compensation (e.g., royalties or one-time payments) from IP. Compulsory
licensing of patents is inconsistent with that fundamental principle
and undercuts the value of Chinese patents both for foreign patent
holders and even more so for Chinese technology companies. We believe
that the best way to address patent infringement issues and create
superior standards is to encourage wide participation of patent holders
in the standards-development effort and also allow them to recover
reasonable and nondiscriminatory patent licensing revenues from their
R&D investments in technology and innovation.
The Chamber was pleased by China's decision in April 2004 to
suspend indefinitely its unique standard for WLAN products. But we
remain concerned that China's WLAN encryption standard is but a leading
example of a clear and disturbing trend across many technology
products. The Chamber hopes that the PRC government will consider its
decision as a precedent to be extended more broadly to standard setting
in China's IT sector, as well as to other industrial sectors that are
considering the development of unique standards that are incompatible
with their international counterparts.
Use of standards as a tool to protect local industry and force
technology transfer is harmful to China's interests. Keeping foreign
goods and services out of China will only hold back China's economic
development and deny its government, people, and businesses of some of
the best tools available to fuel growth and productivity. Foreign
companies can help China achieve many of its development goals if they
are permitted to compete fairly in the marketplace and if their IP is
protected.
Transparency
Regulatory transparency remains a key concern of U.S. Chamber
member companies. China has made important progress in improving the
transparency of its rulemaking and other regulatory activities since
its WTO accession in 2001, but China must do much more to ensure that
it develops and implements laws and regulations in a manner consistent
with international practices and WTO commitments. The U.S. Chamber
applauds the measures that MOFCOM adopted at the end of 2003 to promote
the ministry's compliance with China's WTO transparency commitments,
specifically those that require PRC authorities to provide a
``reasonable period for comment to the appropriate authorities'' before
trade-related measures are implemented.
Other PRC ministries and agencies, however, have been far less
progressive in their approaches to circulating draft regulations to
foreign companies and in providing a reasonable window for comment. We
urge the Chinese government to have all its rulemaking ministries and
agencies follow MOFCOM's example in fulfilling China's transparency
obligations under the WTO. Abrupt issuance of draft regulations by many
ministries in China are still far too often followed by one-week
windows for public comment. The Ministry of Finance's release three
weeks ago of draft regulations on government procurement for software,
for which a 10-day comment period was provided, is the most recent and
pressing example of this practice.
Government Procurement
In its ongoing effort to combat corruption, the U.S. Chamber
welcomes China's efforts to achieve greater transparency and to provide
greater market access in the area of government procurement. China
became an observer to the WTO's Agreement on Government Procurement
upon its accession in late 2001 and agreed at that time to enter into
negotiations to join the agreement as soon as possible. China's passage
in late 2002 of its new Government Procurement Law that aimed to
improve transparency, limit corruption, and remove local protectionism
marked a step forward in these areas.
The U.S. Chamber is highly concerned, however, that the government
procurement sector in China will be substantially closed off to foreign
suppliers of goods and services through the implementation of the
Government Procurement Law, which requires government entities to
procure only domestic goods, services, and public works, with limited
exceptions. The Chamber feels strongly that China's implementation of
its procurement law should not exclude or diminish the ability of
foreign companies to fully participate in China's procurement market.
In particular, we are very concerned that the recently issued Trial
Implementing Regulations on Government Procurement of Software
(Implementing Regulations) are a significant step backwards. Of equal
concern, it is our understanding that the draft Implementing
Regulations are the first of what will likely be a series of sectoral
rules promulgated by the Chinese government to implement the new
Government Procurement Law.
The proposed Implementing Regulations would severely restrict
market access by non-Chinese companies in a manner that goes far beyond
the procurement practices of the United States and other nations. In a
market where more than 90% of software is pirated, costing U.S.
companies billions of dollars in lost exports, such a discriminatory
procurement regime would effectively close the door for most, if not
all, U.S. companies--and for that matter, non-Chinese companies--to
sell software products and services to China's largest purchaser, the
Chinese Government. Effective denial of the ability to sell to China's
government market would also render meaningless to U.S. and other
foreign software companies China's stated goal to promote the use of
legally purchased software in its government.
The Government Procurement Law and the Implementing Regulations
strike us as moving in precisely the wrong direction from China's WTO
accession pledge, yet unfulfilled, to ``initiate negotiations for
membership in the GPA [Government Procurement Agreement]... as soon as
possible.'' We are particularly concerned that now, more than three
years from its WTO accession, China has yet to begin the process for
GPA accession and has proposed procurement regulations that severely
restrict access by non-Chinese companies.
As concerns in the United States increase over the growing U.S.
trade deficit with China, the Chinese government's closure of its
government procurement market in software and other industries appears
to undermine Premier Wen Jiabao's pledge to foster an improved U.S.-
China trade relationship based on increasing, not restricting, market
access for U.S. exports, and to be inconsistent with the spirit of
openness China embraced in joining the WTO. We hope that the Chinese
government will quickly renew its commitment to open, inclusive,
nondiscriminatory and transparent procurement policies by commencing
negotiations to accede to the GPA and suspending adoption of the
Implementing Regulations and any similar discriminatory procurement
rules.
An open, competitive, transparent, nondiscriminatory and
technology-neutral government procurement regime is in China's interest
and in the interest of China's trading partners. This would encourage
investment and active participation by leading foreign companies in
China's economy and bring the best products and services for the best
value to China's government and consumers.
The Chamber hopes that China's new procurement rules in this area
will not discriminate between domestic and foreign suppliers. At a
minimum, we expect that China's decision as to what constitutes a
``domestic manufacturer'' will adhere to the principle of national
treatment so that Chinese subsidiaries of foreign companies will enjoy
the status of domestic suppliers in the market.
Currency
China's status as a large, developing economy that is not yet fully
market-based poses special challenges to world trade and financial
systems. The Chamber encourages China to pursue economic reform and
development through reliance on market principles.
We also believe that countries should not manipulate currencies to
gain a competitive advantage. The U.S. Chamber has and will continue to
support the Administration's engagement of the Chinese government in
discussions on such matters as currency levels, trade flows, investment
regimes, and compliance with international agreements. In addition, the
Chamber supports the increased attention of the International Monetary
Fund and the Group of Seven industrialized nations to China's exchange
rate policies.
And as stated at the outset of our testimony, the U.S. Chamber
believes strongly that China should move as quickly as possible to an
exchange rate system that allows market forces to determine the
exchange rate of the renminbi.
But we also submit that our relationship with China should not be
managed by a unilateralist approach. Unilateralist approaches, such as
those that call for the WTO-unauthorized assessment of massive tariffs
on PRC exports, would not have the intended result, particularly given
the complexity of the issues involved, as made clear by testimony to
Congress by the nonpartisan, objective Congressional Budget Office and
the Congressional Research Service (Testimony of Douglas Holtz-Eakin,
Director, Congressional Budget Office, ``The Chinese Exchange Rate and
U.S. Manufacturing Employment'' (October 30, 2003); ``China's Currency
Peg: Implications for the U.S. and Chinese Economies,'' Wayne Morrison
and Marc Labonte, CRS (September 29, 2003). In fact, the imposition of
massive U.S. tariffs on Chinese exports would only undermine efforts to
achieve the critical objective of a Chinese currency exchange rate
determined by market forces.
The United States was a chief architect of the WTO in large part to
prevent unilateral actions that would close markets abroad to the
detriment of U.S. farmers, manufacturing and service companies, and
their workers. Our companies have worked with successive
Administrations and members of Congress to ensure that a fair and
objective system was put in place to protect U.S. interests both at
home and abroad. A unilateralist approach would abrogate decades of
work by having the United States engage in a violation of its WTO
commitments. If the United States starts unilaterally imposing
additional tariffs when we do not like another government's policies,
imagine the multitude of circumstances in which other countries will do
the same to U.S. agricultural and industrial exports, with enormous
consequences for the U.S. economy as a whole.
A unilateralist approach on currency would likely result in massive
retaliation on U.S. exports to the detriment of farmers, exporters, and
workers throughout the entire United States. U.S. exports to China,
which have grown by 114% since 2000, would be hit by retaliatory
tariffs or other actions. American businesses and consumers would face
higher prices, and the U.S. trade deficit would likely increase as
Americans import the same goods at higher prices. Moreover, American
strategic interests in North Korea and the war on terror could be
undermined. At the end of the day, the United States would lose much
more than we could ever hope to gain from such an approach. Endorsement
of this approach would be used for years to come as an example that
even the United States does not believe in playing by the rules of
global trade--of which the United States is perhaps the largest
beneficiary.
Conclusion
The U.S. Chamber and our members appreciate the opportunity to
participate in China's continuing development. We applaud the many
cases in which Chinese authorities have worked closely with the U.S.
business community to implement WTO commitments, as well as to resolve
disputes that have arisen during the implementation process. As stated
at the outset of this report, China is now the fastest-growing trading
partner of the United States. Rapidly expanding bilateral economic and
commercial ties underscore the market opportunities that China offers
to U.S. exporters and investors, which support the creation of high
value-added jobs at home.
But China can and must do more. The U.S. business community and
others that vigorously advocated China's WTO membership premised their
support on expectations that China is evolving into a more open and
transparent market based on the rule of law. China's unsuccessful
efforts to consistently enforce its IPR laws and to vigorously deter IP
theft represent the most visible examples of these expectations
remaining unfulfilled. Similarly, China has continued its reliance on
state guidance and industrial policies--capitalization requirements,
mandated national technology standards, procurement preferences and
subsidies--in key sectors. Not only is this a breach of China's market
access commitments or the spirit of openness China embraced when
joining the WTO, but it also gives credibility to China's critics who
doubt China's commitment to create a business environment that values
equally the economic contributions of domestic and foreign companies.
At the same time, the Chamber underscores that for all the fits and
starts, for all the examples of China's sluggish WTO compliance, none
of these trumps the value of engaging the world's most populous nation
in the rules-based trading system. For all those who care about the
future of our economy, jobs for Americans, stability and peace in the
world, the protection of global health, and the advancement of
environmental quality and human rights, we must continue to encourage
China to become an active and committed member of the world trading
system. Working within the WTO framework remains the most promising
path to progress and is vastly superior to approaches that seek to
punish and isolate this emerging global power.
Premier Wen Jiabao told us during his visit to Washington D.C., in
December 2003, ``The way forward in our trading relationship is to
increase U.S. exports to China... not restrict Chinese imports into the
United States.'' The only way this strategy can succeed is if China
opens its markets further and more rapidly to U.S. goods and services.
We fully expect China to implement Premier Wen's strategy.
The U.S. Chamber, the world's largest business organization, will
remain fully engaged on these critical issues on behalf of American
business. We will continue to lend our strong voice to ensure that
China fully adheres to market principles and WTO disciplines.
Thank you, Mr. Chairman and members of the committee, for this
opportunity to express the views of the U.S. Chamber on these important
matters.

Mr. SHAW. Thank you, Mr. Brilliant. The next witness is Mr.
Alex Gregory, who is President and chief executive officer of
the YKK Corporation of America in Marietta, Georgia. Mr.
Gregory?

STATEMENT OF ALEX GREGORY, PRESIDENT AND CEO, YKK CORPORATION
OF AMERICA, MARIETTA, GEORGIA

Mr. GREGORY. Thank you, Mr. Chairman. Good afternoon. My
name is Alex Gregory. I am President and CEO of YKK Corporation
of America headquartered in Marietta, Georgia. YKK is best
known, as Mr. Chairman said earlier, by the billions of zippers
we manufacture globally, but we also make a number of other
fastening products, as well as architectural products for
commercial and residential buildings. Headquartered in Japan,
YKK has had a presence in this country since 1960. We opened
our first significant manufacturing plant in Macon, Georgia in
1974. I was among the first employees hired for that plant, so
manufacturing is very dear to me. For almost 4 years I have
been responsible for YKK's 16 companies in the United States,
Canada, Mexico, Central America and Colombia South America. We
have more than 3,000 employees, 1,600 of whom live in Georgia.
YKK has a manufacturing presences in 68 countries,
including China of course, and every other major garment
producing country in the world. I am here today to speak on
behalf of our employees in the United States. In the past 30
years YKK has invested more than a billion dollars in
manufacturing plants in the United States. We are very proud of
these beautiful vertically-oriented plants, and we are equally
proud of our employees who have done a really fantastic job. At
our peak in production about 5 years ago our zipper plants were
as productive and efficient as any plants in the world.
Unfortunately, in recent years we have suffered considerable
pain caused by imports. Many of our customers--and these are
the owners of the brands of jeans, pants, jackets and other
apparel products--have stopped manufacturing in the United
States and are sourcing garments from contractors in Mexico,
Central America, and in increasing frequency, from China and
other parts of Asia. We have had to make significant changes in
how we do business at YKK. Employment in our national
Manufacturing Center in Macon has declined steadily from around
1,100 just 5 years ago. We are proud that we have been able to
continue providing jobs for 900 employees in Macon and another
500 in Kentucky, Tennessee and Alabama. We have been able to do
this because now we are able to ship product from our 2.4
million square foot facility in Macon to our customers in the
United States of course, but also the ones who are in Central
America, Mexico, the Dominican Republic and South America.
Also for the past two years we have worked with our
employees on a competitive YKK Macon initiative, to try to
become as competitive as possible before all the business goes
to China. We have written off millions of dollars worth of
excess manufacturing capacity. We packaged up perfectly good
zipper making machines and shipped them to other parts of the
world where garments are now being sourced. We have reduced
wages and salaries, including my own. We have cut our work
force as a very painful last resort. Our hope is that be
reducing the cost of our products we can positively influence
our customers' decisions to continue sourcing from this
hemisphere. We are petrified by the acceleration of imports
from China. Prices from China are falling dramatically and
imports are skyrocketing. In the two pants categories primarily
affecting our business, imports from China are up over 1,500
percent in the first quarter of 2005, compared with the first
quarter of 2004. That is a 16 time increase in 1 year. If this
trend continues, our customers say they will have to close
additional plants.
We do have a competitive advantage in this hemisphere,
however. This advantage is speed to market. Thanks to frequent
fashion changes and a shift from basic styles to premium
higher-priced garments, speed to market has become our best
friend. Strong alliances are forming among American retailers,
brand holders, contractors and suppliers such as YKK to reduce
dramatically the time it takes to develop new products and
deliver them to retail shelves. CAFTA can go a long way toward
maintaining a strong garment manufacturing presence in this
hemisphere, especially if it is combined with efforts to bring
China onto a level playing field. We need relief in the form of
strong safeguards against unrestricted imports from China, but
CAFTA is the critical and necessary element to strengthening
the collaborative effort within the rapidly growing alliances
in this hemisphere. Restraints on China, coupled with fair
trade and fairly valued currencies, are important to undertake
of course, but if we do not pass CAFTA we will do a disservice
to this industry. CAFTA can help us save the jobs of our
employees in the United States. I have heard our customers here
and in Central America plea for approval of CAFTA. Without a
doubt, they recognize CAFTA's profound importance. On behalf of
our customers and our employees in the United States of
America, I urge you to support swift passive of CAFTA and also
somehow to bring Chinese imports under control. Thank you.
[The prepared statement of Mr. Gregory follows:]
Statement of Alex Gregory, President and Chief Executive Officer, YKK
Corporation of America, Marietta, GA
My name is Alex Gregory. I am president and CEO of YKK Corporation
of America, headquartered in Marietta, Georgia. YKK is best known for
the billions of zippers we manufacture globally, but we also make many
other fastening products, as well as architectural products for
commercial and residential buildings. YKK is headquartered in Tokyo,
Japan, with manufacturing operations in 68 countries. YKK has had a
presence in the United States since 1960. We opened our first
significant manufacturing plant in Macon, Georgia, in 1974. I was among
the first American employees hired for that plant . . . a Georgia Tech
Textile Engineer just out of the Navy, so manufacturing is near and
dear to me. For going on four years now, I have been responsible for
YKK's 16 companies in the United States, Canada, Central America, and
Colombia, South America. We employ approximately 3,000 Americans across
five time zones in the western hemisphere, 1,600 of whom live in
Georgia.
YKK has a manufacturing presence in many countries, including China
and every other major garment-producing country in the world, but I am
here today to speak on behalf of our employees in the United States. In
the past thirty years we have invested more than $1 billion in
manufacturing plants in the United States. We are very proud of the
beautiful plants we have built around this country, many of which we
continue to operate, and we are very proud of the fantastic job our
employees in the United States have done and are doing. At our peak in
production, only five years ago, our zipper plants were as efficient
and as productive as any others in the world.
Unfortunately, in recent years, we have suffered many painful
events caused by imports, mainly from China. Over the past decade, in
response to cheap imports from Asia, many of our customers who are
owners of major brands of jeans, pants, jackets, and many other apparel
products have transitioned from manufacturing their own products in the
United States to sourcing, in varying degrees, products from
contractors in Mexico, Central America, and, in increasing frequency,
from China and other parts of Asia.
Because our customers are sourcing their products from different
parts of the world, we in YKK have had to make significant changes in
how we do business as well. Employment in our National Manufacturing
Headquarters in Macon has declined steadily from around 1100 five years
ago. But we are proud that we have been able to continue to provide
jobs for 950 employees in Macon, Georgia, and another 500 in Kentucky,
Tennessee, and Alabama, even though many of our customers long ago
closed their manufacturing operations in this country. From our 2.4-
million square foot facility in Macon, we now ship zippers and other
fastening products to our customers and their contractors in Central
America, Mexico, South America, and, of course, to those who remain in
the United States.
But we have had to make many other painful sacrifices as well. In
support of our customers, for the past two years we have worked
together with our employees on a Competitive YKK Macon initiative to
become as competitive as possible--right now, before all the business
moves to China. To become more competitive, we have written off
millions of dollars worth of now-excess manufacturing capacity; we have
packed up perfectly good zipper-making machines and sent them to other
parts of the world where our customers are now sourcing their garments;
we have reduced wages and salaries, including my own; as a last resort,
we also have reduced our salaried and hourly workforce (sometimes
painfully, but when possible, by attrition), to reduce the cost of our
fastening products. We embarked on this initiative so that our
customers would make the decision to continue to source garments from
within this hemisphere; we want them to know they have our support in
competing with the flood of cheaper garments from China.
And believe me when I say we are petrified about the acceleration
of imports from China. Prices from China are down significantly and
imports are sky-rocketing. In the two pants categories which primarily
affect our business, 347 and 348, imports from China are up over 1600%
in the first quarter of 2005 compared with the first quarter of 2004.
There has been an absolute explosion of imports in the first
quarter of this year. Our customers tell me that if this trend
continues, they will have to make some dire decisions, including the
decision to close plants. I do not want that to happen because it means
that we will lose more jobs in America, and I am doing everything in my
power to keep that from happening. Something positive must occur going
forward or more plants will close and more jobs will be lost.
A main point I wish to make is that market forces exist today which
give garment manufacturers in this hemisphere a real competitive
advantage. This advantage is ``speed to market.'' Thanks to rapid
fashion changes and a shift from basic styles to premium, higher priced
products, the marketplace in some instances has become a friend to
garment manufacturers in this hemisphere. The key is speed, and we are
partnering with our customers to reduce dramatically the time it takes
to develop new products, sew them, and deliver them to retail shelves.
Strong clusters, or alliances, are forming among American retailers and
brandholders, and the suppliers of the materials which go into their
garments. We are participating in these alliances with enthusiasm, as
proximity to the U.S. market is one of few advantages remaining to us
in this hemisphere. Together with our customers and other vendors and
suppliers, we have reduced lead times significantly.
CAFTA can go a long way towards helping us maintain a strong
garment manufacturing presence in this hemisphere, especially if it is
combined with efforts to bring China onto a level playing field. We
need relief in the form of strong safeguards against unrestricted
imports from China. But CAFTA is an essential element--indeed it is the
critical and necessary element--to strengthening the collaborative
effort within the rapidly growing alliances in this hemisphere.
Restraints on China, coupled with fair trade under fairly valued
currencies are important to undertake, but if we do not pass CAFTA, we
will do a disservice to this industry. CAFTA can help us save the jobs
of our employees in Georgia, Kentucky, Tennessee, and Alabama.
Last week I attended a meeting with many of our top sales
professionals in this hemisphere, and each of them stressed to me how
important CAFTA is to our customers. They expressed the strong
sentiment they have heard from most of our customers, many of whom are
well-known U.S. brandholders. I have heard that same plea for approval
of CAFTA in my own discussions with customers here and in Central
America. I was in El Salvador just yesterday, as a matter of fact, and
in Costa Rica the day before that. It seems as if everyone related to
our business, and especially our customers, recognizes CAFTA's profound
importance.
On behalf of YKK's employees in the United States of America, I
urge you to support swift passage of CAFTA and also somehow to bring
Chinese imports under control.
Thank you.

Mr. SHAW. Thank you, Mr. Gregory. Our next witness is from
Buffalo, New York, so I would yield to the gentleman from
Buffalo, New York to introduce Mr. Stevenson.
Mr. REYNOLDS. I thank the chairman. It is my pleasure to
welcome to the Committee a witness from my area of Western New
York, Mr. Robert Stevenson, the chief executive officer of the
Eastman Machine Company in Buffalo. As we will hear today,
Eastman Machine, which is a family-owned business operating in
Buffalo for over 100 years, manufactures world renowned cloth-
cutting machines. During a visit to Mr. Stevenson's facility, I
heard firsthand how technology investments by this small
family-owned business are being pirated by Chinese
manufacturers. I am grateful that the Committee has been able
to include Mr. Stevenson as a witness today at the hearing. Mr.
Stevenson, I am grateful to you for your willingness to come
here and share your story with us. Thank you, Mr. Chairman.
Mr. SHAW. Mr. Stevenson.

STATEMENT OF ROBERT L. STEVENSON, CHIEF EXECUTIVE OFFICER,
EASTMAN MACHINE COMPANY, BUFFALO, NEW YORK

Mr. STEVENSON. Thank you, Congressman Reynolds, Mr.
Chairman and Members of the Committee. Thank you for this
opportunity to provide a real-world perspective on the impact
of U.S. trade relations with China. It touches upon all levels
of testimony that we have heard here today. I represent five
generations of family ownership of the Eastman Machine Company
that goes back to 1892. We employ 120 people. We manufacture
manual and automated fabric cutting machines that are sold
worldwide, with over 50 percent of our sales exported.
As I sit here today before this honorable Committee, our
union factory workers are in the fifth week of a labor strike.
Management and labor have been unable to find common grounds
and a new three-year collective bargaining agreement because
our workers, who average 50 years of age, 25 years of seniority
and $50,000 in wages and benefits, are seeking a job security
that I simply cannot give them. As much as I appreciate their
everyday hard work, their loyalty and their skill, I cannot
guarantee their jobs will exist beyond tomorrow because of the
uncertainty of the role that China plays. Even our union's UAW
leadership concedes that this economic reality is a situation
that only Washington can address. Although at times the union's
drumbeat that jobs are being exported to China because of cheap
labor may apply to multinational corporations, it misses the
mark for small often family-owned businesses like mine. The
panacea is not trade barriers. Our world today, the global
world of the Internet, is not the world that saw Smoot-Hawley.
What we need today are not tariffs to protect us, nor
currency, cheap labor, the overriding concerns. To be sure,
labor costs and tariffs are part of the story. Indeed, my
people on the Eastman floor average $27 an hour in wages and
benefits, while their Chinese counterparts are paid $2.00 a
day. A 36 percent tariff that is slapped on our U.S. produced
machines is a major impediment. However, the real issue and the
real problem is intellectual property pirating. We sell a
manually-operated fabric cutting machine that has been, with
some functional improvements, considered the Cadillac in the
U.S. and the foreign apparel markets for over a century. That
changed with the appearance of the first Chinese manufacture of
what we call Eastman clones in the early '90s. Surprise would
not be adequate as my reaction to the look of these knockoffs.
The design, the model numbers, the trademarks are all
practically the same. Even the names on some of the Chinese
machines were virtually identical. In one instance, which I
think is in the record before the Committee, they just changed
the name from Eastman to Westman. Over the last 10 years we
went from a company that employed 150 union workers and sold
20,000 of these machines worldwide to a company that now only
employs 58 workers and sells less than 8,000, while Chinese
manufacturers who copied our machines, used our trade, our
technology, our innovations and patents sell over 100,000 of
these units per year.
For my company and the other small to mid-size U.S.
manufacturers, the overwhelming problem that frustrates any
hope to dent this still burgeoning market is the almost
nonexistent intellectual property protection available in the
People's Republic. This situation results not I think from a
conscious policy of the Chinese government, but from the
impossibility of enforcement in such a geographically vast and
populated country. It is this single factor alone that is
sufficient to quash a company's incentive to evolve as a
business. We are not alone. The lifeblood of any innovative
manufacturer, no matter its size, is to continue to develop new
technologies for broader niche markets. Indeed, in the last 10
years, as we have seen the sales of our manual machines that
have been copied and cloned and those sales plummet, we have
also invested millions of our dollars to develop new technology
that automates the cutting process. This product line of
automated cutting machines has established in its single decade
of existence a reputation that justified this investment. We
are still just a small manufacturer, averaging 25 million a
year in sales, and we are truly afraid--I think petrified, as
my colleague to the right of me said--that our research and
development efforts will shortly be pirated as well as we start
to sell these machines into China and the global market. The
simple fact of the matter is that companies our size do not
possess the resources that can be devoted to fighting the
outbreak pilfering of our design innovations a half a world
away. Not only do we lack the on-the-ground awareness of the
thievery, but even if we did, we lack the hard cash to legally
engage such interlopers.
Mr. Chairman and Members of the Committee, I am not here to
employ your intervention into areas over which, frankly, you
have as little control as I do. What the U.S. Government can do
for the very survival of our domestic manufacturing base is to
help us protect the entrepreneurial genius that made America
great. There remains an expanding place for the Eastmans of
this country. We can market and sell worldwide but only if our
investment in research and development can be protected to
provide half a chance to establish itself in the marketplace.
In my view that is the indispensable role of our government,
and that effort can't be intermittent, polite, politically
superficial. It must be real. I believe the foundation of the
U.S. economy and the continuing existence of the American
middle class is at stake. Should our government be absent and
unwilling to protect this national base, then our efforts as
manufacturers to develop new technology, new products, or even
to remain in business, will ultimately prove to be a waste of
time and energy, not to mention money. In closing, I implore
this Committee to focus its effort on protecting technology and
protect our investments of those truly domestic companies that
seek to provide American families with an opportunity to raise
their children, pay their taxes and be good citizens, an ideal
that my family has sought to emulate for the past 120 years.
Thank you, Mr. Chairman, for the opportunity to testify today.
I look forward to answering any questions you may have later.
[The prepared statement of Mr. Stevenson follows:]
Statement of Robert Stevenson, Chief Executive Officer, Eastman Machine
Company, Buffalo, NY
Mr. Chairman, Congressman Rangel, and members of the Committee,
thank you for this opportunity to provide a real-world perspective on
the impact of U.S. trade relations with China. My name is Robert L.
Stevenson, and I represent four generations of family ownership of the
Eastman Machine Company. Established in Buffalo, New York in 1892,
Eastman manufactures manual and automated cutting machines sold
worldwide that are the definition of quality.
As I sit here today before this honorable committee, Eastman's
union factory workers are in the fourth week of a labor strike.
Management and labor have been unable to find common ground on a new,
three-year collective bargaining agreement because our workers--who
average 50 years of age, 25 years of seniority, and $50,000 in annual
wages and benefits--are seeking job security that I simply cannot give
them. As much as I appreciate their loyalty, skill, and everyday hard
work, I simply cannot guarantee that their jobs will be there tomorrow
any more than I can bank on mine when I wake up tomorrow morning. Even
our union's U.A.W. leadership concedes that this economic reality is a
situation that only Washington can address. Although the union's
drumbeat that jobs are being exported to China because of cheap labor
may apply to the giant auto industry, it misses the mark for small,
often family-owned, businesses like mine. Labor's panacea is trade
barriers. But our world today--the global world of the Internet--is not
the world of Smoot-Hawley.
To be sure, differences in labor costs are part of the story.
Indeed, my people on the Eastman plant floor average $18.39 an hour in
wages alone, while their Chinese counterparts are paid $2.00 a day.
This disparity in the cost of labor is only one of several factors
affecting Eastman's and other U.S. manufacturers' ability to be serious
global players, however, and it will likely become a less-dominant
factor in the future. Even today, as hard as it is to imagine, there
are reports of factory labor shortages in the provinces south of
Shanghai that will inevitably cause wages to rise. Even the 36% tariff
slapped on our U.S.-produced machines is not the major obstacle to
sustained access to that market in the future.
Eastman sells a manually operated electric-powered cloth-cutting
machine that had been, with little significant functional change, the
Cadillac in the U.S. and foreign apparel markets for half a century.
But that changed with the appearance of the first Chinese Eastman-clone
in the early '90s. Surprise does not describe my reaction at the look
of those knockoffs--the design, the model number, and the color were
all the same. Even the name on the machine was virtually identical,
changed only from ``Eastman'' to ``Westman.'' Over the last ten years,
we went from a company that employed 150 union workers and sold 20,000
straight knife machines worldwide, to a company that now employs only
58 union workers and sells less than 8,000 of these machines. Today, we
are almost a non-player on Mainland China, where 75% of the world's
cutting machines are to be found and over 100,000 pirated Eastman-
clones are sold annually.
For my company and the other small to mid-sized U.S. manufacturers,
the overwhelming problem that frustrates any hope to dent this still
burgeoning market is the almost non-existent patent and trademark
protection available in the People's Republic of China. This situation
results not from a conscious policy of the Chinese government--for
surely China is not a monolith--but from the impossibility of
enforcement in such a geographically vast and populace country.
It is this single factor that, in my opinion, alone is sufficient
to quash Eastman's incentive to evolve as a business. And we are not
alone. The lifeblood of any innovative manufacturer, no matter its
size, is development of new technologies for broad or niche markets. In
the last ten years, as we have seen our manual machines copied and
cloned and our resulting sales plummet, we have also invested millions
of our dollars to develop new technology that automates the cutting
process. This product line of automated cutting machines has
established in its single decade of existence a reputation that
justifies that financial leap of faith. But we are still just a small
manufacturer averaging $25 million a year in sales. And we are truly
afraid that our research and development efforts--all the hard work and
effort to bring these machines to market--will shortly be pirated as
well as we start to sell these machines in the Chinese market.
The simple fact of the matter is that companies our size do not
possess resources that can be devoted to fighting the outright
pilfering of our design innovations half a world away. Not only do we
lack the on-the-ground awareness of the thievery but, even if we did,
we lack the hard cash to legally engage such interlopers. It is a
looming fear of industrial life for those U.S. manufacturers seeking to
establish operations in the Chinese market that a Shanghai partner
today will become a competitor tomorrow when he sneaks out the back
door with U.S. technology and sets up his business literally down the
street.
Mr. Chairman and members of the Committee, I am not here to implore
your intervention in areas over which, frankly, you have as little
control as I do. What the U.S. government can do for the very survival
of our domestic manufacturing base, however, is to help us protect the
entrepreneurial genius that made America great. There remains an
expanding place for the Eastmans of this country. We can market and
sell worldwide, but only if our investment today in research and
development can be protected to provide half a chance to establish
itself in the marketplace. In my view, that is the indispensable role
of our government at this point in commercial history. And that effort
can't be intermittent, polite, or politically superficial--I am not
talking about the niceties of trade delegations or hollow formal
gestures.
I believe that the very foundation of the U.S. economy and the
continued existence of the American middle class is at stake. Should
our government--which surely is the only entity capable of protecting
such innovation--be absent and unwilling to protect its national base,
then our efforts as manufacturers to develop technology, or even remain
in business, will ultimately prove to be a waste of time and energy, to
say nothing of money.
In closing, I implore this committee to focus its efforts on
protecting the technology investments of those truly domestic companies
that seek to provide America's families with an opportunity to raise
their children, pay their taxes and be good citizens: an ideal that my
family has unabashedly sought to emulate for the past 120 years.
Thank you for the opportunity to testify today, and I look forward
to answering your questions.

Mr. SHAW. Thank you, Mr. Stevenson. Our final panelist is
Mr. David Spence. He is the Managing Director for Regulatory
Affairs, Legal Department, Federal Express Corporation,
Memphis, Tennessee. Perhaps you might be able to give Mr.
Stevenson some advice. Mr. Spence.

STATEMENT OF DAVID SPENCE, MANAGING DIRECTOR FOR REGULATORY
AFFAIRS, LEGAL DEPARTMENT, FEDERAL EXPRESS CORPORATION,
MEMPHIS, TENNESSEE

Mr. SPENCE. Thank you, Mr. Chairman and Members of the
Committee. The purpose of my testimony is to highlight the
experience that FedEx has had in exporting our services to the
Chinese market and the importance of U.S.-China trade to U.S.
businesses including FedEx. From FedEx's perspective, there is
no doubt that China's membership in the WTO and its greater
participation in the world economy greatly benefits U.S.
businesses and the global economy as a whole. Since our
inception in the early 1970s FedEx has grown to now serve over
220 countries and territories. Today the FedEx family of
companies has annual revenues near $24 billion and a work force
of over 250,000 employees and contractors worldwide. FedEx is
heavily vested in global trade and the future of the global
economy.
FedEx has been providing U.S.-China express services since
1984 and began operating our own aircraft there in 1996. Having
long recognized the economic promise of Asia, FedEx began
planning accordingly. We conceived the idea of an international
network decades ago when we purchased in 1984 a courier company
that had offices in Europe and Asia. In 1989 FedEx purchased
Flying Tigers, an all-cargo airline with flying rights to 21
countries including China. In 1995 we acquired the all-cargo
route authority to serve China, becoming the sole U.S.-based
all-cargo carrier with aviation rights to China. The U.S.-China
Air Transport Agreement signed in 2004 provides U.S. cargo
carriers with 111 new flights. So far FedEx has obtained 15 of
those flights, maintaining our lead as the U.S. cargo carrier
with the most rights to fly to China.
Globally, over 40 percent of the world's trade moves by air
when measured by value. The value of China's exports and
imports carried by air is growing rapidly, soon to catch up to
that level. In 2004 approximately $60 billion worth of goods
left China by air, and another 61 billion worth of goods
entered China by air. As global markets expand U.S. businesses
are seeking ways to participate in those markets and so grow
their companies at home. Exports are critical if our companies
are to participate in global markets, whether it is finished
products for consumption abroad, or as components to add into
U.S. businesses' global supply chains. To compete effectively,
American companies must stay constantly ahead of the
development curve. One of the most important tools a U.S.
business has, whether it seeks to export to China or work with
its Chinese based subsidiaries or partners there, is an
integrated, global air express network. Such a network carries
the products, components, samples and documents necessary to
bring U.S. businesses closer to those markets, improve their
supply chain management, and establish and strengthen their
trading and business relationships.
U.S. exports to China, although still lagging behind
imports from China, continue to grow rapidly, and the two-way
trade relationship is vital to U.S. economic growth. Together
the U.S. and China were responsible for half of the world's GDP
growth last year. In the past 3 years U.S. exports to the world
grew only by 9 percent, while its exports to China rose by 76
percent. The transportation of goods by air continues to be the
service of choice for high-value, high-tech goods. Air cargo is
an increasingly important mode of transport for China as it
imports high-value components and exports high-tech products.
China's key imports are products that America excels in making:
electronic components, telephones, data processors,
semiconductors and optical and medical instruments. Those
products need air transportation to move them fast while the
value of the innovation reflected in their designs is still
high.
As the world's sixth largest economy and the third most
active trading nation, China's role in the global economy is a
fact of life, and one that FedEx welcomes. Certainly, trade
relations with China are not without issues and challenges. Yet
Beijing has shown sincere efforts to liberalize its economy and
remove barriers. Despite the challenges that we may face its
economic significance is such that we must continue to engage
China and ensure that China's role in the global economy is one
that continues to be an engine for global growth. The express
industry connects China and the U.S. with the rest of the
world. Our industry and FedEx as a company benefit from China's
economic growth. As a large U.S. exporter of services, express
delivery services, FedEx unequivocally believes that U.S. trade
policy should continue to be one that leads the world in
advocating for free trade and global market openness. Thank
you.
[The prepared statement of Mr. Spence follows:]
Statement of David Spence, Managing Director for Regulatory Affairs
Legal Department, Federal Express Corporation, Memphis, TN
Introduction

Thank you Mr. Chairman. Thank you for this opportunity to appear
before this committee to testify about the important issue of U.S.-
China economic relations.
My name is David Spence and I am the Managing Director for
Regulatory Affairs in the Legal Department at Federal Express
Corporation.
The purpose of my testimony is to highlight the experience that
FedEx has had in exporting our services to the Chinese market and the
importance of U.S.-China trade to U.S. businesses, including FedEx.
From FedEx's perspective, there is no doubt that China's membership
in the WTO and its greater participation in the world economy greatly
benefits U.S. businesses and the global economy as a whole.
FedEx in China

Since the inception of FedEx in the early 1970s, FedEx has grown to
now serve over 220 countries and territories. Today, the FedEx family
of companies has annual revenues near $24 billion and a workforce of
over 250,000 employees and contractors worldwide. FedEx is heavily
vested in global trade and the future of the global economy.
FedEx has been providing U.S.-China express services since 1984 and
began operating our own aircraft there in 1996. Having long recognized
the economic promise of Asia, FedEx began planning accordingly. FedEx
conceived the idea of an international network decades ago, when it
purchased in 1984, a courier company that had offices in Europe and
Asia.
In 1989, FedEx purchased Flying Tigers, an all-cargo airline with
flying rights to 21 countries, including China. In 1995, FedEx acquired
the all-cargo route authority to serve China, becoming the sole U.S.-
based all-cargo carrier with aviation rights to China. The U.S.-China
air transport agreement signed in 2004 provides U.S. cargo carriers
with 111 new flights. So far, FedEx has obtained 15 of those flights,
maintaining its lead as the U.S. cargo carrier with the most rights to
fly to China.
China's Importance to U.S. Businesses

Globally, over 40% of the world's trade moves by air when measured
by value. The value of China's exports and imports carried by air is
growing rapidly, soon to catch up to that level. In 2004, approximately
U.S.$60 billion worth of goods left China by air. And another U.S.$61
billion worth of goods entered China by air. As global markets expand,
U.S. businesses are seeking ways to participate in those markets and so
grow their companies at home. Exports are critical if our companies are
to participate in global markets, whether as finished products for
consumption abroad or as components to add into U.S. businesses' global
supply chains.
To compete effectively, American companies must stay constantly
ahead of the development curve. One of the most important tools a U.S.
business has, whether it seeks to export to China or work with its
Chinese-based subsidiaries or partners there, is an integrated global
air express network. Such a network carries the products, components,
samples, and documents necessary to bring U.S. businesses closer to
those markets, improve their supply chain management, and establish and
strengthen their trading and business relationships.
U.S. exports to China, although still lagging behind imports from
China, continue to grow rapidly, and the two-way trade relationship is
vital to U.S. economic growth. Together, the United States and China
were responsible for half of the world's GDP growth last year. In the
past three years, U.S. exports to the world grew only by 9%, while its
exports to China rose by 76%.\1\
---------------------------------------------------------------------------
\1\ ``Common Interests between China and the U.S. Isn't Decreasing:
Official,'' People's Daily Online, September 30, 2004, available at
http://english.people.com.cn/200409/30/eng20040930_158849.html
---------------------------------------------------------------------------
The transportation of goods by air continues to be the service of
choice for high-value, high-tech goods. Air cargo is an increasingly
important mode of transport for China, as it imports high-value
components and exports high-tech products. China's key imports are
products that America excels in making: electronic components,
telephones, data processors, semiconductors and optical and medical
instruments. Those products need air transportation to move them fast
while the value of the innovation reflected in their designs is still
high.
The Future of U.S.-China Relations
As the world's sixth largest economy and the third most active
trading nation, China's role in the global economy is a fact of life,
and one that FedEx welcomes. Certainly, trade relations with China are
not without issues and challenges. Yet, Beijing has shown sincere
efforts to liberalize its economy and remove barriers. Despite the
challenges that we may face, its economic significance is such that we
must continue to engage China and ensure that China's role in the
global economy is one that continues to be an engine for global growth.
The express industry connects China and the U.S. with the rest of the
world. Our industry and FedEx, as a company, benefit from China's
economic growth. As a large U.S. exporter of services--express delivery
services-- FedEx unequivocally believes that U.S. trade policy should
continue to be one that leads the world in advocating for free trade
and global market openness.

Mr. SHAW. Thank you. I thank all the panelists. Mr.
Reynolds, do you care to inquire?
Mr. REYNOLDS. I thank the Chairman. One of the things that
both in the testimony and having been to the plant and seen
both the cutting machine made by Eastman for 100 years with
modifications as science and ability and research and
development has modernized their equipment, is to see the
Westman knockoff that was sitting side by side. They are a
duplicate of technology presentation, using distributors and
others. Could you--I believe we have these for the record. We
have made distribution. Just confirm that the copy that I have
and some of those that were handed out are in fact identical
knockoffs to what you have and to again talk about the fact
while many multinational companies might have a law shop that
could defend and protect their patents in a world court or
whatever, you are trapped in the size of a small business that
are unable to go after the infringement you have seen and
actually have on display in your plant?
Mr. STEVENSON. That is correct, Congressman. The brochure
you have in front of you says Westman Model 829. Our machine is
an Eastman Model 629. All the--to a layman, actually to an
expert it would be very hard to tell the difference. This is a
case where again form does not have to follow functionality.
There is many different ways you can create a reciprocating
cutting machine. Our concern is, and our problem has always
been, by duplicating the trademarks of our machine, duplicating
the colors, duplicating a certain technology and patents we
have on the machine, that it ends up confusing the end user.
China's manufacturer of these machines, not only sell them into
China, they also export them into other market such as South
America, Central America, even into this country. Now, we are
successful in defending ourselves with the help of Customs and
with the help of Government in sales of these machines into the
United States. However, to undertake a legal battle on a
worldwide scale is simply beyond our resources. We do not have
the tens of thousands of dollars needed to engage attorneys,
and even if we did, it seems to me it sometime is a case of
that old carnival game that, the little things pop up and you
try and pound them down, and as soon as you have beaten one
into the ground, another one seems to emerge. There are
numerous of these competitors that engage in this practice, and
they all trade on our reputation and trade on our technology
and our innovations that we have spent over 100 years in
developing.
Mr. REYNOLDS. Another question I just would have is if
China and other countries were attacking American intellectual
property like your patents for cutting machines, would you be
selling into those countries or looking in a more aggressive
aspect throughout the world?
Mr. STEVENSON. Yes, we would. If we had the ability to
protect ourselves in that way we certainly would be able to
sell more machines and we certainly would be employing more
people in our plant in Buffalo.
Mrs. TUBBS JONES. Mr. Chairman?
Mr. SHAW. Mrs. Tubbs Jones, would you like to inquire?
Mrs. TUBBS JONES. Thank you, Mr. Chairman. I was one of
those who opposed China WTO opportunities, and as I sit here
and listen to the 7 of you, a few years ago it would have been
the flip. I would have been saying what you are saying has
happened in China. It is almost like ``I told you so.'' You
know, your mother used to say, ``I told you so if you do so and
so.'' I am not trying to place myself in that role, but as we
go down this next road--and I am going to direct my initial
question to Mr. Wilkey from NAM, because I have been working
with NAM in my congressional district, Cleveland, Ohio, where
we lost 60,000 jobs from 2001 to 2004 in the city of Cleveland
alone. You didn't perceive, didn't even contemplate that what
is happening with China was going to happen, Mr. Wilkey? Was it
in your mind at all?
Mr. WILKEY. It seems to me that when we developed this
relationship we set some rules. What I can't perceive is why
aren't we enforcing those rules? We wouldn't have this same
problem if we had enforced some of the rules. Fundamentally, we
have to get--when you set a rule, when you are playing a game--
--
Mrs. TUBBS JONES. That is if you believe in rules, Mr.
Wilkey, though. Pirates don't believe in rules. That is why we
call them pirates.
Mr. WILKEY. There are ways of enforcing those rules.
Mrs. TUBBS JONES. Okay. You believe that the resolve for
you or those members of the National Association of
Manufacturers, is for the United States to use the tools that
they have to enforce the rules, either through the WTO, the
International Trade Commission, or one of those, to resolve
some of your issues; that is what you think, sir?
Mr. WILKEY. Absolutely, and trade, we believe that free and
fair, quote, unquote, is critical, because I think that we can
do it. Now, I think that it has done a lot for our economy and
we need trade, we cannot get along without trade, but we need
to have a level playing field.
Mrs. TUBBS JONES. Okay. A lot of people talk, use the term
``level playing field.'' What does level playing field for you,
Mr. Eastman? I have forgotten your first name, sir.
Mr. STEVENSON. We are able to compete in a world where we
feel like our innovations are protected. If I may just comment
briefly. Our machines were cloned--that is the expression we
use--or copied prior to any treaty by the WTO. This started
back in the early '90s. We actually felt that having China in
the WTO might bring this issue to heel a little bit and protect
us somewhat, because we depend on exports. Over half our
business is exports, indeed our major market is the Pacific rim
and we would love to have back some of the number of machines
that are sold in China.
Mrs. TUBBS JONES. So, you believe that having them under an
enforcement too would have helped you, but in reality that is
not what has occurred.
Mr. STEVENSON. In reality you are correct. It has not
occurred and that is why I urge our Congress, our government to
do something to let us enforce the rules that are in place.
Now, a level playing field, there are other issues. Certainly
for my people the issues are rising health care costs in this
country, it is a tremendous burden on a small manufacturer like
myself to have to pay the entire burden, and we are trying to
negotiate a fairness with that with our union shop. I think
there are other issues which we have discussed. Again, we have
various rules and regulations on operating a factory in terms
of environmental protection, in terms of Occupational Safe and
Healthy Act that other countries don't have. So, therefore we
are automatically burdened with a cost that other countries
don't----
Mrs. TUBBS JONES. Right. Listen to----
Mr. STEVENSON. I think we need to level the playing field
to----
Mrs. TUBBS JONES. I only have a little bit of time, Mr.
Stevenson, if I can cut you off, please, sir. My question to
you is--none of you are advocating that even though in other
countries there are fewer labor standards, there are no
environmental standards, that you are not required to maintain
a safe environment in which your workers work; none of you are
advocating that, are you?
Mr. STEVENSON. No.
Mrs. TUBBS JONES. Thanks. Let me go to Mr. Spence because I
am about to run out of time. The yellow light is on. Mr.
Spence, how much more product do you bring to the United States
than you take back to China? Is it like this?
Mr. SPENCE. No. I don't have a specific number. We export,
we are a very large exporter, but we also bring much back in.
Mrs. TUBBS JONES. Is that an answer you could send to me?
Mr. SPENCE. Yes, absolutely.
Mrs. TUBBS JONES. I would appreciate it. You know how to
find me.
Mr. SPENCE. Yes.
Mrs. TUBBS JONES. Gentlemen, thank you very much. We don't
get but 5 minutes. We appreciate you coming before the
Committee and I admit that I am prepared to do what we need to
do to deal with China, though I am not in charge. I am going to
do my best though. Thanks, Mr. Chairman.
Mr. SHAW. Thank you. Mr. Beauprez. I would ask the
Members--I have been advised that our vote is going to come
right around 3:00 and it is the intention of the Chair not to
recess but to conclude the hearings when we have to go vote.
So, Mr. Beauprez?
Mr. BEAUPREZ. Thank you, Mr. Chairman. I want to comment
the panel. I think this has been an exceptional panel and I
very much appreciate your testimony. It is quite helpful. Mr.
Wilkey, you made the point very strong that we need to enforce.
Mr. Berman, you seem to have considerable knowledge of the
Chinese market and some painful experience about dealing with
the Chinese. It crossed my mind with the first panel we had--I
unfortunately wasn't able to question them, so I will pose the
question to you. One, do you believe the Chinese have the will
to enforce, and two, if the answer happens to be yes, do they
have the ability, do they have the infrastructure to accomplish
it?
Mr. BERMAN. Based on my painful experience, Congressman, I
would say what China has the will to do is the point of least
resistance. What does it take to remove this as an irritant in
the U.S. trade dialog, and how long can that be strung out? I
would say if you go back in the history of intellectual
property protection in China, there is a singular event in that
history when the Chinese actually produced the result, and that
was when the United States took a decision to impose trade
sanctions on China for intellectual property violations. The
Federal Register lists of Chinese exports to the United States
was published and because of goods in transit the effective
date of that was 30 days from the data of publication in the
Federal Register. One billion dollars in Chinese export to the
U.S. would have been subject to tariffs based on the estimated
losses to U.S. companies due to intellectual property
violations. The day after that notice appeared in the Federal
Register, Ambassador Barshefsky was asked to go to Beijing and
to conduct a negotiation. That is the singular event that moved
the ball forward. There has not been anything since.
Mr. BEAUPREZ. I am going to make an assumption that the
United States is not unique in the world in countries that
trade with China to experience the pirating, the
counterfeiting, the stealing of intellectual property?
Mr. BERMAN. No. The EU has said most recently that 60
percent of the goods seized by EU customs officials in the year
2003 came directly from China. The difference, Congressman, is
that the EU, through its instrumentality, which is the European
Commission, seems to be somehow removed from the reality of the
companies that are represented in the European member countries
of the EU, so there doesn't seem to be the same sense of ``we
have to fix this problem.'' It is much more a ``yes, there is a
problem and, yes, we need to do something about it, and, yes,
we have to have a process, and yes, we should have a discussion
with them and a dialog, and we should meet again 3 months from
now.'' That is the process that moves along in the EU. We ask
more of USTR and sometimes we get it.
Mr. BEAUPREZ. Keep asking.
Mr. BERMAN. Thank you.
Mr. BEAUPREZ. Mr. Stevenson, question to you. Looking at
this document you have provided us, who stole your technology?
Was this another private enterprise as we would determine or
define a private company in China, or quasi-government?
Mr. STEVENSON. I believe most of them, Congressman, are
quasi-governmental companies.
Mr. BEAUPREZ. I was afraid you would say that.
Mr. STEVENSON. On the other hand there are--there is a
proliferation of them. I would say right now there is about 10
different manufacturers of what I consider our machines in
China. Some of them now are privately owned. Many of them are
owned in cooperation with the local provincial governments,
which we have heard testimony earlier today that they are under
pressure to employ people. Apparel is such a big business in
China that obviously they want to manufacture the hardware that
goes along with the apparel.
Mr. BEAUPREZ. I am looking at five pages I believe that you
have supplied. How many of those pages indicate machines
technology that you have developed, invented that have been
pirated?
Mr. STEVENSON. All of them.
Mr. BEAUPREZ. All five of these are basically clones with a
different tag on them.
Mr. STEVENSON. Right. I think No. 5 is actually our
machine, and if experts can't tell the difference----
Mr. BEAUPREZ. That is the one that looks like it has
``Eastman'' on it. Everything else looks like it has been
stolen.
Mr. STEVENSON. That is right.
Mr. BEAUPREZ. Gentlemen, thank you very much. Mr. Chairman,
I yield back. This has been most helpful.
Mr. SHAW. We have been called for a vote, so I would ask
the remaining questioners if you could limit your time we could
get to everybody. Mr. Becerra.
Mr. BECERRA. Thank you, Mr. Chairman, and I will do so.
Gentlemen, thank you for the testimony, very enlightening,
and--I am sorry, Mr. Chairman?
Mr. SHAW. I am sorry.
Mr. BECERRA. I am fascinated by something. Anyone here
believe that China is living up to its terms of the agreement
when it acceded to the WTO? If you believe so, please raise
your hand. Okay. Anyone believe that if they tell us that they
are going to tell us that they are going to start enforcing
whatever rules they may already have in place that we should be
willing to trust them? Raise your hand if you would believe
them. I sense then that all of you believe that we have got to
have some teeth in our enforcement mechanism to make sure that
they do what they are supposed to do and not simply live on
some good intention, good faith or handshake that they may give
us in terms of their competition with us; is that fair to say?
Okay. Mr. Stevenson, I thank you for your testimony perhaps
more than anyone else's because you bring to light the
difficulty that employers face and that employees face. I think
those employees that have been around with you for decades that
are earning a pretty decent wage, from what you said, still
want to continue to make it up the ladder. For you it is
probably very difficult to consider increasing those wages
because you are talking about competition where they are paying
$2.00 a day, as you said, in China. I don't see how that does
anything but force you to compete against China by trying to
keep the wages where they are if not diminish them, which I
think is terrible for American workers when you have to engage
in that race to the bottom. My question is this, because, Mr.
Gregory, you said that you supported CAFTA.
Mr. GREGORY. Yes, sir.
Mr. BECERRA. Have you had a chance to read the CAFTA
agreement?
Mr. GREGORY. I have not read it in its entirety, no, sir.
Mr. BECERRA. You haven't?
Mr. GREGORY. No, sir.
Mr. BECERRA. Let me suggest to you that you read it because
would you agree that we should deal with the Central American
countries and the Dominican Republic--which by the way, have a
lot of their operations in textile and other areas in the
maquila--that are owned, operated or controlled by a lot of the
same Chinese companies that are ripping you off right now. Do
you believe that we should operate in a free trade agreement
where we open up our markets to the Central American countries
based on a handshake?
Mr. GREGORY. Well, certainly there can be some teeth put
into the agreements but----
Mr. BECERRA. Okay, but no, no. There could be but there
weren't. You can't--the trade agreement that we have before us
that we will vote on, we don't get to renegotiate.
Mr. GREGORY. Yes, sir. We have looked at the agreement and
we feel like----
Mr. BECERRA. So, where are the teeth in the agreement that
will make sure that China doesn't continue paying a $2.00 wage
or that those Central American countries don't pay a $2.00 wage
so that Mr. Stevenson can have workers and produce products
that can compete against Central American or Chinese goods?
Mr. GREGORY. I can't answer that, sir.
Mr. BECERRA. It is not in there. I ask you, how can you
agree to an agreement, how can you support an agreement where
we have turned over the keys not just to the Central Americans,
because remember--and you have probably been down to Central
America, some of you----
Mr. GREGORY. I was there yesterday.
Mr. BECERRA. A lot of those operations in Central America
are now owned by Central Americans. They are owned by some of
the same Chinese and other Asian interests, along with some of
the Central Americans. If we have nothing that forces them to
compete in ways that are fair, you have just opened up the door
for that further race to the bottom, and that is what CAFTA
does. So, I was startled to hear you say, given all the
testimony, that you support a CAFTA agreement. You know what it
says with regard to, for example, wages, what they are going to
do in Central America to make sure that they don't descend to
the bottom to try to compete with China's wages, because that
is what they would have to do, right? Otherwise, China would
take them. The only protection we have is a provision in the
agreement that says, ``You must not fail to enforce your laws
on labor.'' So, if they have deficient laws, guess what? That
is all they have got to do is enforce deficient laws. If they
decide to reduce the protections in their laws, if they decide
to reduce their wages, under CAFTA we can't do a thing about
it. Is that good for competition for Mr. Stevenson?
Mr. GREGORY. In many ways we see CAFTA as our only hope to
compete against China.
Mr. BECERRA. Okay, but as you know, any agreement can be
negotiated to make it better. We found out with side agreements
in NAFTA that it doesn't work. I made a commitment to the
Chairman to not take up more time. Let me close. You all were
very good. I appreciate your testimony. Mr. Chairman, let me
yield back my time.
Mr. SHAW. I would say to the gentleman from California that
the intellectual property enforcement rights in CAFTA is
stronger than it is in the WTO.
Mr. BECERRA. Chairman, you are absolutely right, it is a
double-barrel shotgun, but we use a pea shooter when it comes
to labor and the environment.
Mr. SHAW. Mr. English.
Mr. ENGLISH. Thank you, Mr. Chairman. I look forward to
exploring CAFTA when we actually have a hearing on CAFTA. I
would like to, if I could, gravitate back to China trade, which
I am delighted at the testimony we have received today from
this particular panel because it is extraordinarily helpful.
Mr. Stevenson, the story you have told about intellectual
property rights is almost identical to a similar experience of
a small manufacturer in my district. What I have discovered is
that small manufacturers in the United States have very little
recourse even with the assistance that the Administration is
clearly trying to provide on intellectual property rights.
There are few opportunities for a small manufacturer with a
patent to go into China and really receive an opportunity for a
hearing and to be made whole. So, I sympathize with the
extraordinary experience you have gone through. You are not
unique in this regard.
May I have a quick show of hands? How many of you think
China should move toward floating its currency the way I
believe WTO standards oblige it to? Pretty much everybody. That
is very helpful. At the same time how many of you feel that
there is a real imperative to improve the structure of the
legal system in China to allow intellectual property rights to
be more properly enforced? I guess the other issue that I
haven't heard a lot about--and I would throw this open to any
of the panelists quickly--clearly China has been involved in
discriminatory practices as far as its tax system, and we
realize that China's tax system is currently undergoing an
evolution, but they have clearly dictated some preferences to
their neighbors under their tax system, which permit
neighboring countries to send products tax free into the
Chinese market, whereas products manufactured in the United
States face a discriminatory tax. Have any of you experienced
this problem or wish to comment on it? No one on the panel.
Thank you. Mr. Chairman, I have a number of other questions,
but as per your understanding, I would like to simply thank the
panelists for giving us some real ammunition to move forward on
the China front and a sense of what we need to prioritize.
Mr. SHAW. Thank you.
Mr. Levin.
Mr. LEVIN. Just quickly, thank you for coming. Let me just
then make an observation. I was going to ask you a question.
There really isn't time. On currency and IPR I think the
problem is, except for you, Mr. Berman, who I take it would
support a WTO case?
Mr. BERMAN. I would.
Mr. LEVIN. You do. The NAM has not, so even when there is
WTO legal action, you tend to hedge. For example, when we filed
a 301 petition we didn't have the NAM's support, and that is a
real problem because they don't hear clearly when you don't
speak clearly. Also, Mr. Brilliant, your testimony on this,
which is aside from liaison, the U.S. Chamber strongly supports
the continuing efforts to address China's failure to comply
with IPR commitments through the JCCT and other bilateral and
multilateral mechanisms. Would you support the filing of a WTO
case?
Mr. BRILLIANT. We actually, in our submission to the U.S.
Trade Representative Office, did call for WTO consultations. It
is on the record.
Mr. LEVIN. So, you support--the consultations come after
the case is filed.
Mr. BRILLIANT. No, before.
Mr. LEVIN. Before.
Mr. BRILLIANT. What we support is treating China as a
priority country as well as WTO consultations.
Mr. LEVIN. So, you support a WTO action?
Mr. BRILLIANT. We support WTO consultations, not WTO cases.
Mr. SHAW. We have 4 minutes to get over to the floor.
Mr. LEVIN. On currency? On currency, what is your position?
Mr. BRILLIANT. Well, on currency our position is as I
stated, we support China moving rapidly toward a market-based
exchange system. We do not support legislative unilateralist
measures to impose tariffs.
Mr. LEVIN. How about consultations, section 301, WTO
process; you support that?
Mr. BRILLIANT. We will consider that.
Mr. SHAW. I am going to have to conclude the hearing. I
appreciate each one of you for giving your time. I have some
questions too. I may submit them to you in writing. I think
this hearing has really shown us a lot. It has pinpointed some
of the problems that we have, and I think we will probably go
forward in a bipartisan way to try to find solutions because
this is about American jobs and American business.
We are adjourned.
[Whereupon, at 3:15 p.m., the hearing was adjourned.]
[Question submitted from Representative Thompson to Mr.
Freeman, and his response follows:]

Question Submitted by Representative Thompson

Question: Thank you for holding yesterday's Full Committee hearing
on United States-China Economic Relations and China's Role in the World
Economy. I would like to submit a follow-up question to Mr. Charles
Freeman, Assistant USTR for China. The World Trade Organization's
Agreement on Trade-Related Aspects of Intellectual Property (``TRIPS
Agreement'') protects geographical designations, such as Napa Valley.
Specifically, I would like to know what the USTR is doing to address
misuse of geographical indications in China? As I indicated to Mr.
Freeman, 2 years ago, the Napa Valley Vintners Association filed
actions in Chinese court to prevent the registration of the brand name
``Na Pa He Gu,'' or Napa Valley, by Beijing's Hongye Grape Wine Co. The
name is identical to the way wine producers from my district translate
Napa Valley on wines exported to China.
[Response not received at the time of printing.]

[Statements for the record follow:]
Statement of Meena Khandpur, Advanced Medical Technology Association
AdvaMed and its member companies would like to thank the Committee
for holding this important hearing. China continues to be a growing
market for medical devices. We are grateful that the U.S. and Chinese
Governments are working with our industry in a number of constructive
ways to address issues affecting sales on the Chinese market.
Resolution of these issues would benefit the U.S. economy, as well as
the health and welfare of the Chinese people.
AdvaMed represents over 1300 of the world's leading medical
technology innovators and manufacturers of medical devices, diagnostic
products and medical information systems. Our members manufacture
nearly 90% of the $83.4 billion in health care technology products
purchased annually in the U.S., and nearly 50% of the $175 billion in
medical technology products purchased globally. Exports in medical
devices and diagnostics totaled $22.4 billion in 2003, but imports have
increased to $22 billion-- indicating a new trend toward a negative
trade balance for the first time in over 15 years.
The medical technology industry is fueled by intense competition
and the innovative energy of small companies--firms that drive very
rapid innovation cycles among products, in many cases leading to new
product iterations every 18 months. Accordingly, our industry succeeds
most in fair, transparent, global markets where products can be adopted
on their merits. We face both challenges and opportunities in the China
market.
Global Context
Innovative medical technologies offer an important solution for
nations that face growing health care needs and constraints on
resources, including the demands of aging populations. China will be
the first developing country to experience an aging work force.
Advanced medical technology cannot only save and improve patients'
lives, but also lower health care costs, improve the efficiency of the
health care delivery system, and improve productivity by allowing
people to return to work sooner. Our industry saves lives and money.
To deliver this value to patients, our industry invests heavily in
research and development (R&D), and U.S. industry is a global leader in
medical technology R&D. The level of R&D spending in the medical device
and diagnostics industry, as a percentage of its sales, more than
doubled during the 1990s, increasing from 5.4% in 1990, to 8.4% in
1995, to 12.9% in 1998. In absolute terms, R&D spending has increased
20% on a cumulative annual basis since 1990. This level of spending is
on par with spending by the pharmaceutical industry and more than three
times the overall U.S. average.
AdvaMed greatly appreciates the support we have received from U.S.
government agencies. Trade agencies--such as the Office of the U.S.
Trade Representative (USTR), the Department of Commerce (DOC), and the
Department of State, with strong support from U.S. Embassies and
Consulates--have helped us open markets for our products around the
world, including in China. Regulatory agencies, such as the Department
of Health and Human Services and the Food and Drug Administration, have
worked with foreign governments, including China's, on improving the
regulatory environment for our products.
AdvaMed believes the USTR, DOC and Congress should monitor
regulatory, technology assessment and reimbursement policies in foreign
health care systems and push for the creation or maintenance of
transparent assessment processes and the opportunity for industry
participation in decisionmaking. We believe China is making progress on
these important procedural matters. We welcome China's willingness to
continue to improve its administrative and regulatory processes.
AdvaMed strongly supports trade liberalization globally and
throughout the Asia-Pacific region. We believe China can and should
play a key role in this effort. As a prominent member of the World
Trade Organization (WTO) and a substantial beneficiary of the global
trading system, China should lend its weight to further trade and
investment liberalization. In this regard, the Doha Development Round
of the WTO offers a major opportunity to continue to reduce tariffs and
address non-tariff measures.
AdvaMed also recognizes that international negotiations and
discussions occur in variety of venues. We seek medical device
regulatory regimes that conform to these guiding principles:

acceptance of international standards;
transparency and national treatment;
use of harmonized quality systems or Good Manufacturing
Practice inspections;
recognition of others' product approvals (or the data
used for those approvals);
development of harmonized auditing and vigilance
reporting rules;
use of non-governmental accredited expert third party
bodies for inspections and approvals, where possible.

Similarly, many economies require purchases of medical technologies
to take place through centralized and/or government-administered
insurance reimbursement systems. China is still in the process of
reforming and developing its reimbursement system. To ensure timely
patient access to advanced medical technologies supplied by foreign as
well as domestic sources, member economies should agree to adopt these
guiding principles regarding the reimbursement of medical technologies:

establish clear and transparent rules for decisionmaking;
develop reasonable timeframes for decisionmaking;
institute data requirements that are sensitive to the
medical innovation process;
ensure balanced opportunity for the primary suppliers and
developers of technology to participate in decisionmaking, e.g.,
national treatment;
establish meaningful appeals processes.
Challenges and Opportunities in China
The Chinese market presents excellent opportunities for the U.S.
medical technology sector. China has already become an important market
for our industry. While reliable statistics are not yet available,
AdvaMed estimates that the Chinese market for medical technology is at
least $3 billion and growing rapidly. It is on pace to surpass some of
the key European markets for medical technology in a few short years.
As global leaders, U.S. medical technology firms already account for a
significant portion of sales in China, and the position of these firms
underscores the importance of ongoing efforts with the U.S. Government
to open the Chinese market further.
At the same time, AdvaMed members must overcome hurdles to realize
further opportunities. AdvaMed and its member companies have identified
a number of priority issues we are seeking to address in China. AdvaMed
looks forward to working with the government of China, the U.S.
Congress and the U.S. Administration to address the following barriers

redundancy in the regulatory process;
unnecessary regulatory burdens on diagnostic products;
and
difficulties with the centralized tendering system.

For the medical technology industry, the Bush Administration's
efforts with China under the U.S.--China Joint Commission on Commerce
and Trade (JCCT) are critical for allowing U.S. medical technology
firms broader access to the burgeoning Chinese health care market. The
JCCT has been a valuable forum for the open discussion of specific
regulations affecting medical devices, including between the U.S. FDA
and the Chinese State Food and Drug Administration (SFDA). This forum
allows us to gain a better understanding of the status of China's
regulatory process--including some of its regulations we believe to be
duplicative and unnecessary for patients' health, and its unique
treatment of certain diagnostic products as pharmaceuticals instead of
devices. We would like to see this forum enhanced to include discussion
of other issues.
In addition, we have appreciated the government of China's
willingness to meet with us and representatives of our member companies
on issues not covered under the JCCT. For example, we have benefited
from China's explanation of its centralized tendering system, but
difficulties remain. We hope to have additional exchanges with the
Ministry of Health and other appropriate agencies to address a number
of lingering questions and concerns.
The nascent U.S.--China Health Care Forum initiative, led by the
U.S. Department of Commerce and supported by AdvaMed and other health
care partners, holds great promise as another vehicle for addressing
many of the trade-related and health policy-related barriers
confronting U.S. medical technology firms in China. AdvaMed looks
forward to participating in this forum at its inaugural meeting this
July.
Conclusion
AdvaMed appreciates the shared commitment by the President and the
Congress to expand international trade opportunities and encourage
global trade liberalization. We look to the President and his
Administration to aggressively combat barriers to trade throughout the
globe, including China. The medical technology industry is committed to
working with Congress and the Administration on upcoming trade policies
and agreements to ensure patients throughout the world have access to
medical products

Statement of Richard N. Holwill, Alticor, Inc.
INTRODUCTION
We would like to thank the Chairman and the Committee for this
opportunity to participate in this review of U.S.-China Economic
relations through a written submission. The topic, U.S.-China economic
relations, deserves a thorough and dispassionate review. Yet, much of
the rhetoric about this topic is based on incomplete information and is
often driven by intense passions. We are submitting our views with the
hope that they will provide the committee with a perspective of a
company that has faced numerous difficult problems but has,
nonetheless, succeeded in China.
Alticor, Inc., is a Michigan-based manufacturer of cosmetics,
nutritional supplements, personal and home-care products that sells
exclusively through the direct selling channel. Alticor's operating
companies include Amway (China) Co., Ltd. (ACCL), with retail sales
last year of more than $2 billion. These sales include as much as $800
million in U.S. exports that support thousands of jobs in Michigan and
California.
We have strongly supported normalization of trade relations with
China and full approval of China's accession into the World Trade
Organization. We continue to believe that the WTO provides the rules-
based framework needed for the full resolution of the challenges that
exist in this relationship. We also believe that some of the proposals
being discussed in Congress would grievously undercut the WTO system
and, thereby, do more harm than good to U.S. commercial interests. In
this paper, we will outline the problems as we see them and will
articulate an appropriate response in each case.
Our goal in this paper is to explain that, even amid the most
daunting problem area, there are success stories that will serve as
models for long-term solutions that are consistent with the WTO rules.
The fundamental point is quite simple: If we want China to participate
in a rules-based trading system, we must work within those rules to
solve problems that develop in the trading relationship. To do
otherwise by taking unilateral actions against China or any other
trading partner both makes us vulnerable and makes the system less
effective.
INTELLECTUAL PROPERTY RIGHTS
Enormous problems are associated with the failure to enforce
intellectual property rights. These include counterfeit products,
illegally recorded media, misused and degraded trademarks and an
overall degradation of brand value. We will not repeat the litany of
abuses in this area, as we are certain that others have done so.
Instead, we wish to report to the Committee that Amway China has
been extremely successful in protecting its intellectual property
rights. Our executives recognized that provincial-level officials were
responsible for enforcement of IPR. By courting local officials and by
demonstrating that our tax payments contributed significantly to local
development, we were able to engage these officials as stakeholders in
our success. We further demonstrated that counterfeit products hurt the
local tax base as well as our company.
As a direct consequence, ACCL has enjoyed excellent support from
authorities, who last year seized millions of dollars worth of
counterfeit Amway products and who closed businesses that sold such
products or improperly used our trademarks. We believe that other
companies can follow the model we have used and, thereby, find willing
partners in provincial and local governments who will contribute to
improved IPR enforcement.
Having said this, we must also note that some provinces and, in
particular, at least one autonomous city government are reported to
have been particularly uncooperative with others in the business
community in general with regard to IPR protection. We believe that,
U.S. government efforts in support of IPR protection will be more
effective when officials work with the central government to target
localities with the worst IPR enforcement records.
We would also ask that the U.S. government press the Chinese
government to establish courts where civil complaints about IPR
violations can be heard on an expedited basis. With such courts,
companies can seek restraining orders or other forms of injunctive
relief aimed at stopping the production of counterfeit products. The
government should also create a mechanism to seek damages in cases
where IPR violations are proven. We believe that the threat of
effective civil action will greatly enhance government enforcement of
intellectual property rights.
We urge Congress to provide full funding to the State and Commerce
Departments and the U.S. Trade Representative so that they can assist
U.S. companies in their effort to protect intellectual property rights,
assist the Chinese government in developing better programs to enforce
IPR rules and, if the pattern of IPR abuse is not broken, seek redress
for damages through WTO procedures.
EXCHANGE RATES
We have watched with interest as many in the manufacturing
community and in Congress have focused on China's exchange rate, which
is pegged to the U.S. dollar, as the panacea for resolution of those
problems that are apparent in the trading relationship with China. At a
hearing last year, the President of Alticor, Doug DeVos, offered
testimony challenging the conventional wisdom with regard to exchange
rates. We said then, and iterate now, that allowing the Chinese
renminbi to find its own value in a free market could be a disastrous
experiment.
Our concern is driven by the fragility of the Chinese banking
system. The legacy of politically driven loans to State Owned
Enterprises (SOE's) has not yet been resolved. Because so few of these
SOE's are solvent and paying on their loans, several of the major banks
rely on Government support to maintain solvency. While China has the
reserves to support banks for the time being, doing so indefinitely is
a fundamentally unwise policy. Most investors understand this problem
and, if given the chance to move assets to a more secure currency, may
well do so. Were that to happen, the renminbi would fall in value
relative to the U.S. dollar and, thereby, exacerbate not resolve the
exchange rate problem.
We must also note that, heretofore, China's purchases of industrial
goods and raw materials had left it either in a global trade deficit or
with imports and exports nearly balanced. China recorded a trade
surplus for the first time earlier this year. There is every reason to
believe that this surplus will be systemic. As a consequence, China
would be wise to take steps to revalue the renminbi using technical
measures short of a full float.
We believe that a realistic valuation can be achieved by pegging
the renminbi to a basket of currencies that is representative of trade
volumes with its major trading partners, to include the Euro and Yen.
The average price of the currencies and percentages in the basket will
fluctuate in ways that reflect market forces without exposing the
banking system to the disintermediation associated with a flight to
value. This type of ``technical'' float has proven useful in other
developing countries and should be tried before exposing the renminbi
to market forces that consider factors other than trade flows in
determining actual value.
We urge the Congress to reject appeals to a unilateral tariff based
upon immediate demands that China allow the market to set the value of
its currency. Such appeals are unwise and likely to be
counterproductive. We would also encourage the Chinese government to
look to alternate mechanisms in determining the value of the renminbi.
Finding a safe alternative is as much in China's interest as it is
ours. With a proper balance in currency values, China will avoid the
trap of distorting its development by artificially subsidizing exports
while penalizing imports that will keep the economy both viable and
competitive.
CONCLUSION
Congress is correct in seeking to better understand the issues in
the U.S.-China economic relationship. It would be wrong, however, to
place the blame for the current trade imbalance solely on the policies
and actions of the Chinese. While China must do more--particularly with
regard to IPR protection and revaluing its currency--Congress should
also examine U.S. policies that hinder the competitiveness of U.S.
companies in world markets. A list of burdens on U.S. exporters
includes:

The high cost and inefficiency of the U.S. health care
system.
Double taxation on corporate dividends.
Extra-territorial taxation.
Excessive product liability damage awards.
Regulatory requirements that impose costs without
commensurate benefits.

Congress could do much to make U.S. companies competitive by
identifying and revising U.S. policy issues that hinder business.
Blaming China for policy failures in the United States accomplishes
nothing at all. At the very least, Congress should avoid making matters
worse by taking unilateral actions that are inconsistent with WTO
rules, as would be the case with a unilateral tariff imposed on Chinese
exports to the United States. Such a move would expose U.S. companies
to WTO sanctioned retaliation and, thereby, destroy our growing exports
to China, harm U.S. companies that now profit in China and, most
severely, damage irreparably our commitment to a rules-based trading
system. We are the ultimate beneficiaries of such a system. Congress
should move to strengthen that system, not harm it with the imposition
of unilateral sanctions on any country.

Statement of Nate Herman, American Apparel & Footwear Association,
Arlington, Virgina
Thanks you for providing us this opportunity to submit a statement
for the record in connection with this hearing.
The American Apparel & Footwear Association (AAFA) is the national
trade association representing apparel and footwear companies, and
their suppliers. AAFA members produce, market, distribute and sell
clothing and shoes in virtually every country in the world, including
China and the United States.
Our comments are structured to offer commentary on the role of
China in the post textile and apparel quota world as well as the role
of China as a potential consumer market for U.S. footwear and apparel
companies. We will then make recommendations on U.S./China trade
policy, particularly with respect to China's compliance of its World
Trade Organization (WTO) obligations.
Role of China in the Post Quota World
On January 1, 2005, the United States and other WTO member
countries discontinued the use of quotas to restrain imports of textile
and apparel products from WTO and many non-WTO countries. The end of
quotas has generated considerable anxiety among textile and apparel
interests worldwide as the prevailing view, reinforced by a number of
academic studies and some industry assessments, is that China will
become a dominant player in the industry in the coming years. While
many developing countries have traditionally viewed quotas as a policy
tool to limit their exports to the United States, they have only
recently begun to view them as a mechanism that prevented one country
from gaining a single dominant share in the marketplace.
We have made no official assessment of how China will perform in
the post has quota world. While statistics on some products freed from
quotas in the past few years and other anecdotal evidence derived from
other industries backs up the view that China will gain an enormous
share of the U.S. import market, equally compelling facts show that
China will have difficulty assuming this role. Many companies are
reluctant to commit additional orders to China because they want to
achieve diversity in their sourcing. Companies cite many reasons for
retaining business in other countries, including proximity to markets,
uncertainties in China, preferential trade arrangements, and pre-
existing partnerships with factories.
Much attention has focused recently on the role that China
safeguards--negotiated as part of China's accession package to the
WTO--can play in the coming 4 years. The United States has already
invoked the safeguard on four occasions and has recently self-initiated
investigations in three more cases. With all the hype surrounding these
cases, it is important to understand several issues relating to the
safeguard tool.
First, although many in the textile industry support their
aggressive use, safeguards on imports of textile articles from China
are not likely to promote textile and apparel manufacturing in the
United States. Imports already supply 96 percent of the U.S. apparel
market, so quotas on imports from China will merely divert some Chinese
made apparel imports to other countries, primarily those in Asia.
Moreover, safeguards only restrict the cutting and sewing of Chinese
made apparel, and not whether that apparel contains Chinese fabrics.
The safeguards may succeed in shifting some apparel operations from
China to other countries but those diverted garments may still contain
Chinese textiles. At a minimum, safeguards on Chinese apparel do not
promote the use of U.S. inputs.
This is a critical point to understand as there is considerable
expectation that quotas on China will result in increased business in
the United States. Up until the beginning of last month, the United
States maintained quotas on hundreds of textile and apparel articles
from dozens of countries. Many of these quotas were in place for
several decades. During that time, apparel import penetration grew to
high levels while U.S. textile and apparel employment fell steadily. If
quotas on dozens of countries for 30 years did not help protect the
U.S. textile and apparel industry, it is unlikely that quotas on a
single country for only 4 years will now accomplish that goal.
Second, the safeguard tool is intended to be used when there is
market disruption in the United States that has occurred because of
Chinese imports. In other words, it is intended to stop market
disruption when the source of that disruption can be traced directly
back to China. It is not intended, as some argue, to address real or
perceived concerns with the Chinese economy or to encourage Chinese
adherence to its WTO obligations. In fact, use of the safeguards as an
enforcement tool, without data to show an explicit Chinese role in U.S.
market disruption, may cause the WTO to find that the U.S. is violating
its own WTO obligations with respect to China.
Third, there is an unintended side effect of quota restraints on
China that should be more fully understood by the Commission. Efforts
to restrain imports from China, or encourage the Chinese government to
impose additional taxes on their textile and apparel exports to the
United States, do indeed result in an additional cost. That cost is
either borne by the U.S. apparel company or passed on to the U.S.
consumer. In either case, that cost represents a transfer of funds from
U.S. citizens to the Chinese government. We fail to understand why a
policy promoting such a financial transfer is in the best interest of
the United States, especially when the quota restraints achieved do not
promote U.S. jobs.
Role of China as Consumer Market
With a middle class of over 200 million people and growing, China
represents the next great market for U.S.-made and U.S.-branded
products. Many of our members, including such well-known household
names as Reebok and New Balance, have already blazed the trail for
American brands by aggressively pursuing the Chinese consumer. Even so,
multiple obstacles abound that restrict the access of U.S. footwear and
apparel brands to this lucrative and growing market.
While we applaud the huge strides China has already made in meeting
its WTO obligations, China has fallen short in two important areas that
directly affect both our footwear and apparel members.
First, China continues to delay the issuing of regulations
providing foreign firms distribution rights in the Chinese marketplace.
In addition, the regulations issued to date allowing foreign firms
trading rights in China are vague in many key aspects. As a result, our
members must comply with a myriad of often conflicting regulations that
can vary from region to region and forces them to enlist a Chinese
partner in order to sell their products in China. More importantly,
without rules on distribution rights, our members are unable to sell
their product in the Chinese market even if the product is made in
China in Chinese factories. For example, with over 98 percent of the
shoes sold in the United States being imported, U.S. footwear firms
produce a significant percentage of shoes in China to serve not only
the U.S. market but also many other countries around the world. Despite
the fact China accounts for over half of the shoes produced worldwide,
U.S. footwear firms currently cannot sell the shoes they make in China
to the Chinese market. Under current rules, these firms are required to
export the shoes out of China and then re-import them back into the
country. Until China issues and then enforces a single and simple set
of clear and transparent rules granting foreign firms distribution
rights, U.S. footwear and apparel brands and the U.S. workers they
employ in marketing, distribution, and research & development will
continue to lose out on one of the biggest consumer markets in the
world.
Second, the scourge of counterfeiting continues to run rampant in
China, with knock-offs of well-known U.S. footwear and apparel brands
sold in markets in virtually every Chinese city and town. Even if U.S.
footwear and apparel firms are granted full distribution rights, they
will have to compete against these inferior knock-offs that
dramatically undercut U.S. brands. Not only are these products priced
well-below actual market value, but the low-quality of the counterfeit
products also tarnish the hard-earned reputation of U.S. brands.
Again, China has made significant progress in Intellectual Property
Rights (IPR) enforcement. However, by all accounts, the most recent
rules promulgated by China fall well short of what is needed to ensure
that the intellectual property rights of U.S. footwear and apparel
firms are protected. Among other problems, the new rules lack the
criminal penalties needed to deter counterfeiting.
As you know, many of these same counterfeit products end up on the
streets of U.S. cities, hurting U.S. footwear and apparel brands in
their own home market. We believe concrete steps, such as those
proposed in new bi-partisan legislation introduced at the beginning of
this Congress, are needed to punish those in the United States that
attempt to benefit from Chinese counterfeiting. The Stop Counterfeiting
in Manufactured Goods Act, introduced by U.S. Representative Joe
Knollenberg (R-MI), requires the mandatory destruction of equipment
used to manufacture and package counterfeit goods. In addition, it
addresses methods that counterfeiters have used to evade prosecution,
such as the selling of patch sets or medallions that can later be
attached to generic merchandise and given the appearance of a genuine
product.As the Committee moves forward with its deliberations, we would
make several policy recommendations.
First, to the extent that Congress wishes to discourage sourcing in
China, there are several policy options that are far more effective
than the imposition of additional quotas. Swift implementation of new
trade agreements with Central America, such as the U.S./Central America
Free-Dominican Republic Trade Agreement (CAFTA), would promote more
imports from a region with a demonstrated capability and supply chain
that favors U.S. textiles and yarns. This, in turn, would promote more
U.S. textile jobs. Similarly, enactment of programs, such as that
proposed in the Tariff Relief Assistance Development Act of 2005 (S.
191), which would eliminate tariffs on countries like Bangladesh,
Cambodia, and Sri Lanka, would promote sourcing in poor, developing
countries that are highly dependent upon textiles and apparel for
employment and foreign exchange revenues.
Second, we encourage the Committee to focus on those areas of
China's WTO commitments where more progress can be made and where there
are demonstrated U.S. commercial interests at stake. From our
perspective, we believe greater attention to intellectual property
rights (in particular preventing counterfeiting of trademarks or
trademarked goods), distribution rights, and market access can promote
greater use of U.S. exports or U.S. branded products in China while
reducing revenue loss to U.S. intellectual property holders.
We also support resolution of the currency issue, primarily to
induce more certainty into the relationship. Some of our apparel
members and many of our footwear members are very dependent on China,
both to import inputs that are used for U.S. assembly as well as
finished products that are sold throughout the United States. Sudden
shifts in the currency value would disrupt supply chains in a way that
would ultimately harm U.S. interests. Likewise, imposition of
additional taxes on imports from China, such as recent Congressional
proposals, only raise emotions and uncertainty without making a
positive contribution to the bilateral economic policy debate.
Third, we believe the China safeguards should only be invoked where
the data shows a precise cause and effect between U.S. market
disruption and imports from China. We understand the EU is viewing
these safeguards as a ``last resort'' and only when the ``measures are
fully justified.'' We would encourage a policy that is more in line
with this thinking so that safeguard policy not act as a disruption to
the broader commercial relationship. Above all, we believe safeguard
policy should be part of a transparent process that leads to
predictable, fact-based outcomes.
In conclusion, we are mindful that many in our industry, and many
around the country, are concerned over the role that China will play in
the coming years. At the same time, we know that many in our industry
view China as an important strategic partner. While many disagree over
whether China is more a challenge or an opportunity, most agree that
the way forward involves a predictable and comprehensive approach that
is based on rules and not political imperatives.
Thank you.

Statement of Robert Stallman, American Farm Bureau Federation
The American Farm Bureau Federation (AFBF) appreciates the interest
of the House Committee on Ways & Means in the U.S./China economic
relationship, and is pleased to submit the following comments for
inclusion in the hearing record. As the nation's largest organization
of farmers and ranchers, Farm Bureau members are directly affected by
both farm product exports to China and farm product imports from China.
FBF has trade and economic concerns with China. Nevertheless, AFBF
has also found the Chinese to generally be constructive trading
partners. This is important because U.S. agriculture:

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

Unlike many other U.S. economic sectors, the agricultural products
sector enjoys a rapidly growing annual trade surplus with China of more
than $4.7 billion,\1\ an increase of 216 percent in 5 years. Since
1998, the U.S. has registered dramatic gains in exports (by value) of
soybeans, cotton, wheat, hides and skins and consumer-oriented products
such as dairy products and processed fruits and vegetables. In 2004
alone, the total value of U.S. agricultural exports to China grew over
the previous year by more than 94 percent to $6.45 billion. China is
now the fourth largest market for U.S. agricultural products, exceeded
only by North America and Japan.
---------------------------------------------------------------------------
\1\ U.S. Bureau of Census Trade Data / USDA-FAS BICO, CY2004
---------------------------------------------------------------------------
Since 2000, the value of agricultural imports from China has grown
at a slower rate of 88 percent during the period, starting from a much
smaller value base. China has made gains into the U.S. market for
intermediate and consumer-oriented products such as feeds and fodder,
fresh and processed fruits and vegetables including juices and
miscellaneous high-value products.
To U.S. agriculture overall, China is a great economic opportunity.
In some agricultural sub-sectors however, it is a substantial economic
threat.
China is a dominant world producer of many agricultural products
that have export potential, including corn, vegetables, fruits and
nuts, soybean meal, pork, sugar and confections, food ingredients and
rice. U.S. producers of horticulture and specialty crops are concerned
about the direct negative impacts that Chinese fruits and vegetables
are likely to have when they are approved for entry into the U.S.
market. The direct negative impacts are expected to be both in the form
of extreme price competitiveness (imported at price levels below the
U.S. cost of production) and increased exposure to the introduction and
subsequent control of new pests and diseases, which can be very costly.
Additional threats by China to U.S. agriculture result indirectly
from increasing competition in third country markets in which China is
or has established preferential or free trade agreements, especially
with several important customers of U.S. agricultural products in the
Asia-Pacific region, including Japan, Korea, Taiwan and the ASEAN
countries. Recent reports indicate in fact, that traditional sales of
U.S. corn to South Korea have declined as South Korean purchases of
corn from China have substantially increased.
SPECIFIC ISSUES THAT NEED CLOSE ATTENTION
For U.S. agriculture, the economic issues with China are
predominately trade oriented. China has made considerable progress in
trade liberalization, including its WTO agriculture commitments. It
still has some distance to go to be fully consistent with its WTO
obligations but we recognize that it will take time. As long as good
and meaningful progress is being made AFBF is satisfied to let that
progress continue.
There are some economic issues that do need more immediate, more
aggressive intervention because they are beginning to have meaningful,
negative and often times unfair repercussions to the U.S. economy.
Monetary Policy
Several have made the point regarding China's peg of its currency
to the U.S. dollar. AFBF feels strongly that China should become the
full-fledged member of the global economy that they seek to be.
However, part of the cost of that membership is exposing their currency
to market forces. AFBF supports the Administration's efforts to send
the strongest possible signals to China that it needs to take this step
soon. This transition should be done in a reasonable manner, but it
should be done nonetheless. The Chinese economy is strong enough and it
certainly has the monetary reserves to make this transition. China
should lay out a transparent process and initiate this transition soon.
If it is determined that China's management of its monetary policy
has the effect of providing a WTO-inconsistent government subsidy that
unfairly benefits Chinese product imports into the U.S. market, AFBF
would support the imposition of import duties on Chinese products. AFBF
policy is clearly opposed to the arbitrary imposition of import duties
that are not based on the outcome of a competent, procedural and WTO-
consistent examination of the issues.
Export Subsidies
The use of WTO-inconsistent export subsidies by Chinese officials
continues and has been expanded by provincial governments. The practice
of exempting corn, produced in China but destined for export markets,
from the requirement to pay value-added tax (VAT), while applying the
VAT to Chinese corn consumed domestically, is clearly a subsidy to
exported corn that competes against corn produced and exported by the
United States, and the subsidy may be getting larger. The VAT rate on
imported corn remains 13 percent but the base value on which the VAT is
calculated is established by the government, not by the market. Because
Chinese corn production in 2005 is forecast to be larger than total
domestic demand, corn traders believe China is expected to increase the
base value of corn from Y860 (U.S. $104) per ton to Y1100 (U.S.$133)
per ton and then rebate the 13 percent VAT on the larger base value
(approx. U.S.$3.77 more per ton).
The reduction of U.S. and other countries' corn sales to South
Korea, while Chinese corn sales to that same country correspondingly
increase, is good evidence that China has increased the use of export
subsidies to sell its excess production in 2005.
Moreover, application of the VAT on corn imported by private firms,
while at the same time exempting state enterprises from paying the VAT
on imported corn, discriminates against the private enterprises and
their suppliers.
Other Market Access Barriers
U.S. agricultural exports to China have increased substantially in
part because China has reduced many barriers to its market including a
reduction of tariff levels, bringing sanitary and phytosanitary
procedures into greater consistency with its WTO obligations, and
educating its officials about the procedures needed to be a member in
good standing of the WTO.
That said, China still maintains non-tariff barriers that inhibit
further imports of many U.S. agricultural products. The most obvious of
these is the manner in which China imposes additional, seemingly
arbitrary requirements on import shipments. The actions are applied
without prior notice and lack geographic consistency, they fail to
allow transition periods sufficient for trading partners to implement
compliance measures and they result in expensive delays in the issuance
of permits for quarantine inspections. The administration of AQSIQ
(Administration of Quality Supervision, Inspection and Quaratine)
Decree 73 on U.S. soybeans is but one instance where trade is easily
restricted by the Chinese under the guise of phytosanitary protection.
Application of U.S. Import Relief Statutes to Non Market Economics
(NME)
The failure of U.S. import relief statutes to aid the U.S. apple
industry in competing with imports of apple juice concentrate from
China is a major reason why such statutes must be amended to apply to
non-market economies such as China. The effort by U.S. apple producers
to reasonably compete in their domestic market, and in the process
preserve their entire pricing structure, was defeated by a procedural
matter even after the U.S. Department of Commerce and the International
Trade Commission confirmed the existence of product dumping and
material injury.
Rep. Philip English of Pennsylvania has introduced H.R. 1216, a
bill to extend countervailing duty provisions of the Tariff Act 1930 to
non-market economy countries. The ability of U.S. apple producers and
processors to base their unfair trade complaint on the presence of a
government subsidy could have been very helpful in being awarded
relief, rather than grief. AFBF believes that public debate on the
merits of H.R. 1216 is warranted and encourages the full Committee to
hold hearings on the bill for the purpose of facilitating that debate.
Import Duty Bonding Privileges by New Shippers
Another issue of considerable concern to AFBF is the failure of
U.S. law and administrative practice to prevent Chinese firms from
escaping their obligation(s) to pay import duties on products that have
been assigned such duties subsequent to antidumping investigations.
Existing U.S. law and administrative practice of the U.S. Customs &
Border Patrol allow importers to post bonds in lieu of cash deposits
for duties that must be paid on imports while the Commerce Department
conducts a New Shipper Review, which is required of new exporters to
the United States if the products exported are subject to an
antidumping order.
Too often, Chinese firms have evaded the proper payment of duties
by posting a bond for the duties owed and shipping product to the U.S.
subsequent to that bond. During this time, the Commerce Department is
undertaking its aforementioned New Shipper Review. After the review is
completed (up to 12 months after imports first appear on U.S. shores),
the Commerce Department attempts to contact the new exporter to collect
duties owed only to find that it has vanished. In its place is a new
exporter that, because it is new, must itself go through the New
Shipper Review process. In the meantime, efforts to collect duties owed
from the bond posted by the previous but now vanished exporter are met
with resistance, even litigation, by the issuing surety company. The
result is that millions of dollars of import duties are not paid,
Chinese exporters maintain their illegal competitive advantage over
U.S. companies, and U.S. firms lose faith and confidence in the ability
of their government to protect the principles of ``fair'' trade.
Rep. Charles Pickering of Mississippi has introduced H.R. 1039 as a
temporary remedy to this problem. AFBF supports the bill and urges the
Committee and Congress to enact the bill into law as quickly as
possible.
Thank you for the opportunity to provide comments to the Committee.
Again, AFBF thanks the Committee for its interest in and leadership on
this very important topic.

Statement of Donna Harman, American Forest & Paper Association
The American Forest & Paper Association (AF&PA) appreciates this
opportunity to present the forest and paper products industry's views
regarding United States-China Economic Relations & China's Role in the
World Economy. AF&PA is the national trade association of the forest,
pulp, paper, paperboard and wood products industry. The forest and
paper products industry accounts for more than 7 percent of total U.S.
manufacturing output and ranks among the top ten manufacturing
employers in 42 states. The more than 200 companies and related
associations AF&PA represents have a strong interest in making sure
that commitments made by China are met from the outset to establish a
solid basis for the continued growth of business and economic
opportunities.
AF&PA was a strong supporter of Permanent Normal Trade Relations
for China, and of China's accession to the WTO. Our industry's support
was based on the prospect that China's rapid economic growth would
generate strong demand for U.S. exports of paper and wood products. At
the same time, we recognized that the expectation of market
opportunities could only be achieved if China implements commitments to
open up its market and removes trade barriers--which were a condition
of its accession to the WTO.
While China has made progress toward becoming a market economy, the
Chinese government has been employing an array of industrial policy
tools to grow its manufacturing capacity and become a top supplier of
manufactured products to the world. In the forest products sector, this
has resulted in the rapid expansion of China's paper and wood
production. Consequently, there has been a substantial drop in market
opportunities for U.S. manufacturers and rapid growth in China's
exports of paper and wood products. This is particularly troubling
since China doesn't have the large fiber resource base needed for a
competitive forest products industry, and is almost wholly dependent on
imported fiber in the form of logs and other wood products, wood pulp
and recovered paper.
FORESTS PRODUCTS TRADE WITH CHINA

U.S. exports to China of paper and paperboard reached $491 million
in 2004, up from $328 million in 2001. While this is a healthy increase
and reflects China's rising paper and paperboard consumption and
overall reduction in tariffs, the longer term prognosis is not positive
as China's production capacity is rising at a rapid pace and is
displacing imports in key paper and paperboard grades. Over the same
time period, U.S. paper and paperboard imports from China more than
doubled, from $635 million to $1.3 billion last year.
To supply China's massive paper and paperboard capacity growth,
Chinese producers have had to turn to foreign supplies to meet their
fiber needs. The results have been skyrocketing demand for imported
wood pulp and recovered paper. In particular, the U.S. has become the
main source of China's recovered paper imports, affecting the U.S.
market for certain recovered paper grades. U.S. recovered paper exports
to China rose from just 1 million metric tons in 1998 to 5.9 million
metric tons in 2004, representing 13 percent of total U.S. paper
recovery.
China is a major market for U.S. wood products, particularly for
hardwoods used domestically in architectural applications and flooring.
U.S. hardwoods are also used for furniture, picture frames and other
manufactured wood articles exported back to the U.S., and to Europe and
other markets. As it currently stands, China is now the fourth largest
importer of all wood products; the largest importer of logs and the
world's second largest plywood producer, behind the United States. U.S.
wood product exports to China rose from $140 million in 2001 to $378
million in 2004. The U.S. is the fourth largest supplier of wood
products to China, behind Russia, Malaysia and Indonesia.
SUBSIDIES

China's domestic forest products industry faces a large fiber
supply gap due to insufficient domestic forest resources and strong
growth in demand for wood, pulp and paper to fuel both the domestic
market and exports. To assist the domestic industry, the Chinese
government has implemented a number of policy measures aimed at better
balancing China's fiber supply with domestic fiber demand over the
long-term as well as reducing dependence on imported processed wood and
paper products.
With a stated objective of encouraging domestic investment and
expansion in value-added forest products processing industries, China
has expanded its production capabilities in many valued-added paper and
wood processing enterprises. Many of the measures used to achieve this
rapid industry development include certain subsidy related measures
that may be in violation of WTO rules. In particular:

Using the tariff structure to encourage imports of raw
materials versus finished products (tariffs on pulp, logs and lumber
reduced to zero);
Protecting domestic producers via various non-tariff and
product standard barriers and anti-dumping investigations (newsprint-
1998, coated art paper--2002, kraft linerboard-2004);
Policy loans, subsides, and preferential tax polices for
domestic enterprises to invest in forest resources, processing
operations, and capacity expansions;
Expanding border trade value-added tax (VAT) provisions
to allow for large increases in low cost wood imports;
Active government and banking sector involvement in
financing, including subsidies and/or low interest loans and debt
forgiveness or extension of repayment terms.

Last year, AF&PA completed the study ``China's Subsidization of its
Forest Products Industry'', which examines and documents the various
financial, trade and policy measures that the Chinese government is
using to build its pulp, paper and wood processing industries and
supporting fiber resources. The study found that the Chinese government
is employing an array of industrial policy tools--especially
subsidies--to prop up state-owned enterprises, promote the introduction
of new technology, and build new production capacity. Some key findings
from the study:

$1.67 billion in government financing and loan interest
subsidies were granted for technology renovations of 21 state-owned
papermills from 1998 to 2002.
Policy banks such as the China Development Bank and the
Agriculture Bank of China are providing companies in the forest
products sector with low interest loans or loans with unusually long
repayment terms.
At the provincial and municipal levels, banks are engaged
in non-standard lending and other practices to attract foreign
investment, including debt forgiveness and debt-for-equity swaps,
extended loan repayment terms and preferential loan interest rates.
The Ministry of Finance has designated $1.73 billion for
the development of fast-growth-high-yield plantations by 2015.

AF&PA has consulted with USTR and the Department of Commerce on
these findings. Last fall, the U.S. submitted a series of questions to
China in the WTO regarding China's subsidy practices, including
subsidies to the forest products sector. The Chinese government
committed to respond to the U.S. questions regarding its subsidy
practices by the end of 2005.
While USTR has expressed concerns over China's subsidies practices
in the WTO, U.S. industries have not been able to resort to the use of
countervailing duty (CVD) law to such subsidy practices. Since 1984,
the U.S. Commerce Department has not applied CVD law to non--market
economies (NMEs) such as China, even though the WTO does not prohibit
the application of CVD law to NMEs. AF&PA, and a large group of U.S.
industries, supports H.R. 1216 and S. 593 to clarify the intent of
Congress by expressly providing for the application of CVD provisions
to China and other NMEs.
CURRENCY MANIPULATION

Under its WTO accession agreement, China committed to open up its
market across the board by reducing tariffs and other impediments to
trade. However, China effectively has nullified this commitment by
engaging in protracted large-scale buildup of foreign exchange in order
to keep its currency, the Yuan, at a fixed exchange rate of 8.28 Yuan
to the U.S. Dollar for the past 10 years. This exchange rate level is
significantly weaker than the Yuan would be otherwise based on
international market forces alone. Many economists estimate that
China's currency is undervalued by some 40 percent. As a result, U.S.
exporters of forest and paper products, as well as other U.S.
exporters, have been at a significant competitive disadvantage when
doing business in the Chinese market or when competing in the U.S. or
third country markets against Chinese products.
The effect of the significant undervaluation of the Yuan has
impacted more than just the trade balance. China's accumulation of
dollar reserves means that for every dollar the Central Bank of China
purchases it is creating 8.28 new Yuan. As a result, China's money
supply is growing at a rapid pace, providing a large source of cheap
funds for investment in massive manufacturing capacity including in the
paper and wood sectors.
Government manipulation of exchange rates for the purpose of
gaining a competitive advantage for local industry can substantially
offset the balance of benefits U.S. trade negotiators achieve in any
trade agreement. The General Agreement on Tariffs and Trade (GATT)
Article XV, now incorporated within the WTO, addresses Exchange
Arrangements and stipulates that members should not take exchange rate
actions which ``frustrate the intent of the provisions of this
Agreement'', namely, negotiated reduction of tariffs and other barriers
to trade. For this reason, AF&PA urges the Administration to initiate
formal negotiations on an expedited basis for the purpose of ending
China's currency manipulation.
ANTIDUMPING PROCEEDINGS

China has used antidumping investigations to protect inefficient
producers and to reduce import competition for new manufacturing
capacity. On March 31, 2004, China initiated an antidumping
investigation against U.S. unbleached kraft linerboard--the raw
material used in the manufacture of corrugated shipping containers. If
China proceeds to impose antidumping duties on U.S. kraft linerboard,
it would severely impact more than $115 million in U.S. exports to that
country.
This is the third Chinese antidumping investigation against U.S.
paper products in the past 6 years and follows a pattern where such
investigations are launched against imports of paper products that are
experiencing significant growth in domestic manufacturing capacity.
Indeed, in this case there is no evidence that the domestic Chinese
linerboard producers identified in the petition are in any way injured.
Based on publicly available information, all the identified producers
are profitable, have ready access to capital, are expanding rapidly,
and increasing market share. It would be especially egregious should
China stop imports of U.S. kraft linerboard that is primarily used to
package China's massive exports to the United States that have resulted
in the U.S. bilateral trade deficit with China which exceeded a record
$160 billion last year.
While a preliminary determination is still pending more than 1 year
after the initiation of the investigation, AF&PA would like to
highlight two particular issues:

Errors in the Scope of the Investigation: The specific
Harmonized System (HS) codes identified in the official scope of the
investigation conflict with the written description of the product
subject to the investigation in several significant respects.
Specifically, the scope of the investigation identifies several HS
categories that describe products that are not within the scope of the
investigation and excludes the proper HS category for kraft linerboard.
AF&PA is concerned that these errors will result in the use of
inaccurate import data by the Chinese authorities and also could result
in duties being imposed on products not subject to the investigation.
China's Ministry of Commerce (MOFCOM) must correct the HS codes that
are inconsistent with the written description of the scope of the
investigation and adjust the statistical data used in the investigation
accordingly.
Inadequate Access to Information: The Investigation
Bureau of Industry Injury (IBII) did not make available to the U.S.
industry copies of the questionnaire responses of the Chinese industry
for more than a month after the due date for questionnaire responses.
This lack of timely access to information is impairing the ability of
the U.S. industry to present fully its arguments against imposition of
antidumping duties and is inconsistent with China's obligations under
the WTO Antidumping Agreement. That Agreement specifically requires
that ``evidence presented in writing by one interested party shall be
available promptly to other interested parties participating in the
investigation'' (Art. 6.1.2) and ``the authorities shall whenever
practicable provide timely opportunities for all interested parties to
see all information that is relevant to the presentation of their
cases'' (Art. 6.4).
ILLEGAL LOGGING/SMUGGLING

Of growing concern is the amount of illegally harvested timber that
may be entering the China market. International environmental agencies
have documented significant discrepancies between China's import
statistics and the export statistics of some of China's wood trading
partners, particularly in border areas with Myanmar and Russia. Illegal
logging affects not just the health of the forest in particularly
sensitive regions, but also undermines public acceptance of commerce in
legally harvested and traded forest products. U.S. trade opportunities
in China are directly affected by the abundance of inexpensive,
illegally harvested timber. Points raised in a study recently
commissioned by AF&PA, Illegal Logging and Global Wood Markets: The
Competitive Impact on the U.S. Wood Products Industry (November 2004)
include:

China is a price sensitive wood market where an exploding
demand is fueling wood imports, much from countries without strong
environmental or forest management controls.
Despite a logging ban and other cutting restrictions
which have led to a significant decline in Chinese timber harvests,
unauthorized timber harvesting continues to be a problem.
It is estimated that 40% of Russian log imports entering
China are suspicious (potentially illegal) because of excess cutting,
harvesting without authorization or as undocumented/unreported exports.
Imported Russian lumber is also suspicious (manufactured from illegal
logs).
The impact of illegal wood in China extends to Chinese
exports, for example plywood or wooden furniture, made with illegal
tropical hardwoods from Africa and SE Asia.

Compounding the problem is that illegally logged wood is frequently
smuggled into mainland China in an effort to avoid the 17% VAT, or is
sent to a third country where it is processed and then re-exported to
China. The smuggling activity is putting U.S. exporters at a
competitive price disadvantage. Progress is being made in shutting down
smuggling operations, but concern still exists over the presence of
illegally logged wood in the marketplace.
CONCLUSION
AF&PA agrees with the Administration that China has made important
strides in meeting its WTO obligations. However, the benefits of the
economic relationship with China have been largely one sided, with
China continuing to maintain a range of industrial policies that
significantly reduce export opportunities for U.S. industry and give
Chinese producers an unfair advantage in the U.S. and third country
markets. The Administration needs to address the critical issues of
subsidies, currency manipulation, and illegal logging in both bilateral
negotiations with China and in the WTO, as appropriate. AF&PA believes
the Congress can take action in the short-term by passing H.R. 1216 and
S. 593 to clarify the intent of Congress by expressly providing for the
application of CVD provisions to China and other NMEs. In addition, we
urge the Congress to consider other WTO compliant measures that would
to encourage swift action on the part of the Chinese government to
revalue their currency.
AF&PA appreciates this opportunity to provide comments on this
issue. Please do not hesitate to contact us for further information
regarding this submission.

Statement of Shane Downey, American Foundry Society
The American Foundry Society (``AFS'') submits these comments for
the record of the April 14, 2005 hearing. The AFS regrets that time
limitations did not permit the Committee to hear from AFS witnesses in
person, but hopes that these written comments will help the Committee's
understanding of serious problems faced by the U.S. foundry industry
because of China's trade and economic policies.
Overview of the U.S. Foundry Industry

Foundry products encompass all cast products that are formed by
pouring molten metal into molds or dies and allowing the metal to
solidify. The terms ``castings'' and ``foundry products'' are used
interchangeably. The products manufactured by foundries are typically
divided into several categories, based on the type of metal that is
cast (i.e., iron, steel, aluminum, copper, and other non-ferrous
metals). Most foundries work only with one type of metal.
Castings are used in a wide variety of applications, the three
larges of which are automotive; machinery and equipment; and other
transportation equipment. Other applications include piping systems
(pipe, valves, fittings) and construction and municipal applications.
The foundry industry is critical to the manufacturing sector.
Indeed, about 90 percent of all U.S.-manufactured goods contain some
type of cast product.
The future of the U.S. foundry industry, however, is being severely
threatened by low-priced imports, primarily imports from China. Imports
have become a large and growing share of the U.S. market for foundry
products. Increasing imports have displaced U.S. sales by domestic
foundries in two key ways: first, imports of foundry products take
sales directly from the domestic industry, as purchasers such as
automotive original equipment manufacturers (``OEMs'') have increased
their foreign sourcing of foundry-made parts. Second, further-
manufactured good or finished goods that contain foreign-made castings
(such as imports of finished construction equipment) are increasingly
being imported. Thus, imports directly take sales away from domestic
foundries and indirectly supplant domestic castings in finished
products; both have caused a reduction in demand for foundry products
within the United States market.
A few statistics highlight the foundry industry's decline. In 1984,
the U.S. industry was comprised of 3,400 foundries; in 2004, there were
just 2,380--a loss of more than one thousand businesses, and a
percentage contraction of almost 30 percent. Over 50 foundries have
been lost every year for the past 20 years.
These closures have a devastating impact on communities across this
country. Traditionally, and corresponding to the great diversity of
products made by this industry, the U.S. foundry products industry has
been made up of a large number of relatively small companies: 80
percent of U.S. foundries have fewer than 100 employees. With foundry
companies being located in every state of the Union, plant closures
have been felt across the United States.
China's Policies and How They Affect U.S.-China Trade

Of all current sources of castings imports, China is by far of the
greatest concern to U.S. foundries. Not only is there a huge and
virtually limitless capacity in China for castings products, with
prices that undercut all other foreign sources as well as U.S. prices,
but China appears to provide a number of subsidy programs that are
contingent upon exports. Other Chinese subsidy programs are contingent
on the use of domestic over imported goods in the manufacturing
process.
The Office of the U.S. Trade Representative's 2005 report on trade
barriers, an excerpt of which is attached here, provides more detail on
the suspected subsidies and also expresses frustration from lack of
transparency about Chinese programs and China's continued failure to
make any of the subsidy notifications that have been required of China
since it became a member of the World Trade Organization 3 years ago.
(Only in November 2004 did China indicate that it would submit a
subsidies notification during 2005.)
It is ironic, moreover, that Chinese foundries enjoy unimpeded
access to the U.S. market while U.S. foundries trying to do business in
China are faced with substantial barriers. For example, a U.S. bronze
foundry company, Bronze Craft, has been trying to establish a foundry
in China to serve the Chinese market. It has been informed by its
broker that if it plans to manufacture and sell its products in China
it will have a 17 percent tax levied on its products--but if it were to
manufacture in China and export its products, it would be given a
preferential tax deferral of 17 percent. This is, sadly, a fairly
common example of what U.S.-China trade is like today: American
manufacturers are welcome to set up plants in China, provide jobs to
Chinese workers and purchase Chinese inputs to make those goods, but
can't expect to sell there. The only economic incentive for setting up
a plant in China is to send the goods back to markets like ours.
What Can be Done to Help the U.S. Foundry Industry

The U.S. foundry industry is facing a bleak future, but if Congress
and the Administration act soon, this industry may be able to survive.
When China joined the WTO, it agreed to certain conditions that
were designed to protect U.S. industries against surges of imports that
were injuring them. The safeguard mechanism was codified in section 421
of the Trade Agreements Act 1974, as amended. Although the
Administration has said that it is committed ``to maintaining the
integrity of section 421 as a viable and useful trade mechanism'',\1\
the President's actions, unfortunately, directly contradict this. Not
one of the section 421 cases that has gone to the President with
recommendations for relief from the U.S. International Trade Commission
has resulted in the President giving any relief. Given the results of
the 421 cases to date, it is not likely that any industry or U.S.
producer will seek a remedy under section 421; and even if one were
willing to commit to the significant resources needed to pursue a 421
remedy, this Administration's record to date gives little hope of a
successful result.
---------------------------------------------------------------------------
\1\ Testimony of Deputy United States Trade Representative Peter F.
Allgeier before the House Appropriations Committee on Commerce,
Justice, State, and the Judiciary and Related Agencies (May 22, 2003).
---------------------------------------------------------------------------
As mentioned, the President has not provided relief in any section
421 case to date, and we believe this is because there are several
problems with the Administration's approach to the statute. To give
U.S. manufacturers a fair shot at getting the relief they deserve, we
ask that the Committee consider the following changes to section 421:
The President amd/or Office of the U.S. Trade Representative should
be prohibited from revisiting facts found, or conclusions drawn by the
fact-finder in section 421 investigations (i.e., the ITC). The ITC
receives reams of briefs and data (including confidential submissions)
and holds public hearings in which all parties can be questioned under
oath and respond to all arguments raised. The Commission issues a
report and opinion that addresses each of the issues raised by the
contending parties. Recognizing that the Commission would engage in a
fair and exhaustive process, Congress indicated in the legislative
history to section 421 that the ITC findings be given great weight by
the President. Unfortunately, the interagency process that has been
established under section 421 has resulted in staff essentially
reviewing and revisiting factual determinations made by the ITC.
Indeed, it appears that the interagency staff acts like an appellate
body, second-guessing the determinations of the six presidentially
appointed members of the Commission. AFS does not think that this is
what Congress intended, or is the best process otherwise.
This approach certainly violates the congressional intent that the
ITC's findings be given great weight by the President: the legislative
history to section 421 explains that Congress created a presumption in
favor of the President giving relief when the ITC made an affirmative
finding of market disruption. Moreover, Congress said that presumption
could be overcome only if the President finds that providing relief
would have an adverse impact on the United States economy ``clearly
greater than the benefits of such action, or, in extraordinary cases,
that such action would cause serious harm to the national security of
the United States.'' H.R. Rep. No. 106-632 at 18 (2000), reprinted in
2000 U.S.C.C.A.N. 727, 737. This standard makes sense: the President is
to accept the ITC's determination unless there are broad domestic or
international reasons not to do so. Disagreement with a factual
determination does not rise to this standard.
The President should be prohibited from using certain
justifications to deny relief. For example, one of the reasons given by
the President in denying relief to U.S. industries under section 421
has been that the proposed relief would be ineffective, given the
presence of third-country imports in the United States that could
increase following a decline in Chinese imports. This justification
should not be permissible for denying relief for at least two reasons.
First, relief under section 421 does not necessarily have to cause a
decline in imports from China: it could have the effect of encouraging
a rise in prices to a reasonable level at which U.S. goods could
compete. And, because Chinese imports tend to be the lowest-priced
goods in the market among all imports, an increase in the prices of
Chinese goods often leads to an increase in other imports' prices, so
it is also unlikely that third-country imports will displace Chinese
imports. Second, it would be a rare instance, if ever, in which imports
from other countries are not in the U.S. market at the same time as
Chinese imports are in the market, so using this as a reason to deny
relief ensures that there will never be a case in which the President
would afford relief.
The President should also not be allowed to deny relief through the
use of piecemeal aspects of the ITC's record. The President has, for
example, said that relief was not justified because the ITC's
econometric model known as ``COMPAS'' did not support it. The COMPAS
model, first, is controversial because it can have greatly varying (and
unreliable) results depending upon the nature of the databases to which
it is applied, and its utility has, thus, not been proven across the
wide variety of industries and cases in which it has been applied.
Second, even when working with optimum data conditions, COMPAS
addresses only the first year of potential relief under section 421.
Because it will always take a certain amount of time for any program of
relief to begin to work and more time for relief to become effective,
any assessment of whether relief should be given based only on the
first year following implementation would always or virtually always
lead to a negative result. Not only should COMPAS model results not be
allowed to deny relief, but the President should not be allowed to pick
and choose from the ITC's record those parts he chooses to justify his
decision. Congress intended for the President to consider the ITC's
findings as a whole, not individual aspects that may suit a different
outcome.
China and the United States each agreed to the section 421
safeguard mechanism as part of China's accession to the WTO. U.S.
industry needs a workable, effective mechanism, not one that appears
never to be used to give relief when needed. As the Committee considers
our trade with China, AFS urges you to modify--and make usable--the
section 421 process.
______

quasi-governmental industry associations formed to take the place of
the ministries that governed production during the earlier central
planning era. Foreign investors report that the industry associations
are using the power to issue export licenses to force companies to
participate in association-supported activities. For example, the steel
producers' industry association will not issue an export license to any
company that does not contribute to its antidumping defense funds., as
the January 1, 2005 deadline for removal of global textile quotas drew
near, China announced plans to impose export duties on certain In
categories of textile and apparel products. Details of this plan are
still unclear but appear to represent an effort by China to manage the
export growth of these products in response to concerns from China's
trading partners.
Export Subsidies
China officially abolished subsidies in the form of direct
budgetary outlays for exports of industrial goods on January 1, 1991.
China agreed to eliminate all subsidies prohibited under Article 3 of
the WTO Agreement on Subsidies and Countervailing Measures, including
all forms of export subsidies on industrial and agricultural goods,
upon its accession to the WTO in December 2001.
A general lack of transparency makes it difficult to identify and
quantify possible export subsidies provided by the Chinese government.
China's subsidy programs are often the result of internal
administrative measures and are not publicized. Many of the subsidies
take the form of income tax reductions or exemptions that are de-jure
or de facto contingent on export performance. They can also take a
variety of other forms, including mechanisms such as credit
allocations, low-interest loans, debt forgiveness and reduction of
freight charges. U.S. industry has alleged that subsidization is a key
reason that Chinese exports are undercutting prices in the United
States and gaining market share. Of particular concern are China's
practices in the textiles industry as well as in the steel,
petrochemical, high technology, forestry and paper products, machinery
and copper and other non-ferrous metals industries.
U.S. subsidy experts are currently seeking more information about
several Chinese programs and policies that may confer export subsidies.
Their efforts have been frustrated in part because China has failed to
make any of its required subsidy notifications since becoming a member
of the WTO three years ago. At a meeting of the WTO's Council for Trade
in Goods in November 2004, China committed to submit its long-overdue
subsidies notification in 2005.
Since shortly after China acceded to the WTO, U.S. corn exporters
have been concerned that China provides export subsidies on corn. In
2002 and 2003, it appeared that significant quantities of corn had been
exported from China, including corn from Chinese government stocks, at
prices that may have been 15 to 20 percent below domestic prices in
China. As a result, U.S. corn exporters were losing market share for
corn in their traditional Asian markets, such as South Korea and
Malaysia, while China was exporting record amounts of corn. In 2004,
however, trade analysts began to conclude that, because of several
economic factors, including changes in the relationship between
domestic prices and world prices, China is now trending toward becoming
a net importer of corn.
INTELLECTUAL PROPERTY RIGHTS (IPR) PROTECTION
While China has made significant progress in its efforts to make
its framework of laws, regulations and implementing rules WTO-
consistent, serious problems remain, particularly with China's
enforcement of intellectual property rights. Throughout 2004, the
United States placed the highest priority on the need for improvements
in China's enforcement efforts, as counterfeiting and piracy in China
are at epidemic levels and cause serious economic harm to U.S.
businesses in virtually every sector of the economy. In April 2004, in
response to concerns raised by the United States, China's Vice Premier
Wu Yi presented an ``action plan'' to address the IPR problem in China.
Intended to ``substantially reduce IPR infringement,'' this action plan
calls for improved legal measures to facilitate increased criminal
prosecution of IPR violations, increased enforcement activities and a
national education campaign. The United States is monitoring
implementation of this action plan closely and will conduct an out-of-
cycle review in early 2005 under the Special 301 provisions of U.S.
trade law to assess China's implementation of its IPR commitments. The
United States will take whatever action is necessary at the conclusion
of the out-of-cycle review to ensure that China develops and implements
an effective system for IPR enforcement, as required by the WTO's
Agreement on Trade-Related Aspects of Intellectual Property Rights
(TRIPS Agreement). Supplementing these efforts is the Strategy
Targeting Organized Piracy (STOP!), a U.S. Government-wide initiative
begun in October 2004 to empower U.S. businesses to secure and enforce
their intellectual property rights in overseas markets, to stop fakes
at the U.S. borders, to expose international counterfeiters and
pirates, to keep global supply chains free of infringing goods, to
dismantle criminal enterprises that steal U.S. intellectual property
and to reach out to like-minded U.S. trading partners in order to build
an international coalition to stop counterfeiting and piracy worldwide.
Legal Framework
In anticipation of its accession to the WTO, China began modifying
the full range of IPR laws, regulations and implementing rules,
including those relating to patents, trademarks and copyrights, in an
effort to comply with the TRIPS Agreement. By the end of 2001, China
had completed amendments to its patent law, trademark law and copyright
law, along with regulations for the patent law and regulations
addressing computer software protection and the protection of layout
designs of integrated circuits. After it acceded to the WTO, China
issued regulations for the trademark law and the copyright law. China
also issued various sets of implementing rules and judicial
interpretations in the patent, trademark and copyright areas. Overall,
the legal changes made by China represent major improvements that have
moved China generally in line with international norms in most key
areas, although more work needs to be done, particularly with regard to
administrative and criminal enforcement. In addition, new legislation
may be required in certain ``cutting edge'' areas.

Statement of John Nolan, American Iron and Steel Institute, China
Currency Coalition, and Steel Manufacturers Association
My name is John Nolan, and I am Vice President and Manager of Sales
and Marketing for Steel Dynamics, Inc. (SDI), a producer of a broad
array of high-quality, carbon flat-rolled, structural, and bar steels.
SDI was founded in 1993 as a new, independently financed, American
steel company with several mini-mills and steel-processing operations
located in Indiana, and our total annual capacity now exceeds 4 million
tons. I am submitting this written statement on behalf of the American
Iron and Steel Institute (AISI), the China Currency Coalition (CCC),
and the Steel Manufacturers Association (SMA), all organizations to
which SDI belongs.
There can be no reasonable doubt that China presents an enormous
challenge for the United States. The single greatest commercial
disadvantage that the U.S. faces is China's manipulation of its
currency. The undervaluation of the yuan is estimated to be about 40
percent and acts both as a subsidy for Chinese exports to the United
States and third countries and as a hidden duty on U.S. products that
would be imported into China. From our perspective, the situation is
not unlike being in a 100-yard dash and starting at least 40 yards
behind your chief competition, not a good position in which to be.
Last week, as you know, Chairman Hunter and Congressman Ryan
introduced H.R. 1498, the Chinese Currency Act of 2005, a bipartisan
effort to address in a constructive manner an extremely serious threat.
The AISI, CCC, and SMA all wholeheartedly support this legislation,
which is a thoughtful attempt to hold China to account for its currency
manipulation in a way that is consistent with the agreements of the
World Trade Organization (WTO).
It is vitally important that China's undervaluation of the yuan be
seen as the violation that it is. China must not be allowed to ignore
its international legal obligations at the WTO. Exchange-rate issues
become trade issues as a practical matter and are recognized as such
under Article XV of the General Agreement on Tariffs and Trade.
Consequently, they should no longer be considered to be solely within
the purview of the Treasury Department and monetary policy. When
currency manipulation acts as a prohibited export subsidy and
facilitates imports from China, the result is market disruption in the
United States.
The Ryan-Hunter bill rightly recognizes this distinction and would
amend the U.S. countervailing duty statute and the China-specific,
market-disruption statute to enable U.S. industries and workers to
pursue relief under either or both laws against subsidized, injurious
imports into the United States from China. Also importantly, in a case
in which market disruptions were found, the Ryan-Hunter bill would
prohibit the Secretary of Defense from procuring Chinese-origin
products if the Secretary determined that the U.S.-made products like
the imports from China were critical to the U.S. defense industrial
base. The President could waive this prohibition on a case-by-case
basis only if he decided waivers were in the national security
interests of the United States.
Along these same lines, we also enthusiastically support H.R. 1216,
introduced by Congressman Phil English and others, which would clarify
that the U.S. countervailing duty statute applies to imports from
nonmarket-economy (NME) countries. These WTO-consistent bills are a
valuable part of the broader effort to check China's unlawful
subsidization.
Finally on this subject, I want to convey a sense of urgency.
Valuable time is being lost, and the figures on China's enormous
foreign-currency reserves, bilateral trade surplus with the United
States, and global trade surplus continue to rise alarmingly and at an
unsustainable pace from the vantages of the United States and China
itself in the final analysis. Even so, the Treasury Department in
recent years has refused in its semi-annual reports to find any
currency manipulation and undervaluation by China of the yuan. This
reluctance is unsettling and confusing. During the period 1992-1994,
the Treasury Department in five semi-annual reports made affirmative
findings of currency manipulation by China on the strength of data far
below the levels of today. A chart showing these contrasts is attached.
More than negotiation with China is needed to avoid serious adverse
consequences for the economic and security interests of the United
States.
The United States needs to communicate a clear, unified,
consistent, and apolitical position to the Chinese on the important
business issue of their currency manipulation. This position needs to
address the yuan's undervaluation for the prohibited export subsidy
that it is; it needs to address the impact of the yuan's undervaluation
on U.S. manufacturers; and it needs to address the dangers of China's
currency manipulation to the Chinese economy going forward.
While China's manipulation of its currency is of paramount concern,
not surprisingly, we have a number of concerns regarding important non-
currency matters, and it is essential to get these right as well.
WTO Compliance Problems

Ensuring that China fully implements and abides by its WTO
commitments--and that U.S. industries have ready and meaningful access
to WTO-sanctioned trade remedies--is a top priority to industries in
the United States.
With regard to China's compliance record, we have growing concerns
about the pace and thoroughness of China's efforts to comply with its
WTO obligations. Particularly worrisome is that China:

Imposes WTO-inconsistent restrictions on the exportation
of key raw materials;
Provides significant subsidies beyond its currency
manipulation to its manufacturing and other industries;
Fails to meet key implementation milestones (e.g., on
trading and distribution rights);
Continues to pressure the U.S. and others to end
nonmarket-economy treatment in antidumping (AD) cases, in spite of
China's failure to eliminate its non-market practices;
Continues to pressure foreign countries to eliminate
China-specific ``safeguard'' provisions early (e.g., section 421 in the
U.S.), despite numerous findings of disruptive trade, and threatens to
take countermeasures; and
Manipulates its value-added tax system to benefit Chinese
companies.

Chinese Government Subsidies

In China, key national, provincial and local governmental goals are
to promote investment, exports and employment. Governmental policies
are used to ``direct'' or ``manage'' corporate decisionmaking in
manufacturing and other industries. For example, at industrial parks
throughout China, a wide variety of tax-related investment incentives
are advertised to encourage direct foreign investment, with exemptions
and reduced rates often linked to ``technologically advanced''
enterprises and to export levels (that is WTO-illegal).
We believe it is well past time to do an in-depth analysis of the
entire government-industry relationship in China. It should, at a
minimum, explore such factors as: government ownership; privatization
and private ownership; land ownership and control; price coordination;
other administrative guidance; banking and finance; utility rates;
infrastructure development; taxation; restraints on imports;
restrictions on exports; research and development; worker training and
retraining; and rationalization and the closure of uneconomic
enterprises.
China's Unacceptable Position in the OECD Steel Subsidies Agreement
(SSA)
Negotiations

China is already the world's largest producer and consumer of steel
by far (with nearly 30 percent of total world steel production and
consumption). Its actions are having a growing impact in a number of
areas of direct importance to the global steel industry--including
trade in raw materials and activity in other manufacturing sectors.
The positions that the government of China has taken in the SSA
negotiations are revealing of larger aims. China would like to use
these negotiations (whose initial goal was to enhance subsidy
disciplines in the global steel sector) to obtain relief from its WTO
accession obligations. The three steel industries of North America have
spoken with one strong, united view on China's goals in the SSA
negotiations. They oppose:

Granting China market-economy status in steel antidumping
cases;
Guaranteeing that there will be no use of the ``special
safeguard'' mechanism against Chinese steel products; and
According China status as a ``developing country'' and
giving it preferential treatment of any kind in the SSA.

At a time when China is running enormous trade surpluses with the
United States and North America:

1. We must retain an unchallenged right to use the special
safeguard mechanism if there are surges of imports from China of steel
or any other product;
2. We must retain an unchallenged right to apply NME methodology
in AD cases involving imports from China until steel and other key
sectors of the economy in China are no longer under governmental
regulation or control; and
3. China should comply fully with its WTO commitments and
eliminate all of its direct and indirect subsidies to steel.
Need to Get Our Own House In Order

We need to continue to make ourselves much more competitive through
a comprehensive and proactive approach that might be called ``trade
policy plus.'' With regard to domestic policy, we need to do all we can
to help:

Make steel producers and our customers in the U.S. and
North America more competitive;
Look at our own natural advantages; and
Reform tax, litigation, regulatory, health care and
energy policies.

The goal must be to make it more attractive to invest in
manufacturing--and infrastructure--in the NAFTA region. China is in the
process of building a first-class, nation-wide infrastructure. As it
does, it will drive down production costs for manufacturing and other
industries even more.

[GRAPHIC] [TIFF OMITTED] 23921A.017

Statement of David L. Karmol, American National Standards Institute
Introduction
The standardization policies and practices of the People's Republic
of China (hereinafter referred to as either ``PRC'' or ``China'') have
significant ramifications for American firms that wish to export to the
PRC market or who wish to source manufacturing in China. As described
in this testimony, recent events indicate that stakeholders in the PRC
may have been considering the use of standards as trade barriers as a
strategy to shelter certain of China's growing industries.
It is well established in the community of nations that standards
should meet societal and market needs and should not be developed to
act as barriers to trade. In approving the World Trade Organization
(WTO) Technical Barriers to Trade Agreement, WTO members established
globally accepted principles as a framework to promote cooperation and
discourage the use of standards as trade barriers.
During 2004, the PRC government completed its own investigation of
the nation's standards system, identifying problems and suggesting
solutions. The issuance of these strategy reports and the seemingly
positive content identifying internal changes to be made to the PRC
standardization system has been applauded by the American National
Standards Institute (ANSI), administrator and coordinator of the United
States' private sector-led and public sector-supported voluntary
consensus standardization system.
ANSI has offered its support in carrying out the goals to reform
the PRC standards system and will encourage support of a process that
is driven by marketplace demand where standards are developed in r
esponse to specific concerns and needs expressed by industry,
government, and consumers.
Policy Considerations
To assist in the mitigation of concerns about the Chinese
standardization policy, ANSI offers the following policy considerations
for review and deliberation by the Ways and Means Committee of the
United States House of Representatives and for consideration by
stakeholders in the PRC:
The global economy will be best served if the PRC joins with the
United States and other nations in embracing the globally accepted
principles of standardization endorsed by the WTO (see Annex A). In
particular, support should be given to open and inclusive participation
in standardization activities; balancing the interests of all
stakeholder groups so that the outcomes are representative and broadly
supported; and maximizing the participation of, and value to, both
intellectual property rights (IPR) holders and implementers.
Voluntary consensus standards enable industry growth, promote
vendor differentiation and allow for adaptation to meet unique consumer
and stakeholder needs. To the extent that the PRC adopts existing and
globally recognized voluntary standards--rather than developing unique
standards for use only in China--the nation and its growing export
market will benefit.
The inclusion of intellectual property, under reasonable and non-
discriminatory (RAND) terms and conditions, in voluntary consensus
standards provides benefit to the contributor of that intellectual
property via licenses and/or recognition and to implementers of the
standard via the reduced need to support multiple specifications.
Companies in China are encouraged to consider offering intellectual
property for inclusion in globally recognized standards.
The global landscape is rich with entities, systems and processes
that support regional and international standardization activities.
These include treaty organizations where governments are members; non-
treaty organizations whose membership is comprised of national
representatives; professional and technical organizations whose
membership is on an individual or organizational basis; and through
consortia whose membership is typically company and industry based.
The PRC will benefit by broadening its definition of
``international standard'' to include documents that have been either
developed or ratified by any consensus-based organization pursuant to
transparent policies that are reasonable and non-discriminatory.
China's current definition is limiting in that it applies only to
standards that have been approved by the International Organization for
Standardization (ISO), International Electrotechnical Commission (IEC),
and the International Telecommunication Union (ITU).
As a means of fostering both competition and innovation,
governments in all nations should allow stakeholders, particularly
companies, to choose among the different voluntary standards that may
be applicable.
The above policy considerations are aligned with high-level
strategies developed by the U.S. Department of Commerce following the
issuance in May 2004 of ``Standards and Competitiveness--Coordinating
for Results,'' a report by then Commerce Secretary Donald Evans
acknowledging the growing awareness of standards as a key trade issue
for U.S. exporters to PRC.
These considerations are also aligned with the latest edition of
the draft United States Standards Strategy,\1\ a guidance document
developed during 2004 and 2005 by members of the U.S. standardization
community, including representatives of industry,\2\government,
consumers, academia and more. The Strategy's purpose is to establish a
framework that can be used by all stakeholders to advance U.S.
viewpoints on global trade issues--such as those arising with China and
other trading partners; key national priorities such as homeland
security and emerging technologies such as nanotechnology; consumer
health and safety; and more. A key aspect of the Strategy is reference
to the requirements of the WTO's Technical Barriers to Trade as related
to standards practices.
---------------------------------------------------------------------------
\1\ The United States Standards Strategy (draft second edition) is
an update of the National Standards Strategy for the United States
(first edition--August 2000).
\2\ Representatives of the National Association of Manufacturers
(NAM) have been actively involved in the process of updating the U.S.
Standards Strategy; William Primosch, NAM's senior director of
international business policy, headed the working group drafting the
international section of the Strategy.
---------------------------------------------------------------------------
The current draft version of the U.S. Standards Strategy can be
found on ANSI's website at. The draft is expected to be finalized by
mid-year 2005.
Call for Congressional Recognition and Endorsement
Congressional recognition and endorsement of the U.S. Standards
Strategy will provide valuable support to the private sector as it
engages with the PRC and the various governmental and private standards
organizations in China. We encourage the Ways and Means Committee to
offer a resolution or other legislative vehicle to enable the Congress
to formally endorse the U.S. Standards Strategy.
Background on the U.S. Standardization System and the Role of the
American National Standards Institute (ANSI)
The U.S. private sector-led, voluntary standardization system has
been in existence for more than 100 years. It is a highly decentralized
system and naturally partitioned into industrial sectors that are
supported by numerous independent, private sector standards development
organizations (SDOs). It is a system that is demand-driven by the
marketplace with standards typically developed in response to specific
concerns and needs expressed by industry, government, and consumers.
Since 1918, this system has been administered and coordinated by
the American National Standards Institute (ANSI) with the cooperation
of the private sector and the Federal, state and local governments.
ANSI does not develop standards. Rather, it functions as a central
clearinghouse and coordinating body for its member organizations. The
Institute is a unique partnership of industry, professional, technical,
trade, labor, academic and consumer organizations, as well as
government agencies. These members of the ANSI federation actually
develop standards or otherwise participate in their development,
contributing their time and expertise in order to make the system work.
ANSI ensures the integrity of the U.S. standards system by:

establishing a set of due process-based ``essential
requirements'' that SDOs may follow in order to manage the consensus
standards development process in a fair and open manner,
accrediting SDOs who adhere to these requirements,
approving candidate standards from ANSI-accredited SDOs
as American National Standards (ANS), and
conducting regular audits of the ANS activities of ANSI-
accredited SDOs to ensure ongoing compliance with ANSI's essential
requirements.

ANSI has accredited hundreds of SDOs across a range of industry
sectors. These industries include (but certainly are not limited to)
telecommunications, medical devices, heavy equipment, fire protection,
information technology, petroleum, banking and household appliances.
There are now approximately 10,000 ANSI-approved ANS that address
topics as diverse as dimensions, ratings, terminology and symbols, test
methods, interoperability criteria, product specifications, and
performance and safety requirements. These standards development
efforts serve the public interest and are being applied to new critical
areas such as the environment, healthcare, homeland security and
nanotechnology.
The Institute's approval of a candidate standard as an ANS verifies
that the principles of openness and due process have been followed and
that a consensus of all interested parties has been reached. Due
process requires that all proposed ANS be circulated to the public at
large for comment, that an attempt be made to resolve all comments, and
that there is a right of appeal. In addition, ANSI considers any
evidence that a proposed ANS is contrary to the public interest,
contains unfair provisions or is unsuitable for national use. This
basic formula has been the hallmark of the ANS process for decades, and
it has garnered worldwide respect and acceptance.
One of the best indicators of confidence in the U.S. voluntary
consensus standardization system (as exemplified by the ANS process) is
Congress's 1996 passage of the National Technology Transfer and
Advancement Act (NTTAA). This law (P.L. 104-113) requires Federal
agencies to use voluntary consensus standards for regulatory purposes
wherever feasible, and to procure equipment and services in accordance
with such standards. It also requires agencies to increase their
participation in voluntary consensus standards activities and directs
the Commerce Department's National Institute of Standards and
Technology (NIST) to coordinate Federal, state and local voluntary
standards and related conformity assessment activities.
ANSI also promotes the use of U.S. standards internationally. The
Institute serves as the U.S. national body representative in two major,
non-treaty international standards organizations: the International
Organization for Standardization (ISO) and, through the United States
National Committee, the International Electrotechnical Commission
(IEC). ANSI and the USNC play a leadership role in ISO and IEC,
respectively, on both policy and technical matters.
Part of ANSI's role as the U.S. member of ISO includes accrediting
U.S. Technical Advisory Groups (U.S. TAGs) which develop and transmit,
via ANSI, U.S. consensus positions on the activities and ballots of ISO
technical Committees and Subcommittees. Similarly, the USNC approves
TAGs for IEC activities. In many instances, voluntary standards
developed by U.S. SDOs are taken forward, through ANSI or the USNC,
where they are approved in whole or in part by the ISO and/or IEC as
International Standards. ANSI also encourages the adoption of
international standards as national standards where they meet the needs
of the user community.
In addition, ANSI advocates U.S. positions in various regional
standards organizations and regularly meets with representatives from
standards bodies in other nations. Thus, ANSI plays an important role
in facilitating the development of global standards that support global
commerce and which prevent regions from using local standards that
favor local industries as trade barriers.
Conformity assessment is the term used to describe steps taken by
both manufacturers and independent third-parties to determine
fulfillment of standards requirements. ANSI's role in the conformity
assessment arena includes accreditation of organizations that certify
that products and personnel meet recognized standards. The ANSI-
American Society for Quality National Accreditation Board (ANAB) serves
as the U.S. accreditation body for management systems certification,
primarily in areas such as quality (ISO 9000) and/or the environment
(ISO 14000). ANSI also is involved in several international and
regional organizations to promote multilateral recognition of
conformity assessments across borders to preclude redundant and costly
barriers to trade.
In summary, through its various roles and responsibilities, ANSI
advances its mission to ``enhance both the global competitiveness of
U.S. business and the U.S. quality of life by promoting and
facilitating voluntary consensus standards and conformity assessment
systems and safeguarding their integrity.''
Standards and Trade With China
The role of the PRC as the world's largest contract manufacturer
makes it critical that China be persuaded to continue its participation
in international standards forums, rather than develop its unique
national standards. This is especially important in those instances
where the intellectual property rights that are often incorporated into
standards are not made available on the basis of reasonable and non-
discriminatory terms.
As the U.S. member body of ISO, and via the U.S. National
Committee, of IEC, ANSI serves as the national standards body
counterpart to the PRC and can help influence Chinese stakeholders to
participate in the fair and open standardization process that has as
its goal the development of a single set of globally recognized and
accepted standards.
As noted in the Introduction of this testimony, however, events of
the past few years indicate that stakeholders within the PRC may have
been considering the establishment of trade barriers as a strategy to
shelter the nation's growing industries. One well-publicized example is
related to the PRC's domestic high-technology industry and the issue of
a Wireless Local Area Network (WLAN) Authentication and Privacy
Infrastructure (WAPI) and Wireless Fidelity (Wi-Fi) chips, the devices
that allow computers to access the Internet through local wireless
networks.
On May 12, 2003, the PRC government mandated that a new WLAN WAPI
security standard take effect in June 2004. The new standard was
developed independently by the PRC Broadband Wireless IP Standard
(BWIPS) Group with little or no communication with other standards
organizations and no foreign participation. Upon implementation of the
PRC government directive, foreign importers to China would have been
mandated to comply with a requirement to form joint ventures with one
of 24 PRC companies that had been given proprietary technical
information required for implementation of the WAPI standard.
The U.S. government and industry pointed out that there is already
an internationally accepted standard for such technology (IEEE 802.11).
On March 2, 2004, in a joint letter signed by U.S. Secretary of State
Colin Powell, U.S. Commerce Secretary Don Evans and U.S. Trade
Representative Robert Zoellick to Zeng Peiyan, Vice Premier of the
People's Republic of China, the Bush Administration urged PRC to drop
WAPI. Following high-level meetings in Washington, D.C., the PRC
government announced that it would (a) suspend implementation of the
WAPI standard, (b) work to revise the WAPI standard, taking into
account comments received from PRC and foreign firms, and (c)
participate in international standards bodies on WAPI and wireless
encryption for computer networks.
In recent months, ANSI has worked through international forums, its
ISO membership, and in concert with the China desk at the Department of
Commerce's International Trade Administration to invite representatives
of the PRC standards organizations to a meeting to discuss a long-term
resolution of the WAPI issue, including fair consideration of the PRC
proposal in the appropriate international forum. ANSI believes that
respectful and open engagement with the various PRC standards groups is
the best way to resolve such issues going forward.
While WAPI is important for many reasons, the PRC is also
developing several other important (but locally divergent) standards in
areas as diverse as the Internet Protocol, 3G wireless communications
(such as TD SCDMA \3\ and SCDMA \4\), audio-video capture and playback
(AVS), document and data protection, the small intelligent grouping and
resource sharing (IGRS) for terminal device collaboration radio devices
being developed for inventory management (RFID), and others. It is the
pervasive nature of these activities, and the related treatment of
intellectual property, that is of significant concern to PRC's trading
partners.
---------------------------------------------------------------------------
\3\ Time Division Synchronous Code Division Multiple Access (TD-
SCDMA) is a mobile telephone standard for wireless network operators
who want to move from a second generation (2G) wireless network to a
third-generation (3G) one.
\4\ Synchronous Code Division Multiple Access
---------------------------------------------------------------------------
Subsequent to the initial WAPI controversy, the PRC government
issued a report identifying concerns in the PRC standards system and
suggesting solutions. The study was a cooperative effort between the
Chinese Ministry of Science and Technology (MoST), the Chinese General
Administration for Quality Supervision, Inspection and Quarantine
(AQSIQ), and the Standardization Administration of China (SAC). The
report itself was drafted by the China national Institute of
Standardization (CNIS), an agency within the AQSIQ, which met with an
ANSI delegation in Washington, D.C. in December 2003.
The report suggested:

changing the existing four levels of: National, Vertical,
Local, and Enterprise standards to the three levels of: National,
Association, and Enterprise standards;
changing the two categories of standards: Mandatory and
Recommended standards into only voluntary standards; voluntary
standards becoming mandatory only via references or citations in
government regulations;
changing the standards development accreditation scheme:
Currently, national, vertical and local standards are subject to
government approval. The suggestion is to change this system so that:
governmentally accredited bodies will approve national standards and
associations will approve association standards;
that enterprises should be free to determine their own
standards usage without the governmental registration required today;
that standards should be adopted voluntarily by the users
of standards.

The issuance of the SAC strategy reports, and the seemingly
positive content identifying internal changes to be made to the PRC
standardization system, prompted ANSI to send a letter to the
Administrator of SAC, Li Zhonghai, in October 2004. This letter
congratulated SAC on the undertaking of this study and applauded the
recommendations put forward in the report.
To further its outreach efforts, in mid-January 2005 ANSI's
president and chief executive officer Dr. Mark. W. Hurwitz, traveled to
China to meet with Administrator Li and representatives of CNIS, the
administration of Certification and Accreditation of China (CNCA), the
Standards Press of China (SPC) and the U.S. Foreign Commercial Service
in Beijing. During these discussions, ANSI agreed to serve as the
distributor of Chinese national standards in the U.S. and SAC agreed to
become a distributor of American National Standards, as well as certain
other standards developed by U.S.-based standards-setting bodies, in
China. This arrangement will facilitate access to the national
standards of each nation and is seen as crucial to the promotion of
cross-border trade.
ANSI has also taken steps to mitigate the difficulty of obtaining
entry visas for Chinese technical experts who are attempting to attend
meetings of international standards Committees in the United States.
Among the actions taken was publication of a guidelines document that
provides information for Chinese technical experts and for the
administrators and officers of the technical Committee meetings that
are hosting those meetings; ANSI is engaged in ongoing discussions of
this topic with the U.S. Department of State and other relevant
agencies.
Dr. Hurwitz also explored with SAC the prospect of increasing U.S.
and other foreign access to participation on standards-setting
Committees in the PRC. Current and proposed future options were
discussed, with a strong indication being given to ANSI by SAC that
China will be moving away from its past practices of favoring
government-held seats on its national standardization Committees and
placing restrictions and/or limits on open participation on these
Committees.
Finally, during his visit Dr. Hurwitz was introduced to a new
initiative within PRC to develop a Chinese Standards Strategy. The
Strategy's goals include efforts to develop, within 15 years,
``independently self-proprietary technical standards through effective
measures, so as to improve international competitiveness of China's
technical standards and therefore increase the international market
share of Chinese products.''
Its Guiding Principles bear in mind the goals of ``new-stage
industrialization and comfortably off society,'' focus on improvement
of technical standard adaptability and competitiveness, couple standard
independence/innovation with international norms, integrate
governmental instruction and market orientation with enterprise as the
major player, and meet the strategic requirements of technological
innovation as well as industrial and trade development on technical
standards.
In the near term, Chinese strategic goals to be achieved by 2010
include the formation of a rather complete national technical standard
system, putting the overall technological level of Chinese standards on
a par with that of international standards for key areas. By 2020, the
PRC intends to upgrade its international standards involvement to an
advanced level, putting China high on the rank of international
standardization contributors.

Statement of James Thomas, ASTM International, West Conshohocken,
Pennsylvania
ASTM International is pleased to take this opportunity to comment
on United States-China economic relations and China's role in the world
economy. As the largest U.S. domiciled international standards
developing organization, we are particularly interested in commenting
on China's progress and the U.S. response in the implementation of
China's World Trade Organization (WTO) accession commitments to remove
non-tariff barriers to trade such as standards and technical
regulations. Standards are vital to everyday commerce and trade as they
effectively provide for a level playing field and ensure that two
parties involved in a contract or two nations involved in trade are
able to communicate clearly, in a common language.
ASTM International's Role in International Trade
ASTM International facilitates the development of technical
standards for about 90 industrial sectors including steel, copper,
plastics, building construction, roads, petroleum, textiles, adhesives,
medical devices, sports equipment, air quality, water quality, consumer
product safety, nuclear energy, industrial chemicals, and so forth.
With 30,000 individual technical experts from 118 countries--including
China-- participating in the drafting of ASTM standards, ASTM
International is truly a global forum for the development of consensus
standards. ASTM standards and technical documents serve as the basis
for manufacturing, management, procurement, codes, and regulations
worldwide.
ASTM International Agreements with Chinese Standards Bodies
ASTM International has a long history of participation in Chinese
standardization activities and many deep and mutually productive
relationships. Activities include the recent signing of an agreement
with the Standardization Administration of the People's Republic of
China, and agreements with other standards organizations including the
Chinese National Institute of Standardization and the Shanghai
Institute of Standardization.
Through our agreements with China's leading standards bodies, ASTM
International provides access to all ASTM standards; jointly sponsors
standards and training programs; provides participating membership to
Chinese representatives on ASTM technical committees; and provides
internship programs for Chinese experts to come to ASTM International's
Global Headquarters in Pennsylvania for extended study of the ASTM
International standards development process. In return, the Chinese
standards bodies promote the acceptance and use of ASTM standards in
China; utilize the resources of ASTM International to develop Chinese
National Standards and reference ASTM standards where applicable in
Chinese National Standards (China currently uses over 500 ASTM
standards as the basis of their national standards); and facilitate
connections between Chinese technical experts and ASTM International
technical committees to ensure that the standards meet the needs of
Chinese industry.
ASTM International's Presence in China
ASTM International is one of four U.S.-based international
standards development organizations that have jointly established the
Consortium for Standards and Conformity Assessment (CSCA) and that has
opened a new China office to establish a much-needed presence in China
for U.S.-based standards and conformity assessment organizations.
Located in Beijing, the office will help to build cooperative and
enduring relationships with Chinese governmental and industry standards
associations. It will also help promote the acceptance and use of ASTM
International standards and of other U.S.-domiciled standards
developing organizations in China. Part of the funding for the office
was awarded through the U.S. Commerce Department's Market Development
Cooperator Program. The other members of the consortium are the
American Petroleum Institute, ASME International (formerly known as the
American Society of Mechanical Engineers), and CSA America.
China's Obligations Under the WTO TBT Agreement
With China's accession to the WTO comes an obligation for China to
comply with the World Trade Organization's Technical Barriers to Trade
(TBT) Agreement. The WTO TBT Agreement has established certain rules
and procedures that pertain to the development, adoption and
application of mandatory technical regulations, voluntary product
standards, and the procedures used to determine compliance with those
standards and regulations. Under the WTO TBT Agreement, international
standards are recognized based on the transparency, openness and
impartiality in their development process rather than the label they
bear or their source.
While ASTM standards are accepted and used throughout the world as
the basis for contracts, codes, and regulations, access to global
markets increasingly depends on standards being set by other countries
and international organizations. Some nations' have government policies
or laws that prohibit the use of de facto international standards,
including those developed by ASTM International. Of particular concern,
the implementation document (Document #10) of China's Law of Standards
states in chapter 1, section 3;
``International Standards are the standards issued by the
International Standard Organization (ISO), International
Electrotechnical Commission (IEC), International Telecommunication
Union (ITU) and other international organizations recognized and
publicized by ISO.''
China's definition of ``international standards'' appears to be
inconsistent with the definitions and principles of the WTO TBT
Agreement and harmful to the best interests of ASTM International. This
definition can also be disadvantageous to the efforts of many
businesses to compete in China's emerging marketplace.
Through the CSCA office and other contacts, ASTM International will
continue to engage in an open dialog with Chinese governmental and
enterprise representatives so they might better understand the multiple
paths to international standardization and conformity assessment. While
we are encouraged by efforts to date, continued attention from the U.S.
government officials and Congress would be welcomed to ensure that a
market-oriented, enterprise-centered standards development system
develops in China that is consistent with the WTO TBT Agreement
obligations. The U.S. government should communicate a clear and concise
statement of U.S. trade policy as it relates to the WTO TBT Agreement
and its obligations to accept and use ``international standards'' based
on the transparency, openness and impartiality in their development
process rather than the label they bear or their source.
Because voluntary consensus standards developed under the auspices
of ASTM International incorporate various aspects of current market
practice--for example safety, quality, efficiency, or the
implementation of new materials--China will benefit from the
application of these standards in improving the quality of its goods,
advancing the health and safety of its people and environment, and
enhancing its competitiveness in a global marketplace.
Launches Aggressive Standards Strategy
Recognizing that standards will continue to be a key success factor
in the expansion of its economy and manufacturing base, and because of
its accession to the WTO, China launched two research programs in
September 2002. The programs, on the technical standards development
strategy in China and the establishment of a national technical
standards system, established strategic goals to be accomplished in
three phases by 2050.

By 2010, form a new voluntary technical standards system
and enhance the market adaptability of technical standards;
By 2020, perfect the technical standards system and raise
the level of Chinese technical standards development; and
By 2050, ensure that Chinese technical standards hold a
pre-eminent and prominent international status.

This strategy has created a demand for the development of technical
standards across a wide range of industry sectors.
Conclusion
In conclusion, the standards of ASTM International are widely
applied in various industries in China. With China's accession to the
WTO comes an obligation for China to comply with the WTO TBT Agreement.
We expect that with China's entry into the WTO and the expansion of
international communication and international trade, the standards of
ASTM international will most likely increase in popularity as more and
more enterprises will adopt them. While we are pleased with our
agreements and relationships with the Chinese standards community, we
welcome the interest and attention from Congress and would benefit from
a clear and concise statement of U.S. trade policy as it relates to the
WTO TBT Agreement and its obligations to accept and use ``international
standards'' based on the transparency, openness and impartiality in
their development process rather than the label they bear or their
source.
Thank you for the opportunity to comment and please feel free to
contact ASTM International's office in Washington, D.C., at (202) 223-
8505, or our Global Headquarters in Pennsylvania at (610) 832-9687, if
we can provide additional information.

Statement of Robert Vastine, Coalition of Service Industries
The Coalition of Services Industries (CSI) appreciates this
opportunity to convey to the Ways and Means Committee the U.S. service
industry's concerns about China's implementation of WTO accession
commitments.
The U.S. has a positive balance in its cross-border services trade
with China, and has experienced dramatic growth in its services exports
in the last decade. In 1992, U.S. services exports to China were $1.57
billion, with a surplus of $52 million. In 2003, U.S. services exports
to China increased to $6 billion, with a positive balance of $2
billion. Our largest exports to China are in travel, transportation,
education, financial, business and professional services.
Services sales by U.S. affiliates in China have grown from $320
million in 1994 to $3.4 billion in 2002. By contrast, China's sales
through affiliates in the U.S. increased from $45 million in 1994 to
$125 million in 2002.
China's WTO accession in 2001 was a significant step in advancing
services trade liberalization and promoting sectoral reforms through
ambitious and comprehensive WTO obligations. These obligations
demonstrated the Chinese government's intention to modernize and
integrate economically with the rest of the world. However, the true
value of China's commitments is to be measured by the degree to which
they are implemented.
Although China has made efforts to bring its legislation into WTO
compliance, significant sectoral and cross-sectoral implementation
issues persist.
Cross-Sectoral Issues
Excessive Capitalization Requirements
We acknowledge China's efforts to reduce required capitalization
levels in insurance in response to the U.S. industry study ``A
Recommendation for Revisions to the Capitalization Requirement Rules
for Life Insurance Companies Operating in China.'' However, more
progress is needed since the capitalization requirements remain high
given assumed risks and international practices.
Chinese regulators have also imposed high capital requirements that
bar market access in other key services sectors, including asset
management, telecommunications, freight forwarding and logistics. CSI
members believe such restrictions hurt the interests of U.S. companies
and impede the expansion of China's economy. High capitalization
requirements are not an effective way to ensure financial solvency.
They prevent the efficient use of scarce capital, thus hindering the
sound development of China's economy.
Emergency Safeguard Authority
China has made important legislative changes intended to implement
its WTO commitments, including the Foreign Trade Law that came into
force on July 1, 2004. However, we are concerned that Article 45 of the
Law permits the use of emergency safeguard measures (ESMs) against
services imports. ESMs for services are not provided in China's terms
of accession, and we strongly oppose any efforts to employ a services
safeguard mechanism.
Transparency
According to the General Accounting Office report ``U.S. Companies'
Views on China's Implementation of Its Commitments,'' of March 24,
2004, U.S. companies consider China's commitments in transparency of
laws, regulations, and practices among the most important. Despite
China's extensive transparency commitments, U.S. companies have been
denied the right to comment on new regulations, or have been unable to
do so because comment periods have been too short. Rather than
specifying all criteria that foreign firms must satisfy, China's rules
sometimes provide regulators with broad discretion which results in
varying rules and decisions. Chinese laws, regulations, and
administrative practices frequently change without warning, and may not
be applied uniformly, especially at the local level.
Government Procurement
China should eliminate significant market access barriers in its
software procurement. Unfortunately, China has recently enacted a
procurement law that requires that the Chinese government purchase
domestic goods and services with limited exceptions. This law has the
potential to exclude U.S. goods and services providers from the
significant public sector market.
China's draft ``Implementation Measures for government Procurement
of Software'' is the first of a series of sectoral rules to implement
the new government procurement law. These regulations will create a
discriminatory procurement regime that will severely restrict or
exclude most non-Chinese companies from selling software products and
services to the Chinese government, China's largest buyer. These
regulations represent a step back, and go far beyond U.S. procurement
practices. China's proposed rules will clearly discourage development
of a strong Chinese software sector by isolating it within a protected
market.
The government procurement law and the Implementing Measures move
in the opposite direction from China's unfulfilled WTO accession
obligation to start negotiations for membership in the GPA. The Chinese
government should adopt an open, inclusive, non-discriminatory and
transparent procurement regime by commencing negotiations to accede to
the GPA and suspending adoption of the Implementation Measures and
other discriminatory procurement rules.
Intellectual Property Rights Protection
China's piracy and counterfeiting at the wholesale and retail
levels, end user piracy, and Internet piracy remain rampant due to
lenient penalties, uncoordinated enforcement among local, provincial
and national authorities, and the lack of transparency in
administrative and criminal enforcement. The piracy rate for optical
media products and software is reported to be in excess of 90 percent.
Although recent copyright amendments and regulations made progress
toward bringing Chinese law into compliance with TRIPS, the law still
provides inadequate criminal liability for copyright offenses, e.g.
corporate end user and Internet piracy, unclear protection for
temporary copies, and overly broad exceptions to protection of computer
software. Overall, the issue of IPR protection is marked by a readiness
of the central government to address the problem, while implementation
at local levels remains unsatisfactory.
IPR Enforcement Regime
Chinese agencies should better coordinate to improve enforcement of
administrative and criminal measures. There has been some success in
bringing civil actions, however China's criminal law has rarely been
used to prosecute piracy because of the high thresholds for criminal
liability. Administrative enforcement is slow, cumbersome, and rarely
results in deterrent fines. Although Chinese authorities have
undertaken administrative enforcement actions against pirates, the
government's refusal to share information about the activities of CD
plants and about the ultimate outcomes of its actions makes it
difficult to assess China's efforts. Copyright authorities are
typically understaffed, and lack skills and resources, as well as a
mandate to take strong administrative measures.
Civil copyright enforcement is also hampered by the courts'
unwillingness to grant provisional remedies on an ex parte basis, even
though the amended law now authorizes such remedies.
Criminal prosecution of copyright piracy remains restricted by the
Chinese criminal code which requires a demonstration that piracy is
occurring for the purpose of making a profit. This is very difficult to
demonstrate, particularly if it happens online. Therefore, China should
closely adhere to TRIPS which requires criminalization of ``copyright
piracy on a commercial scale''--not just piracy for profit.
Unfortunately, the recently amended Supreme Court's Judicial
Interpretations (JIs) have failed to establish an acceptable framework
for criminal prosecutions and deterrent penalties for IPR violations.
The new JIs make only minimal decreases in the monetary thresholds, and
leave damages to be calculated at pirate prices. The new threshold may
be effective only if it brings more criminal cases against pirate
manufacturers and distributors.
Under the new rules, online infringements that meet the thresholds
are criminalized, but the ability to use these rules in practice has
yet to be tested. Although the rules criminalize importing and
exporting of pirate products, criminal penalties are very low, since
liability results from China's rules covering ``accomplices.'' End user
software piracy does not appear to be criminalized, and the rules are
weak with respect to repeat offenders.
The local copyright authorities and the local administration should
cooperate to ensure adequate administrative enforcement against all
types of copyright offenses, including unauthorized use of software by
companies. Chinese authorities at the national and provincial levels
should also conduct aggressive investigations to trace the source of
pirate optical disc production, impose criminal sanctions on pirate
producers and distributors, and institute a zero tolerance policy for
the sale of infringing materials. Chinese customs must be directed to
refer large-scale pirate seizures for criminal prosecution. China's
Internet piracy should be addressed through appropriate legislation and
strict enforcement. At the JCCT meeting in 2004, China agreed to join
the WIPO ``Internet'' Treaties, and we look forward to swift
implementation of this commitment.
To ensure that improvements in China's enforcement regime yield
meaningful gains for U.S. right holders, the industry suggests that the
U.S. government establish evaluation criteria that provide an objective
and verifiable mechanism to measure progress in China's IPR regime.
These criteria should assess (i) criminal, civil and administrative
enforcement against all forms of piracy and counterfeiting; (ii) end
user compliance with IPR laws; and (iii) government-sponsored public
education and awareness programs about the importance of IPR laws.
These IPR initiatives, however, will do little to increase market
access for U.S. IPR products if China persists in maintaining trade and
investment barriers.
Market Access for IPR Products
Foreign investors' greater participation in local media companies
can help solve China's piracy problem. Current rules make it difficult
for U.S. companies to enter the Chinese market to supply legitimate
products, thereby ceding the market to counterfeit producers.
Therefore, we encourage China to increase the 49% cap on foreign
ownership of distribution and video replication companies.
The Chinese government should secure freedom of establishment for
foreign investment companies, including pay-television broadcasters. We
believe that companies should be able to choose the form of commercial
presence that best suits their operations and business objectives.
China should increase revenue sharing beyond 20 films, eliminate
the import monopoly and the distribution duopoly; eliminate or reduce
the ``black-out'' periods for foreign film screening; and reduce taxes
and fees. Prime-time broadcast restrictions for foreign programming of
pay and non-pay television broadcasters should also be reduced.
An improved regulatory and licensing regime is essential in
combating IP piracy. China's censorship clearance procedures for
optical media should be streamlined. These procedures give another
advantage to pirate producers by severely hindering timely distribution
of legitimate CD, VCD, and DVD products in China. Restrictive licensing
policies on retail outlets also inhibit the industry's ability to
provide consumers with timely access to legitimate products. Retail
chain stores should be granted a national license to distribute CDs and
other media products, instead of requiring separate licenses in each
jurisdiction. China should also clarify the authority for the issuance
of retailers' AV licenses in home video.
China remains a large producer and distributor of high-quality
counterfeit software and IT-related products for local and foreign
markets. Corporate end user software piracy and unauthorized loading of
software on computers before they are sold are also significant issues
for CSI members. Actual increases in China's purchases of legitimate
U.S. IPR products are an important tool to measure progress in
improving market access through IPR protection.
Technology Standard Setting Issues
China's movement toward adopting unique national technology
standards instead of available international standards threatens to
become a significant barrier to foreign competition, and to undermine
China's ability to export its own products.
CSI greatly appreciates the Administration's efforts to address the
issue of standard setting for China's wireless local area network
(WLAN) encryption. However, the scope of the problem is much broader,
since China is developing unique national technology standards across a
wide range of products.
Voluntary, industry-led, consensus based, and non-discriminatory
standards are essential to promote interoperability, competition and
innovation. As a general matter, technology standards should not be
mandated by governments. Standards, and the technologies they embody,
should be allowed to compete in the marketplace.
As a general matter, CSI members are concerned about the issues of
protection for foreign patents, the inability of foreign companies to
be voting members of the standards development groups, and attempts to
severely limit compensation for intellectual property rights as the new
standards are being developed.
We encourage China to participate in international standard setting
bodies and to align its standards development with international
practice. It is also important to protect intellectual property rights
embodied in standards through China's adoption of rules consistent with
international practice. Intellectual property is increasingly important
to technology leadership, so it is in both Chinese and U.S. interests
to establish clear rules for standards.
Sectoral Issues
Insurance
Since the amendment of China's Insurance Law in 2003 by the
National People's Congress, China's Insurance Regulatory Commission
(CIRC) has issued several important implementing regulations.These
regulations have relaxed China's initial capitalization and licensing
requirements in insurance. Nevertheless, significant market access and
national treatment impediments for foreign insurers remain.
Branching
Following the establishment of an initial branch in a province,
insurers seek greater clarity regarding procedures and approvals for
establishing subsequent branches, sub-branches, and related entities in
the same province.
Foreign invested insurance companies should enjoy national
treatment, and be able to apply for any number of branch approvals
simultaneously at any given time, as well as receive new product
licenses without delay. Provisions covering branching in the
Administrative Regulations and the Foreign-Invested Implementing Rules
are silent on the number of branches a company may apply for at one
time, and whether branch approvals will be granted consecutively or
concurrently. A number of Chinese companies have received branch
approvals on a concurrent basis, even when first establishing their
businesses in China. In contrast, no foreign insurance company has
received branch approvals on a concurrent basis, including when first
establishing their business.
National Treatment for Capitalization Requirements
After being presented with the U.S. industry study ``A
Recommendation for Revisions to the Capitalization Requirement Rules--
'' in 2003, CIRC has substantially lowered its capitalization
requirements to RMB 200 million for initial establishment and RMB20
million for each additional branch. However, the new capitalization
levels are too prescriptive, and are still much higher than
international norms with respect to specific business models and
assumed risks. According to the industry study, China's new
capitalization requirements in insurance remain higher than in eleven
important Asian markets, and much higher than in the United States and
the European Union.
China needs to confirm the scope of the initial establishment fee
of RMB200 million, and ensure that this includes the right to establish
sub-branches without limitation on numbers. China's prudential
reasoning behind the branching capitalization requirements of RMB20
million for each additional branch should also be addressed.
Overseas Utilization of Foreign Exchange Funds
With respect to CIRC's ``Provisional Measures on the Administration
of the Overseas Utilization of Insurance Foreign Exchange Funds''
released on August 9, 2004, we are concerned that the threshold for
utilization is unjustifiably high. Paragraphs 4 and 5 of the article
entitled ``Insurance fund move precludes qualified domestic
institutional investors (QDII)'' states that only the largest
companies, which excludes foreign participating companies, are
authorized to access overseas fund/equities. These provisions have
significant national treatment implications, and should be expanded to
allow utilization by foreign participating companies.
Group Life ``Master Contract Coverage''
On December 11, 2004, the CIRC announced that China's commitments
to provide market access in group, health, pension, and annuity
insurance had been fulfilled by the deadline set in the WTO. However,
CIRC is yet to issue implementing guidelines that identify entities
covered under group life ``master contract coverage,'' and specify
qualifying criteria for insurers interested in providing this coverage.
Transparency
China should give insurance entities a reasonable period to review
and comment on proposed new measures. We are pleased that CIRC offered
the opportunity for public comment on its ``Trial Implementing Rules
for the Administration of Foreign-Invested Insurance Companies'' and
``The Administrative Regulations on Insurance Companies'' both issued
in 2003, and the Insurance Law issued in the end of last year. However,
the opportunity to comment on important sectoral regulations is still
rare. Therefore, we encourage the CIRC to allow all interested parties
to participate in the entire rule-making process through submission of
data, written or oral statements, and arguments, in advance of the
issuance and implementation of all regulations.
We also welcome the fact that CIRC's ``trial implementation''
regulations are open to revision as needed. The U.S. insurance industry
fully supports China's efforts to develop and refine its insurance
regulatory system. We remain committed to engaging in positive dialog
with Chinese regulators, and encourage them to consult with U.S. and
other international experts as they continue to develop the Chinese
regulatory system.
Improving the transparency of the rulemaking process as well as
maintaining equal application of licensing and solvency rules to
foreign and domestic companies is especially important as new
regulations are being released. Some new regulations appear to have
unreasonable provisions that will put many new entrants at a
competitive disadvantage in the marketplace. Specifically, recent
regulations allow companies with licenses for more than 8 years to
invest in a much broader range of assets than companies entering the
market since China joined the WTO. Such arbitrary provisions are
inconsistent with China's national treatment commitment and have no
prudential rationale. We urge a transparent discussion of their
prudential justification.
Acquired Rights
CSI members seek confirmation that existing direct branches and
other insurance company operations may continue, but are not required,
to operate under the same conditions and authorities accorded at the
time of establishment, whether or not the said condition and/or
authority complies with new rules, including operations, financial
structure, capital and mode of establishment. China should exempt
existing companies from compliance with new rules if such companies
choose to maintain their existing status, which should be protected as
an acquired right. A company that chooses to maintain its existing
status should not be penalized by additional, alternative restrictions
on its ability to operate and expand business in China.
Any company should be permitted to expand its business into new
cities/provinces and into new product lines, including group business,
consistent with China's insurance commitments. Restrictions, not based
on international norms on the ability to operate and expand business,
are counterproductive both for the companies and for the Chinese
economy, and should not be applied to new foreign companies, either.
CSI and the U.S. insurance industry strongly support the dialog
between CIRC and U.S. insurers under the auspices of USTR and the U.S.
Embassy in Beijing, as an important forum to raise sectoral issues.
Following the second session in April 2005, we see a template for the
dialog and sincerely hope that the proposed November 2005 meeting will
occur as discussed with CIRC and USTR on April 8th. We hope CIRC will
also include relevant Chinese government officials in the discussion on
issues of asset management and taxation, as well as invite other global
companies to the program.
Banking
On June 26, 2004, China's Administrative Measures on Foreign Debt
of Foreign Banks in China, which restrict the foreign-currency lending
of foreign bank branches and their offshore funding, went into force.
These measures will work to the significant detriment of Chinese
businesses and borrowers, including Chinese financial institutions,
which rely on international banks for an increasing proportion of their
financing needs. Under these rules, corporate clients' foreign-currency
denominated loans may not be converted into renminbi. This will
discourage renminbi expenses by foreign investors whose presence is
otherwise actively sought in the Chinese economy. Foreign banks will
also be unable to grant Standby Letters of Credit in foreign currency
to Chinese banks in order to allow corporate clients to borrow renminbi
loans from these banks.
The measures also introduce a quota which limits foreign-currency
refinancing of foreign banks in China from their head office and
offices in third countries. These restrictions are especially damaging,
since China's domestic inter-bank market for foreign currency is almost
non-existent and foreign bank branches are heavily dependent on funding
from their head offices or offices in third countries.
Although identical restrictions are applied to domestic banks,
their negative effect on foreign banks will be much larger. Foreign
banks have little access to the renminbi market, and their clients are
more internationally oriented, with a greater need for flexible foreign
exchange transactions.
Securities and Asset Management
On December 21, 2001, the China Securities Regulatory Commission
(CSRC) issued the Joint Venture Rules for asset management companies,
which do not provide a defined set of criteria for approval, and give
the CSRC broad discretion to impose additional qualification
requirements. The rules also stipulate that foreign firms must have at
least RMB 300 million (U.S.$36 million) to qualify as a joint venture
partner, an amount significantly higher than in any other national
jurisdiction. Given that asset management firms do not need capital
reserves to protect investors, this requirement poses a market access
barrier.
CSRC does not appear to abide by its own regulations which require
giving notice of the status of a joint venture application within 30
days. We also understand CSRC may be changing its regulations regarding
joint venture establishment requirements, and would appreciate the
opportunity to comment on those changes.
CSI members urge China to go beyond its WTO commitments and allow a
foreign firm to choose its form and equity participation levels and
compete on the same basis as domestic firms. We also ask that China
permit foreign firms to set up securities companies through vehicles of
their choice, with power to engage in a full range of securities
activities, including underwriting and secondary trading of government
and corporate debt and A-shares. Foreign securities firms should be
allowed to trade renminbi and renminbi-linked products with Chinese
entities, as well as create and distribute derivatives.
We are pleased that China took steps to open the A-share market to
foreign investors by adopting rules on qualified foreign institutional
investors (QFIIs). However, many institutional investors are unable to
take advantage of the rules because the following aspects of the new
rules limit their practicality:

The rules restrict the percentage of an issuer's
securities that may be held by any single QFII and all QFIIs in the
aggregate.
The rules require each QFII to commit total investment of
at least U.S.$50 million to a special QFII account.
Certain elements of the QFII licensing process lack
transparency. For example, the licensing rules include a provision that
allows the CSRC and SAFE to give priority consideration in granting
licenses to ``pension, insurance or mutual funds that have a good
investment record in other markets.''
Investment quotas must be fully funded within 3 months,
and the unused portion of quotas will expire. This period should be
increased to at least a year.
The invested amount must remain in the QFII account for
at least a year for open-end funds and 3 years for closed-end funds,
and any remittances from the account must be approved in advance by the
State Administration of Foreign Currency Control (SAFE).\1\
---------------------------------------------------------------------------
\1\ The lock up rules pose regulatory compliance issues for mutual
funds, which are required to meet redemptions at all times. As a
result, most U.S. mutual funds obtain exposure to China not under the
QFII rules, but by investing in Chinese securities available in Hong
Kong.

We understand that the CSRC is reviewing the lock up periods for
investment for a possible change in the requirement. We would welcome
such an amendment to the QFII rules, which would encourage further
investment by QFIIs.
Private Pension
CSI members welcome the Chinese government's publication of key
enterprise annuity regulations in May 2004. We believe tax favored,
employer-sponsored supplementary private pension plans, managed by
professional financial services firms--insurers, pension and retirement
savings companies, banks, securities and mutual fund companies--is an
important element to help China adequately address its growing aging
challenges. However, we encourage Chinese authorities to make the
following improvements:

The Chinese government should flesh out the details of
existing regulations, including information on licensing procedures and
licensing authorities for private pension companies. It is essential to
establish simple and transparent licensing procedures.
Tax regulations should enable employers to make tax-
deductible contributions to their employees' pension plans. The rules
should also enable tax deferral for individuals contributing to their
defined contribution pension accounts, similar to the U.S. 401(k)
plans.
Chinese authorities should also ensure strict sectoral
supervision and allow market driven fees on private pension businesses,
without fee caps.
Express Delivery
Draft revisions to China's Postal Law violate its accession
commitments in market access and national treatment. The draft raises
the following key issues:

Market Access for Foreign Providers. The draft
legislation provides China Post with an absolute monopoly for all
shipments weighing less than 350 grams. Regarding shipments over 350
grams, there is a provision prohibiting delivery of ``addressed
letters, printed matters and parcels'' by foreign invested enterprises
unless in the form of express delivery services. We believe that the
enlarged scope of this monopoly is a flagrant violation of the
horizontal rollback provision in China's WTO commitments.

The draft also stipulates that when the State Council's rules with
respect to the international express industry contradict the
legislation, the Council's rules will prevail. However, there are
inconsistencies in those provisions, and we are concerned that the
State Council can change its regulations at any time.

Universal Service Charge on Express Industry Revenues.
The draft legislation creates a new, unspecified charge on express
industry revenues. The size of this fee and the basis on which it will
be charged remain to be outlined in regulations. We understand that
this fee is intended to support China Post's universal service
obligation to deliver mail to remote regions. However, it is not the
obligation of the express industry to fund China Post's responsibility
to provide universal postal service, which is distinct from express
delivery.
Regulator'sIndependence. The draft legislation fails to
provide for the establishment of an independent regulator. Having a
postal agency as regulator puts U.S. companies at a serious competitive
disadvantage and raises significant market access concerns.
Licensing Procedures. The draft legislation establishes a
new, unworkable licensing regime with new authorities of supervision,
inspection, and punishment granted to the postal regulator. Express
delivery companies and their existing subsidiaries, that have already
been issued licenses under existing regulations, as well as all future
subsidiaries should not be required to re-apply and/or apply as
appropriate for the licenses with the new regulatory authority.
Freight Forwarding and Logistics Services
MOFCOM revised the international freight forwarding (IFF) rules on
December 11, 2002 to permit majority foreign ownership of IFF ventures.
However, the revised rules do not provide a schedule for establishing
wholly foreign-owned IFF enterprises. We would like to ensure that
China will allow wholly foreign-owned freight forwarding subsidiaries
according to its schedule of commitments, by December 2005, and that
interested foreign companies will be able to provide their comments
before such rules become law. CSI members are also concerned about the
continuing uncertainty regarding the specific procedures for wholly
foreign-owned enterprises in land transportation to begin operation.
On July 26, 2002 MOFTEC issued the ``Notice on Relevant Issues
Regarding the Experimental Establishment of Foreign-Invested Logistics
Companies'' which allowed foreign providers to conduct the full range
of logistics services in eight provinces and cities. However, IFF
companies are being permitted only to engage in local delivery within
the city or province in which they are licensed to operate, but not
between the specified areas.
The licensing process in logistics and freight forwarding remains
non-transparent, costly, and time consuming. Logistics companies
applying to provide multi-modal services face the arduous task of
acquiring and interpreting information about requirements that vary
depending on the national authority and the province in which they file
the application. Freight forwarding enterprises should be extended
national treatment, and should be able to obtain a national operating
license.
CSI members also urge China to extend national treatment for equity
capital to U.S. providers of freight forwarding and logistics services.
The minimum registered capital in freight forwarding equals U.S.$1
million, plus U.S.$120,000 for each additional branch, which is twice
as high as the requirement for domestic companies. To provide third
party logistics services, foreign companies must meet a U.S.$5 million
capital requirement.
Telecommunications
Despite China's commitment to provide a reasonable period for
public comment, changes to the 2003 Catalogue of Telecommunication
Services were published by the Ministry of Information Industry (MII)
only 1 week before their implementation. The very short period of one
week between publication and implementation made meaningful comment
impossible. The resultant telecommunications service classification
regulations redefine basic and value added services so as to protect
the state-owned incumbent providers. For example, they limit IP-virtual
private networks (IP-VPNs) to ``domestic'' services, and delete
``resale'' services. A basic services license, available to foreign
invested joint ventures only since December 2004, is subject to a RMB 2
billion (U.S.$250 million) capitalization requirement, which is 100
times higher than for value added service licensees.
We urge Chinese authorities to classify value-added and basic
services in a manner that encourages competition and limits pre-
qualification capitalization requirements to those directly related to
specific risks of a new venture. A narrowly tailored performance bond
would be more appropriate to address any reasonable risk concerns.
CSI members believe that the MII cannot be considered as an
independent telecom regulator because it continues to support state
enterprises. The regulator has persisted in issuing rules distinctly
favorable to state owned enterprises without inviting public comment,
contrary to China's obligations.
We are pleased that China is currently circulating a long awaited
telecom bill among its government offices. We hope this bill will
address outstanding sectoral issues, and be available for public
comment well before it comes into effect.
Digital Products Customs Valuation
China made WTO commitments with respect to customs valuation to
apply digital products tariffs based on the value of the underlying
carrier medium rather than on the imputed value of the content (i.e. on
the basis of projected royalties). In June 2003, however, China issued
regulations which do the exact opposite. Chinese authorities should
reverse these regulations and ensure that customs valuation for all
forms of digital products (including, software, movies and music) is
based on the value of the underlying carrier medium.
______

We appreciate the continuing efforts by the USTR, the Department of
Commerce, and other governmental agencies to obtain China's full
implementation of its WTO accession obligations. We hope that this year
the consultative process with the Chinese government can bring more
progress in these and other sectors of interest to the U.S. services
industry.
CSI members believe that China's full compliance with its accession
commitments and further services trade liberalization will accelerate
its development as a mature global trade leader, and help solve
existing trade imbalances with the U.S.. China's initial services offer
at the Doha Round and its intention to submit a revised offer are
welcome steps toward this goal.
CSI members hope that China will join the U.S. efforts to energize
WTO services negotiations. China's active and constructive
participation in the Doha Round services negotiations is essential. The
Doha Round presents a great opportunity for China to exercise its
influence with developing countries by helping convince them of the
benefits of adopting services trade and investment liberalization as
China has.

Computing Technology Industry Association
Washington, DC 20005
April 27, 2005
House Ways & Means Committee
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC

Dear Members of the House Ways & Means Committee:

The Computing Technology Industry Association (CompTIA) is pleased
to submit comments to the Committee to be included in the record for
the Hearing on the United States-China Economic Relations and China's
Role in the World Economy held on April 14, 2005.
CompTIA is the world's largest information and communications
technology trade association with over 20,000 members in 102 countries.
CompTIA's members consist of software developers, hardware
manufacturers, application service providers, Internet service firms,
distributors, retailers, resellers, training, service, and
telecommunications companies. The Association's members collectively
employ thousands of people and produce billions of dollars worth of
goods and services each year. CompTIA operates in both in the U.S. and
in China with offices located in Hong Kong.
CompTIA's core mission includes the promotion of policies that
enhance growth and competition within the computing industry and the
facilitation of the development of vendor-neutral standards in e-
commerce, customer service, workforce development and ICT work force
certification.
Recently, China promulgated draft ``Implementation Measures for
government Procurement of Software''. These Implementation Measures
would severely restrict market access by non-Chinese companies.
Moreover, it is our understanding that the draft Implementation
Measures represent the first of what is likely to be a series of sect
oral rules promulgated by the Chinese government to implement its new
procurement law.
We believe that the domestic procurement preference set forth in
the Implementation Measures contradicts the general trend in
international trade and procurement law toward open, transparent,
technology neutral and non-discriminatory access to global markets. In
addition, the draft Implementation Measures run counter to the spirit
of China's commitments that it made when it acceded to the WTO
Agreement and assumed observer status with respect to the WTO
government Procurement Agreement (GPA).
More specifically, we believe that the requirements set forth in
the draft Implementation Measures are overly restrictive and
inconsistent with international practice. No other major economy has
proposed similar measures to develop their software sector in this way.
These measures create a serious risk that China's software industry
will become further isolated from the global marketplace. This result
has harmful implications for both the U.S. and Chinese economies.
The Chinese government's most recent move to close is software
procurement market to foreign providers signals a troubling departure
from its WTO commitments and from internationally accepted free trade
norms. We urge the U.S. Government to continue to press for further
liberalization of China's trade policies in a manner that benefits both
the U.S and Chinese economies.
We appreciate the opportunity to provide these comments and look
forward to working with Committee on an issue of great importance to
the technology community-- improving China's commitment to fair and
open trade.
Respectfully,
Roger Cochetti
Group Director, U.S. Public Policy

Statement of J.P. Gorgue, ContiGroup Companies, Inc., New York, New
York
Thank you, Mr. Chairman, for the opportunity to bring to this
Committee's attention a matter that I believe is a very important
example to the future of the trade relationship between the United
States and China. This hearing is focused on United States-China
Economic Relations and China's role in the World Economy. However,
there is an essential issue that must be addressed, the administration
and enforcement of arbitral and legal judgments. Simply put, China
cannot reach its economic potential with the United States until it
consistently applies the rule of law and due process of law to foreign
companies and investors doing business in China.
ContiGroup Companies, Inc. (ContiGroup) would like to take this
opportunity to address a specific trade issue with China that we have
first-hand knowledge about. Our issue is an example where the United
States must encourage China to abide by their law and enforce
arbitration awards against a Chinese counterparty under the 1958 New
York Convention. China is a party to that Convention.
Mr. Chairman, allow me to provide you and the Committee with a
little background about ContiGroup Companies, Inc. ContiGroup
Companies, formally known as Continental Grain Co. is a recognized
leader in integrated poultry and pork production and cattle feeding,
with nearly two hundred years of experience in agribusiness and global
trade.
The Co.'s principal businesses are Wayne Farms LLC, ContiBeef LLC,
and Premium Standard Farms. The Co. also has significant business
interests in Latin America and China. In all, ContiGroup serves
customers around the world through facilities and affiliates in ten
countries.
One of the world's largest agribusiness companies, the ContiGroup
Companies:

Employs more than 15,000 people worldwide and has offices
and facilities in 10 countries
Operates 13 state-of-the-art poultry plants across the
southeastern United States
Supplies fresh and further-processed poultry to
restaurant chains, frozen food makers, and other retail companies
throughout the world
Runs one of the world's largest cattle feeding
operations, with six major feedlots in Colorado, Kansas, Oklahoma and
Texas
Raises and markets more than 1 million head of beef
cattle per year
Ranks as the second-largest integrated pork producer in
the U.S. through its joint venture with Premium Standard Farms
Is a major producer of animal feed, wheat flour, pork,
and poultry in Latin America and the Far East

As you can see, Mr. Chairman, ContiGroup Companies has a
substantial role in the U.S. agricultural and related business.
Currently, the U.S. enjoys an agricultural trade surplus with China.
In many respects China is a developing country, yet, it has become
a dominant producer and a world-class exporter of many agricultural
products. To U.S. agriculture, including the ContiGroup, China remains
a great opportunity while at the same time it's a substantial threat.
As in our case where the Chinese court refuses to adhere to the rule of
law and enforce an arbitral award against a Chinese company.
Mr. Chairman, allow me to provide the Committee with the facts of
the ContiGroup case that brings me here today.
Continental Enterprises Limited (a subsidiary of ContiGroup
Companies) entered into a contract on July 2, 1997 to sell 300,000
metric tonnes of Brazilian and/or Argentine Soybean meal to the
Shandong Zhucheng Foreign Trade Group Co. The shipment was to be in
parcels of 50,000 metric tonnes each month in May to August 1998 with
100,000 metric tonnes to be shipped in September 1998.
The agreed price was U.S. $231 per metric tonne C&FFO with payment
to be made by irrevocable sight documentary credit. All other terms of
the contract were as per GAFTA Contract No 100. It was expressly agreed
that any dispute arising under the contract was to be referred to
arbitration in accordance with the Rules of GAFTA Contract No 125 and
with any arbitration to be held in Hong Kong. The Contract was to be
governed by English Law. By Addenda dated 9 March 1998 and 21 May 1998
additional amendments were made to the shipment period, contract price
and credit terms.
The first shipment was made in July 1998. By reason of the failure
of the Buyers to open a Letter of Credit in relation to the next
shipment they were placed in default under the contract. The Buyers
failed to open subsequent letters of Credit in relation to the
subsequent shipments and were placed in default in relation to each
shipment.
On November 27, 1998 notice of arbitration in relation to all
claims arising under the above contract (and Addenda). The Arbitration
proceedings were actively pursued by both parties. On November 9, 2000,
the GAFTA Tribunal handed down a first tier Award against Shandong
Zhucheng Foreign Trade Co. That Award was the subject of an Appeal. By
an Award dated May 9, 2002, the GAFTA Appeal Board gave its Award
against Shandong Zhucheng Foreign Trade Co.
The law of the People's Republic of China on Civil Procedure (1991)
provides that if a party to an Arbitration Award fails to comply with
the terms of the award then the other party may apply for enforcement
to the court in the place where the party against whom the enforcement
is sought has his domicile or where his property is located. At which
time Chinese law also provides that the court has 60 days to grant or
deny recognition and enforcement. In our case, this has not been done.
This is important because Continental Enterprises Limited made
application, dated October 23, 2002, to the Intermediate People's Court
in Qingdao, China for the recognition and enforcement of the Appeal
Award. No decision has been rendered, after two and half years.
The matter came for a first hearing before the court on December
10, 2002. On December 19, 2002, Continental Enterprises Limited were
informed that the Shandong Higher People's Court had ordered the
transfer of the case to them. On February 18, 2003, a hearing took
place before the Shandong Higher People's Court. On July 16, 2003,
Continental Enterprises Limited were informed through their Chinese
lawyer that the matter was then before the Supreme Court in Beijing.
After considerable further delay and in January 2004 the Shandong
Higher People's Court ordered further clarification to be given as to
why the seat of the arbitration was in London and the physical place of
arbitration was in Hong Kong. The GAFTA secretariat responded to that
request for information in March 2004. Further requests by Continental
Enterprises Limited for a hearing or for further information concerning
the status of the long outstanding application have been refused by the
Court.
Yet, as of today, six and-a-half years later, we are still trying
to enforce payment of this $14,000,000 arbitration award.
It is essential, Mr. Chairman, that companies be able to enforce
legal contracts, and when necessary, legal judgments. This is one
example of where the Chinese fail to meet their trade obligations.
Simply put Mr. Chairman and Members of the Committee, China is not
following their own rules of law and denying justice.
By not taking necessary rule of law remedial actions, the Chinese
government and courts promote Chinese companies to break the law.
Federal agencies which administer trade remedy and compliance laws in
the U.S. must have the authority and be able to enforce the rule of law
so that U.S. industries and businesses are protected against unfair
trading practices. This is especially true when administering trade
remedy laws in defense of unfair trading practices undertaken by
countries such as China.
Thank you for the opportunity to present our views. I look forward
to answering any questions that you and members of the Committee may
have.

Kellwood Co.
Chesterfield, Missouri 63017
April 25, 2005
Committee on Ways and Means
1102 LHOB
Washington, DC 20515

I am asking you to support the U.S. apparel industry and the U.S.
consumer by denying any attempts to impose unreasonable and ill-advised
restrictions on Chinese textile and apparel products. Re-imposing
quotas on China will save not a single U.S. textile or apparel
production employee's job.
The 10-year phase out of textile and apparel quotas under GATT
finally reached an end on January 1. The apparel industry can, for the
first time in over 40 years, manage our business with efficiencies and
best practices that other industries have always had available to them;
no longer subject to a patchwork of limits that restrict who we could
work with, in which country and how much it would cost. As a major
supplier of apparel to middle-income customers across the country,
these changes mean we can concentrate on providing quality, cost-
effective apparel to the U.S. consumer.
During the 12-month period leading up to this final phase-out of
the quotas, a confusing array of rules and restrictions that were part
of U.S. quota management, expired. Without the ability to utilize these
rules, U.S. apparel importers changed sourcing patterns during the last
quarter of 2004 and, to avoid potential embargoes, delayed shipping
goods until after the first of the year. These changes lead to the
large volume of imports in January and February.
In addition, since China was one of the last countries to be added
to the quota regime, they had an unusually small allotment in
proportion to their production capabilities. Because of this they were
held to less than 5% of the U.S. apparel import market while subject to
quotas. Taking this into consideration, large percentage increases are
to be expected following the phase-out.
Statistics published by the Department of Commerce bear out
expectations for a sharp increase of imports from China during the
month of January--the only month for which data is yet available.
However, the numbers are not reported within a practical perspective.
Consider, instead of isolated percentages selected out of context, the
following information for the 12-month period ending January 31, 2005,
directly from the DOC report:

U.S. apparel imports from ALL sources were up 8.47%.
Overall imports from China were up 47.05%--increasing
China's total market share to 22%, only a 6% market share increase.
Imports from Hong Kong, Taiwan and Korea were down 29% to
8% of the total U.S. imports.
Imports from South Asia and ASEAN countries maintained
their 32% market share.
Imports from the CBI countries held at 16% of market
share.

Thus, China's increases for the most part reflect held-back
shipments from 2004 and a restructuring of production between Hong Kong
and China. Will China continue to expand their market share? Yes. Did
any of this growth affect apparel production in the United States? No.
This, and future growth, will not come from the minimal apparel
production that remains in the U.S., but from a shifting of production
elsewhere in the world--a phenomenon that has been playing out for
years.
The apparel industry chases changing consumer tastes for styles and
fabrics that require a flexible and ever-changing sourcing model. There
are quality, logistics and social/political considerations that will
prevent any single country from becoming a sole source. China will be a
major source, due to their dedication to installing state-of-the-art
facilities and their ready and able labor force. However the
realignment in global production shakes out, U.S. apparel jobs will not
be affected, since the great majority of production jobs migrated off-
shore in the past 10 years while quotas were firmly in place.
Kellwood Company, a $2.4 billion U.S. marketer and merchandiser of
wearing apparel, is a prime example of the changing face of the apparel
worker in the U.S. Although we no longer maintain sewing facilities in
the U.S., we have a U.S. work force of approximately 5000 employees in
over 14 states in industry-careers that are unaffected by trade
benefits to other countries. Continuing to keep our company strong
through allowing us to source apparel at the right place, the right
time and the right price is vital to our customers, our employees and
our stockholders. Our brands offer fashion and value to the American
consumer through a multitude of retail channels, including department,
mass, specialty, mail order and discount stores, with sportswear,
activewear, sleepwear, lingerie, infant and childrenswear, designer
labels, urban trends, wovens and knits; made possible by our global
sourcing capabilities.
Any threat to what remains of U.S. apparel production--and more
extensively to textile and fiber production--posed by the elimination
of quotas will not be affected by new restrictions that hurt U.S.
business and consumers. The best way to help these remaining U.S.
industries is to help their largest market--the CAFTA countries.
Without tariff assistance, the ability of neighbors in the CAFTA
countries to compete with any of the Asian production centers is
severely handicapped. Efforts to bring about passage of CAFTA would be
far more valuable to the U.S. textile industry than imposing delaying
restrictions on China. We therefore encourage you to vote for this
necessary, positive trade package as the best way to keep a hemispheric
balance in global trade.
Sincerely,
Wendy Wieland Martin

Kondor Waffenamt
Apple Valley, California 92308
April 22, 2005
Committee on Ways and Means
1102 LHOB
Washington, DC 20515

Mr. Chairman and Members of the Committee:

My name is Richard Radcliffe. I am a retired Captain in the United
States Air Force and I wish to express my views regarding trade with
the People's Republic of China (PRC).
I believe that the PRC is using trade as a form of economic warfare
against the United States. The desired outcome of this war is first to
enable the PRC to make Taiwan part of the PRC by coercion if possible
or by military conquest if necessary. To this end the PRC must reduce
the capability of the United States to economically support the
military forces necessary to defend Taiwan. The second desired outcome
is to render the United states incapable of challenging the PRC's
supremacy in Eastern and Central Asia.
I believe that the current currency imbalance is a means of
draining sufficient dollars from the world economy that the PRC can
control the value of the dollar by buying or selling U. S. Treasury
instruments. The supply of dollars held by the PRC also allows them to
apply economic leverage to American industries that they consider to be
strategically important to them or to us. The PRC uses these dollars
and proposed orders from technically advanced American manufacturers
such as Boeing to coerce technology transfers as part of sales. Such
transfers of technologies in the fields of navigation, autopilot and
other types of dual-use aviation technology allow the PRC to advance
the quality of their military aviation by incorporating clones of the
systems they receive in their aircraft.
In addition, aircraft purchased as proposed civilian transports may
be converted into things like command and control aircraft, aerial
tankers, strategic and tactical airlift aircraft and electronic warfare
aircraft. Once the PRC possesses the aircraft we lose control over what
that aircraft actually does.
Additionally, the PRC has used contracts to launch satellites as a
means of acquiring dual-use technology to improve its strategic and
tactical missile forces. There are now public estimates that over 700
tactical missiles are aimed at Taiwan. The Taiwan Relations Act
provides that the United States will defend Taiwan against any attempt
by the PRC to unilaterally incorporate Taiwan into the PRC. Each time
that we sell advanced technology products to the PRC and provide the
technology transfer we are enhancing the ability of the PRC to forcibly
incorporate Taiwan into the PRC and adding to the dangers that
Americans will face if sent to the defense of Taiwan.
I believe that the PRC also uses trade to cripple domestic
industries in the United States and make us more dependent upon the PRC
for certain goods. The textile industry is but one example that was
cited before the Committee. Steel is another example. Both of these
industries are essential to America. Which industry will be next?
I believe that the Committee on Ways and Means must lead the fight
to provide American industry with a level playing field in trade when
dealing with the PRC. I also believe that we must reduce the ability of
the PRC to apply economic pressure to certain American industries and
companies using its extensive dollar holdings. I believe that the
Committee on Ways and Means should produce a bill that levies a
countervailing duty on all goods imported from the PRC. This duty
should be equal to the difference in value between the official value
of the Renminbi and its value presuming it was a free-floating
currency. For example, the stated value of the Renminbi is currently a
little over eight to the dollar. However, if the Treasury Department in
conjunction with the Federal Reserve were to estimate that the actual
value of the Renminbi were to be four to the dollar, a duty would be
assessed on imports from the PRC of 100 percent.
I am not suggesting this countervailing duty merely as a means of
providing equity to American manufactures but also as a measure in the
national defense. The PRC continues to buildup its military. There is
no doubt in my mind that shortly the PRC will attempt to present the
United States with a fait acompli with regards to Taiwan. In addition,
the PRC continues to provide the bulk of economic support to the
Democratic People's Republic of Korea (North Korea). This economic
support allows the DPRK to apply its scarce resources to the
construction, deployment and in some cases export of Weapons of Mass
Destruction and their delivery systems.
I believe that one of the reasons that the PRC provides this
support is to force the United States at some time in the future to
make a choice between defending the Republic of Korea against an
invasion or the threat of an invasion from the North and defending
Taiwan against an invasion from the PRC. The recent civil disobedience
in China relative to Japan and the textbook issue I believe has more to
do with the Joint Communique from the ``2+2'' talks where Japan stated
that Taiwan was of strategic interest to Japan. This an indication of
how serious the PRC is about the incorporation of Taiwan into the PRC
by any means necessary.
Therefore, anything that we can do to reduce the economic power of
the PRC over the economy of the United States is in our National
interests and must be pursued. This must include such countervailing
duties and other measures as necessary to protect strategic American
industries and prevent ``dollar blackmail'' of our technologically
advanced industries.
Additionally, I believe that the responsibility for licensing the
export of advanced technologies should be removed from the Department
of Commerce and placed within the Department of Defense. The Congress
addressed technology transfers in a special report to the Speaker a few
years ago. While this topic may not be under the purview of the
Committee on Ways and Means, members of that Committee are influential
members of Congress and other committees. I would ask the members of
the Committee to use their influence in the House to see that such
action is taken.
Thank you for the opportunity to address the Committee.
Richard Radcliffe
Captain
United States Air Force (Retired)

Statement of Cass M. Johnson, National Council of Textile Organizations
Our statement today specifically addresses the threat from China
and how the removal of quotas on imports from China is likely to the
impact the U.S. textile and apparel sector. It contains recommendations
for steps the U.S. government and U.S. Congress should take to address
the threat that China poses specifically to the U.S. textile sector, as
well to U.S. manufacturing in general.
The National Council of Textile Organizations (NCTO) represents the
entire spectrum of the textile sector, including fiber, yarn, fabric,
and supplier industries. The U.S. textile industry is one of the most
highly automated and advanced textile sectors in the world. Over the
last 10 years, the U.S. textile industry has invested almost $35
billion in upgrading its plants and equipment. The U.S. textile
sector--from fibers to apparel--employs nearly one million workers in
the United States.

BACKGROUND

As you know, the Uruguay round Agreement on Textiles and Clothing
(ATC) required that existing quotas on textiles and apparel be phased
out on January 1, 2005. Recognizing China's ability to overwhelm world
trade in this sector once quotas were removed, the World Trade
Organization (WTO) included a special China textile safeguard in
China's WTO accession agreement. China agreed to the textile safeguard
provision, and in return the WTO allowed China to be integrated into
the ATC and the quota phase-out immediately upon admission to the
organization. This special textile safeguard provision is available to
all WTO members and has been utilized by numerous countries which are
also concerned about China's ability to overwhelm their markets.
On October 27, the U.S. industry began filing safegaurd petitions
with the U.S. government covering a variety of textile and apparel
products. An importing group, the U.S. Association of Importers of
Textile and Apparel filed a case with the Court of International Trade
asking that the cases be suspended while the government's safeguard
procedures were reviewed by the Court. On December 27th, the Court
issued a preliminary injunction. Six weeks later, the U.S. government
appealed the injunction to the Federal District Court of Appeals. The
case is scheduled to be heard in May.
On January 1st, 2005, quotas were lifted on imports of textiles and
apparel from China as well as other countries. On April 1st, the U.S.
government released preliminary data on imports from China showing that
imports surged during the first three months of the year, with over 400
million garments exported from China. Chinese export increases were as
high as 1,500 percent in some of the most sensitive textile and apparel
categories.
On April 4th, the U.S. Government self-initiated investigations
into surging imports from China of cotton trousers, knit shirts and
underwear. ON April 7th, the U.S. industry filed six additional
petitions asking for safeguards to be applied against a range of
textile and apparel categories and urged the U.S. government to
expedite its decisionmaking process.

SUMMARY OF DATA ON THE CHINA THREAT

The enormous surge in imports of textiles and apparel from China
during the first quarter of the year demonstrates that the longstanding
concerns of the U.S. textile industry--as well as most of the world's
textile and apparel producers \1\--of a Chinese tidal wave were well
founded.
---------------------------------------------------------------------------
\1\ The Global Alliance of Fair Trade in Textiles and Clothing
(GAFTT) (www.fairtextiletrade.org) is comprised of almost 100 trade
associations from over 50 countries around the world. GAFTT formed in
2004 to counter China's attempts to gain hegemony over world textile
and apparel trade. GAFTT members represent over $150 billion in textile
and apparel trade worldwide.
---------------------------------------------------------------------------
In January through March of 2005, China exported more than 400
million garments to the United States, an all time record for any
country. Imports increased by more $1.3 billion in just 2 months time
and some particularly sensitive products, such as cotton trousers, saw
import increases of as much as 1,500 percent. Exports of cotton
trousers increased from 5 million in Jan-March 2004 to 81 million in
January-March 2005. Cotton knit shirts, another sensitive category, saw
increases of almost 1,300 percent, from 6 million shirts in first
quarter 2004 to 86 million in first quarter 2005.
In categories removed from quota, China's prices in January dropped
an average of 22 percent compared to prices 1 year ago, with the
average Chinese price in January 2005 of $1.25 per square meter
compared to $1.61 per square meter in January 2004. Highly sensitive
categories saw much deeper price cuts, with prices for Chinese cotton
trousers falling 54%, from $10.56 a trouser to $4.75 a trouser. In
fact, if China repeats its behavior in 2002, when 25 apparel categories
saw their quotas removed, the U.S. can expect overall prices for
apparel to drop by more than 50 percent.
Under normal market conditions, China could never offer these kinds
of price reductions; it is only because of direct government subsidies,
currency manipulation, rebates, and tax breaks, that Chinese firms can
undercut every other producer in the market. If a U.S. firm behaved in
such a manner, it would immediately be the subject of numerous federal
investigations where enormous penalties and prison sentences would be
imposed on those found guilty of such practices. Numerous studies,
recent trade data and insights from importers and sourcing agents on
the impact of the quota phase-out all lead to a simple conclusion: if
the U.S. government does not act and act quickly to re-impose quotas
from China, the U.S. textile and apparel sector--along with much of the
world's textile and apparel production--will quickly be over-run and
destroyed by China.
As China's own reports make clear, for the last 15 years, the
Chinese government has been aggressively implementing an ambitious plan
to make their textile and apparel sector the dominant player in world
trade. In pursuit of this goal, the Chinese government has poured tens
of billions of dollars into its textile and apparel sector in the form
of free capital, direct and indirect subsidies and a host of other
``incentives'' to create an environment where no one, including the
lowest cost-producing countries in the world, can compete with them in
world markets.
In this effort, China has largely succeeded. As U.N. trade figures
clearly demonstrate, there is essentially no doubt that China is
substantially underpricing its textile and apparel exports compared
with every other producer in the world. The United Nations COMTRADE
database \2\ shows that China charges on average 58 percent less for
apparel products than the rest of the world.
---------------------------------------------------------------------------
\2\ The United Nations COMTRADE database collects export and import
trade data from government around the world: http://unstats.un.org/
unsd/comtrade.
---------------------------------------------------------------------------
In every case where China has gone head to head with other
producers, China has won by an enormous margin. Typically, China has
ended up with a 75 percent share of the market with the next largest
supplier getting 5 percent. The trade figures show that whenever China
enters the picture, the free market fundamentals that should drive
trade and competition get thrown out the window. Literally, no country
is spared. It has not mattered whether you have the benefits of lower
labor costs (Bangladesh, Indonesia), duty-free access to a particular
market (the Caribbean Basin, Sub-Saharan Africa) or proximity to the
U.S. market (U.S. producers, Mexico and the Caribbean). These factors
simply do not make a difference when China is part of the equation.
The reason for this is the pervasive intervention of the Chinese
government throughout its textile and apparel sector. Because the
Chinese government essentially finances the sector--through currency
manipulation, central bank loans, subsidies to state-owned enterprises,
exports subsidies, tax incentives, reduced electrical costs (among many
others)-- Chinese exporters are free to drop prices to whatever levels
are necessary to get the sale.
This means that as hard as U.S. textile mills or Bangladeshi
knitters or Turkish yarn spinners or Mexican trouser makers or African
shirt manufacturers invest in their businesses, when put head to head
with China, they will lose the sale. This fact has proven out time and
again in world markets where quotas have not been in place. In Japan,
for instance, China has taken an 83 percent of the Japanese apparel
market. The next largest supplier is Italy with 5 percent.
Producers around the world have tried to compete. U.S. textile
mills have one of the highest capital reinvestment rates of any
industrial sector. Since the quota phase-out was agreed to in 1994,
U.S. Government statistics show that U.S. textile mills have invested
more than $34 billion in new plants and equipment. As a result, U.S.
textile output per worker has increased by 37 percent over the last 10
years, from $44.50 per worker hour to $63.54 per worker hour.
In other words, the U.S. industry has done what it was supposed to
do in order to prepare for the quota phase-out. It has re-invested in
its plants and equipment and become even more productive than ever
before. In fact, productivity increases in the U.S. textile sector are
among the highest of any industrial sectors over the last ten years.
But the textile industry, or any industry, cannot compete against
entire governments. We cannot compete against a Chinese government that
gives its exporters a 40 percent price advantage because of a rigged
currency. We cannot compete against Chinese government banks that
provide essentially free cash for plants and equipment. We cannot
compete against state-owned textile mills that get billions of dollars
in government handouts each year and never have to show a profit.
And, as mentioned earlier, we are not alone. All across the globe,
textile and apparel sectors that provide millions of jobs, mostly in
developing and least developed countries, are at risk. A clear
recognition of this is that 28 countries stood up at the WTO's Council
on Trade in Goods last October and demanded that the WTO take up the
issue. Another is the creation of an international coalition of textile
and apparel groups--the Global Alliance for Fair Trade in Textiles--
which was formed just last March and now includes 96 textile and
apparel trade groups from 54 countries representing $150 billion a year
in textile and apparel trade. At GAFTT's most recent meeting in
Washington, the group called for immediate use of the China textile
safeguard in order to prevent China's takeover of world trade in these
sectors.
When the Chinese government breaks the rules, our government can
and should act on behalf of U.S. industry and U.S. workers. The
safeguard measures in the WTO Agreement are directed specifically
toward China because negotiators realized that China in particular did
not play by the rules and, as a result, it posed a real threat to
textile and apparel sectors around the world.

Recommended Course of Action

First, the U.S. Government must expedite the safeguard actions
which it has self-initiated as well as the decisionmaking process for
safeguard petitions filed by the U.S. industry and also modify its
safeguard procedures in order to make them effective.
Specifically, the government must revise its procedures in order to
speed up the decisionmaking process. Currently, the process requires up
to 4 months to conclude and can be instituted only and entire first
quarters worth of data have been reported upon. In real terms, this
means the industry must wait until July or August to get a safeguard
that will then only be imposed for the remainder of the calendar year.
A safeguard that only lasts 5 months is no safeguard.
China has clearly demonstrated an ability to take advantage of the
procedures as currently written. Import increases from China were the
highest in the apparel categories that were clearly targeted by the
industry for safeguard actions. This included a 1,500-percent increase
in cotton trousers and a nearly 1,300-percent increase in cotton knit
shirts.
Instead, the government must revise its procedures to clearly allow
for ``threat'' cases to be brought and for expedited consideration of
both U.S. Government-initiated and U.S. industry petitions.
Second, the U.S. Government must push for a permanent safeguard
mechanism in the Doha Round of trade talks. A serious flaw in the
existing safeguard is that it is currently scheduled to expire in
2008--regardless of whether China ends the unfair trade practices that
make the safeguard necessary in the first place. A permanent safeguard
must be part of the Doha Round of trade talks.
Third, the U.S. Government must begin to aggressively counter
China's unfair trade practices. The government must impose punitive
sanctions against China's imports if China does not move quickly to
float its currency. It must initiate WTO subsidy cases against China's
use of government banks to finance its export machine. It must crack
down on continuing massive transshipment and illegal smuggling of
Chinese textile and apparel products. It must reverse the Commerce
Department position against allowing industry to attack China's subsidy
schemes using countervailing duty laws.
Fourth, the U.S. Congress must take in the lead in demonstrating to
China that there are costs to its mercantilist trade policies and its
refusal to act as a responsible player in the world trade arena. The
Congress should quickly pass the Ryan-Hunter China CVD bill and the
Schumer-Myrick China currency bills. These bills send the strongest
message to China that its anti-free market behavior has real costs and
that the U.S. Congress will not allow more U.S. jobs to be sacrificed
because of China unfair trade practices.
DETAILED REVIEW of CHINA THREAT
The next sections of this statement will present data evaluating
the threat that China poses: 1) the size of China's textile and apparel
sector; 2) the government support that China gives to this sector, and
3) China's ability to underprice and overwhelm its competitors,
including the U.S. textile industry.
Size and capacity of China's textile and apparel sector.

It is no exaggeration to say that China's textile and apparel
sector exists on a scale unimagined in other countries. This sector
alone employs tens of millions of worker and supports, directly or
indirectly, as many as ninety million workers.\3\ Entire cities in
China are dedicated to the production of specific types of textile or
apparel products. And the textile and apparel sector, targeted by the
Chinese government as a ``pillar of the economy'', is China's largest
earner of foreign exchange of any sector, garnering $65 billion in
foreign exchange earnings in 2003.
---------------------------------------------------------------------------
\3\ China: Stick to WTO Rules, Commerce Minister Urges, just-
style.com, September 20, 2004.
---------------------------------------------------------------------------
Today, according to Chinese government reports, China produces more
than 20 billion garments a year, enabling China ``to offer four pieces
of clothing to every person on earth.'' \4\ Its production base has
increased by 50 percent in just the last 4 years. And the Chinese
government reports investments of $21 billion in its textile and
apparel sector in just the last 3 years.
---------------------------------------------------------------------------
\4\ XINHUA news agency (April 14, 2003) ``China's garment industry
makes important strides''.
---------------------------------------------------------------------------
The International Trade Commission reports that, in 2001, ``China
alone accounted for 29 percent (34.7 billion pounds) of the world's
total textile fiber production.'' Keep in mind that China reports that
its textile and apparel output has increased by between 40 and 50
percent since that time.\5\
---------------------------------------------------------------------------
\5\ Id. See, ITC discussion of Yarn and Fabric production Capacity,
pp. 1-19--1-22 of the ITC Report.
---------------------------------------------------------------------------
Other Chinese government statistics show that last year there were
3,784 textile plants under construction in China, with $180 billion in
outstanding planned investment and $78 billion poured into new
production in 2003.\6\
---------------------------------------------------------------------------
\6\ China Surge Big Topic at Cotton Meet, Women's Wear Daily, March
3, 2004.
---------------------------------------------------------------------------
In order to fill these plants with machinery, China has been on a
buying spree during the past four years, in some cases consuming up to
two-thirds of world production of textile machinery (i.e. broadwoven
fabric looms).
Recent information on China's garment industry indicates that China
has maintained its enormous pace of expansion through September 2004.
Already the world's largest exporter of textiles and apparel, China is
reporting a 27-percent increase in production thus far this year.\7\
A new survey of China's apparel manufacturers by Global Sources, a
large broker for many of China's exports, found that 89 percent of them
were planning to expand output after the global end of apparel quotas.
Half of the 215 companies surveyed planned to increase production
capacity by 20 to 50 percent, and several other companies indicated
intentions to expand capacity by more than 50 percent.\8\ The survey
found manufacturers were either building new factories or moving to new
factories and extending existing factory space or upgrading equipment.
All of them said they would be hiring more staff.
China's government support of its textile and apparel industry.

As the U.S. China Commission and other independent bodies have
already noted, the Chinese government engages in a variety of unfair
and anti-competitive trade practices that make it difficult, if not
impossible, for either U.S. manufacturers or other manufacturers, to
compete.
In textiles and apparel, government involvement is pervasive in
China. China has declared textiles and apparel to be a ``pillar
industry of the nation'' and China's textile and apparel output is
actively managed through Five-Year Plans going back almost 50 years,
and the Tenth Five-Year Plan concludes in 2005.\9\ In its most recent
5-year plan, China establishes government objectives for virtually
every segment of the industry.\10\
According to the most recent Textile Five-Year Plan, 46 percent of
textile assets are state-owned, and 31 percent of all state-owned
enterprises are operated at a loss.
For its part, the U.S. government has long acknowledged that China
does not play fair in textiles and apparel. In a recent WTO submission,
the U.S. Government noted that China provides assistance to its textile
sector in numerous ways, including ``the manufacturing of raw
materials, the financing of mill establishments and the purchase and
selling of raw materials.'' \11\
----------
\7\ Chinese Textile and Apparel-- Updated Figures through Sept. 04.

------------------------------------------------------------------------
Increase over YTD
Amount September 2003
------------------------------------------------------------------------
Textile and Apparel production 1,081 billion Yuan 27%
------------------------------------------------------------------------
Exports of textiles and apparel $83.17 billion 20%
------------------------------------------------------------------------
--Garments $44.69 billion 19%
------------------------------------------------------------------------
--Textiles $26.01 billion 27%
------------------------------------------------------------------------
Source: CNTC

\8\ U.S. Weighs Import Limits on China, The New York Times,
September 11, 2004.
\9\ ``Industry Overview: The Tenth Five-Year Plan of the Textile
Industry and its Development'', BizChina, 11/18/2004.
\10\ The Tenth Five-Year Plan contains objectives for all aspects
of the textile and apparel sector. These include:
1. Annual growth rate;
2. Industrial value growth rate;
3. Growth rate for foreign exchange to be earned;
4. Proportionate growth for different textile and apparel
sectors;
5. Labor productivity growth;
6. Energy consumption;
7. Water consumption;
8. Renovation and upgrade of the cotton spinning sector;
9. Renovation and upgrade of the wool yarn and weaving sector;
10. Renovation and upgrade of the silk and linen sector;
11. Renovation and upgrade of the knitted textile sector;
12. Renovation and upgrade of the chemical fibers sector;
13. Renovation and upgrade of the industrial textile sector;
14. Renovation and upgrade of the industrial textile machinery
sector;
15. Renovation and upgrade of the dyeing and finishing sector;
16. Renovation and upgrade of the apparel sector, including the
expansion of exports and development of branded and children's apparel.
\11\ Ibid.
China's other unfair trade practices affecting textiles and apparel
include currency manipulation, forgiveness of loans from state-owned
banks, favorable bank terms for ``honourable enterprises'' which target
export industries, export-contingent tax incentives for foreign-
invested enterprises (FIEs), income tax refunds for foreign investors
in export-oriented businesses, income tax reductions equal to 50
percent for FIE's in export-oriented businesses, VAT refunds for
imported capital equipment used for export-oriented businesses, grants
by individual provinces for export-oriented industries and continued
subsidies for state-owned enterprises which are running at a loss \12\
and subsidies for coal and oil supplied to Special Industrial Sectors
(such as textiles and apparel).
---------------------------------------------------------------------------
\12\ China committed to end these subsidies as part of its
accession agreement and reported that all had been terminated as of
2002. However, recent Chinese government reports indicate that these
subsidies are still in place and that money-losing enterprises continue
to be supported. This includes a report that 47 percent of state-owned
enterprises in the textile sector are running at a loss.
---------------------------------------------------------------------------
China's ability to underprice and overwhelm its competitors, including
the U.S. textile industry.

The threat that China poses to U.S. textile and apparel companies
and their workers can be assessed in a number of ways. These include a
review of: A) China's prior behavior in textile and apparel categories
removed from quota control in 2002; B) China's penetration of textile
markets outside of the United States; C) China's pricing on the
worldwide market for textile and apparel products; D) analyses and
studies by international groups on China's domination in a post-quota
world; E) statements by importers and retailers about their sourcing
intentions once quotas are removed.
It is significant that all of these perspectives come to the same
conclusion--China will dominate trade in textiles and apparel in a
quota-free world. Estimates for the size of that domination begin at
around 50 percent and increase upward to between 70 and 75 percent.
Correspondingly, the impact on the U.S. textile and apparel sector from
such a scenario is severe, with U.S. production plunging by two-thirds
and job losses of 500,000 workers or more. The United States is not the
only victim--job losses worldwide may be a large as 30 million with
developing and least-developed countries bearing most of the cost.
China's prior behavior in textile and apparel categories removed
from quota control in 2002.

In 2002, as part of the phase-out of worldwide quotas, a relatively
small number of textile and apparel categories were removed from quota
control. The bulk of textile and apparel categories--80 percent of
trade--remained under quota restraint until January 1, 2005.
In particular, 25 apparel categories and 115 home furnishing and
made-up \13\ tariff lines saw quota protection removed. This early
quota phase-out provides a preview of how the rest of the world--
including U.S. textile and apparel manufacturers--might fare now that
all quotas have been removed.
---------------------------------------------------------------------------
\13\ Includes curtains, napery, tenting, bags, sailcloth, cordage,
ropes, twine and bags, among other items.
---------------------------------------------------------------------------
The result in 2002 was a quick and devastating flood of apparel
imports from China in quota-free products. In less than 3 years,
China's exports took a 73 percent share of the U.S. apparel market in
the quota-free categories, with exports from China rising more than
1,100 percent. On the home furnishing and made-up product lines, China
took a 60 percent share of the U.S. market as exports from China
increased more than 900 percent. China's share in these textile and
apparel products is continuing to increase today.
In volume terms, China's export increases were unprecedented, with
China's total increases into the U.S. market in just 3 years totaling
nearly 4 billion square meters.\14\ In comparison, China's increase in
this relatively small number of categories was as large as the entire
exports of the second largest supplier to the U.S. market, Mexico,
which shipped 4.1 billion square meters in 2004. China's increase was
larger than the total textile and apparel export from every other
country in the world.
---------------------------------------------------------------------------
\14\ China increased its exports of apparel products by 1.3 billion
square meters and its exports of home furnishing products by 2.6
billion square meters.
---------------------------------------------------------------------------
The flood of apparel exports from China was driven by a sudden,
drastic decline in China's prices for these goods once quotas were
removed. In apparel categories, China dropped prices by an average of
53 percent while for ``made up'' products, Chinese price declines
averaged almost 60 percent.
As China's exports soared, every other major supplier saw its
market share drop sharply, falling by half or two-thirds. Countries
such as Mexico, Honduras and Lesotho with free trade area and tariff
preference benefits saw their exports in these products fall as
dramatically as non-preference countries. This clearly demonstrates
that China will take markets regardless of whether countries are
beneficiaries of duty-free access to the U.S. market.
China's penetration of textile and apparel markets outside of the
United States.

With quotas in place, China's penetration of the U.S. (and
European) markets remained relatively low. In U.S. textile and apparel
categories which had quotas in place prior to January 1, 2005, China's
market share was generally below 10 percent.
However, United Nations trade figures show that in countries where
China has not been restrained, China achieved a virtual monopoly of
textile and apparel trade. Of particular interest to U.S. textile and
apparel manufacturers is Japan and Australia. These are highly
developed countries with strong consumer markets similar to those in
the United States. The U.N. COMTRADE database shows China's share of
these markets at 83 percent with China's textile and apparel exports
totaling $16.5 billion in 2003. The next largest supplier is Italy with
a 5 percent market share and $1 billion in exports. Following Italy is
Korea with a 1.5 percent market share.
U.N. figures show that China has repeated this domination around
the world. China's market share outside the United States and the
European Union averages 63 percent with China's exports totaling $37
billion and the 100 plus countries making up the rest of the world
exporting only $23 billion. The next largest competitor to China in
this quota-free environment is Italy with a 6 percent share. The United
States ranks third with a 3 percent market share.
China's pricing in the worldwide market for textile and apparel
products.

The following excerpts from a December 2003 study by the Jassin-
O'Rourke Group \15\ details how China is able to sell goods at prices
often below the cost of the production:
---------------------------------------------------------------------------
\15\ ``Merits of A Free Trade Area Of The Americas'', December
2003. The Jassin-O'Rourke Group has been providing consulting advice in
textile and apparel sourcing to leading retailers, manufacturers and
sources for more than twenty years.
---------------------------------------------------------------------------
To date, major countries such as China . . . generally take[s]
little or no profit on exported products, in order to generate hard
currency and maintain capacity utilization levels; actual import
statistics (average price per garment) for core products, compared to
typical garment cost analysis, provide further validation of this, and
in fact, suggest that some product is sold well below possible cost.
Additionally, a vast majority of China's apparel manufacturers are
financed by government banks, and fail to repay loans; it is a
widespread and typical practice to ``forgive'' outstanding debts of
apparel firms. Such practice contributes to China's apparel export
pricing strategies that effectively encourage sale of products at
whatever value is necessary to capture and/or maintain business; in our
experience, such pricing is clearly below possible manufacturing costs
for given garments. These hidden subsidies can have a significant
impact on the profitability or competing opportunities of the exporting
companies.
Exporters in China appear to agree that they lack a reputation for
fair pricing. The China Textile News Co. warns that ``malicious price
competition'' in order to earn foreign currency could invite
retaliation by trading partners.
``Major textile companies and organizations said a mechanism to
control export prices should be set up to prevent malicious prices
competition after quotas are removed in 2005. . . . Export prices of
clothing have dropped by about 30 percent since 5 years ago. Price of
shuttle-woven garment fell by 27 percent and those of knitwear by 33
percent, according to Xu Xiaochuan from the Sichuan Xinlixin Textile
Company.
A senior official from the China Chamber of Commerce of Import and
Export for Textiles echoed Xu, saying malicious price competition
should be stopped because it merely invited international criticism and
trade protectionism that would target the whole industry. . . . To push
exports up and pull in more foreign currency, many domestic companies
run down their export business with fierce price cutting as they get
more freedom with the gradual lifting of quotas.\16\
---------------------------------------------------------------------------
\16\ Textiles Warn of Price War Damage, China Textile Network Co.,
8/23/04.
---------------------------------------------------------------------------
United Nations database tends to verify the Jassin-O'Rourke
conclusions and China's own acknowledgement of their pricing
strategies. COMTRADE shows that China charged, on average, 58 percent
less for exports of trousers, shirts and underwear than did all other
suppliers. These trouser, shirt and underwear product groupings
represent the bulk of apparel production worldwide.
According to U.N. data, China's prices averaged $1.84 per garment
compared to an average ``rest of world'' price of $4.42 per garment.
China's disparity with U.S. producer prices was even greater, with
China's prices averaging 76 percent lower than U.S. producer prices
($1.84 per garment vs. $7.63 per garment).
The U.N. data also showed that China's market share for these
product categories in non-quota countries averaged 58 percent, with
China's share in Japan and Australia averaging 88 percent. China's
worldwide market share has been increasing rapidly over the past 5
years as China has ramped up production and increased exports by 76
percent.
The actual size of China's worldwide exports of these products is
simply astounding. According to the U.N., China exported 2.9 billion
shirts, 2.5 billion trousers and 3.6 billion pieces of underwear in
2003, the latest year that information is available.
Economic analyses and studies by institutional groups on China's
domination in a post-quota world.

Virtually every study produced by private consulting groups,
governments and international agencies has concluded that once quotas
were removed China will rapidly increase its share of world trade in
apparel, and the U.S. market will be the largest recipient of these
exports. These studies include:

Goldman Sachs: ``China's Textile/Apparel Manufacturing: The big
bang in 2005,'' June 2004.
Goldman Sachs concludes that ``without quotas, China's exports
are set to expand immediately'' and that ``China has the ability to
grow its textile and apparel exports rapidly once trade barriers are
removed.''
The Sachs study cites China's domination of similar sectors
``such as footwear or toys or sporting goods--equally labor-intensive
and low-value added'' with China's market shares of 66 and 67 percent
as an example of the kind of market control China can assert. The study
also cites the development of a ``complete food chain in textile and
apparel manufacturing'' in China and the likelihood that ``once quotas
are removed, wholesalers and retailers are likely to immediately
consolidate their orders.''
The study also concludes that safeguard measures based on market
disruption are not likely to be successful because of China's ability
to rapidly capture market share. Sachs says that such safeguards may be
approved but because ``there is likely a lead time for China's exports
to prove to be market disruptive, and by which time, China's exports in
these product may already be very substantial''.
World Trade Organization, Hilegunn Nordds: ``The Global Textile
and Clothing Industry post the Agreement on Textiles and Clothing,''
2004
Nordds concludes ``the predicted changes (from quota elimination)
are a substantial increase in market shares for China and India, while
previously unrestricted (no quota or non-binding quotas) countries will
lose market share as well as local producers in North America and the
European Union.'' [emphasis supplied]
Using a GTAP general equilibrium model, Nordds predicts that
China (including Hong Kong) ``triples its share'' and takes a 56
percent share of the U.S. import market for apparel while the Mexico
and the rest of Latin American loses 70 percent, with the Mexican share
falling to 3 percent (from 10 percent) and the South and Central
American share falling to 5 percent (from 16 percent).
United States International Trade Commission, publication 3671:
``Assessment of the Competitiveness of Certain Foreign Suppliers to the
U.S. Market''
The United States International Trade Commission study of the
impact of the quota phase-out concluded that ``China is expected to
become the `supplier of choice' for most importers because of its large
ability to make almost any type of textile and apparel product at any
quality at a competitive price.'' The Commission cited importers who
said ``there is no garment that they would not make in China.''
The Commission reviewed a number of recent studies concerning
the quota phase-out, all of which predicted a large increase in Asian
market share (China share was not generally extrapolated). One study by
Avisse and Fouquin (2001) extrapolates China's apparel exports,
predicting that it would jump 87 percent once quotas are removed.
The World Bank, Elena Ianchovichina and Will Martin: ``Trade
Liberalization in China's Accession to the World Trade Organization,''
2001.

The World Bank study concludes that China will gain a 47 percent
share of the world's export market in apparel once quotas are removed.
While the study does not break out the U.S. import market, most studies
and commentators agree that the U.S. import market is more susceptible
to import penetration by China than others because of its ``big box''
retail concentration, intense price competition and long standing ties
that U.S. importers and retailers have already developed with China.
Statements by importers and retailers about their sourcing intentions
once
quotas are removed.

Executives that make the sourcing decisions regarding textile and
apparel products have been virtually unanimous that imports from China
into the U.S. market will dramatically increase once quotas are
removed.
Of these statements perhaps most significant was a confidential
survey earlier this year of top U.S. executives for major importing and
retailing firms who predicted that China would dominate trade in
apparel once quotas were removed. The poll, which was conducted in
January at the Cotton Sourcing Summit in Miami, asked what percentage
of the U.S. apparel market China would take once quotas were removed.
87 percent of the respondents said China's share would exceed 50
percent and half of those predicted that China would gain between 75
and 90 percent.
Regarding major suppliers, 96 textile and apparel trade
associations from 54 countries around the world have joined together in
the Global Alliance for Fair Trade in Textiles (GAFTT) to raise
concerns about China's ability to disrupt markets around the world once
quotas are lifted. Citing member concerns, GAFTT recently stated:
``Since China joined the WTO at the end of 2001, it has engaged in a
premeditated and systematic effort to monopolize world trade in
textiles and clothing by undercutting free market prices through a
complex scheme of industrial subsidization and currency manipulation''.
Regarding sourcing agents, one leading sourcing executive recently
sketched his scenario for the end of quotas and China's likely
response. In a Women's Wear Daily article, Robert Zane, of Liz
Claiborne, described why China would move to quickly flood the U.S.
market. Zane, who is senior vice president of sourcing, distribution
and logistics at New York-based Liz Claiborne Inc., said the likelihood
of safeguards will probably prompt a flood of Chinese goods into the
U.S. market starting in January.
Just last week, Mr Zane expanded on his remarks by noting that,
``In 1983, when quotas on Chinese shoes were lifted, China made less
than 4 percent of the world's shoes. By 2003, its factories had
captured more than 80 percent of that business, according to the
American Apparel and Footwear Association.'' ``Why should apparel be
any different?'' Liz Claiborne's Mr. Zane asked.\17\
---------------------------------------------------------------------------
\17\ New York Times, April 21, 2005
---------------------------------------------------------------------------
In a complaint filed in the U.S. Court of International Trade on
December 1, 2004,\18\ the United States Association of Importers of
Textiles and Apparel \19\ (the ``USA-ITA'') stated to the Court that
even allowing CITA to accept this petition for investigation harmed and
aggrieved its members \20\ because of the lead time necessary to enter
into contracts to purchase textiles and apparel from China, which it
indicated could be anywhere from 120 to 160 days.\21\
---------------------------------------------------------------------------
\18\ U.S. Association of Importers of Textiles and Apparel v.
United States, et al., Complaint filed in the U.S. Court of
International Trade, Court No. 04-00598, dated December 1, 2004.
\19\ ``USA-ITA is a person who has been ``adversely affected or
aggrieved by agency action within the meaning of section 702 of title
5.'' 28 U.S.C. Sec. 2631(i). USA-ITA members purchase and import into
the United States textile and apparel products, and have entered or
intend to enter into contractual relationships for the purchase and
import of such products,'' supra note 21 at paragraph 6.
\20\ ``USA-ITA is a non-profit industry association representing
the interests of the textile and apparel importers before Congress, the
executive branch, the judiciary, the business community, and the
public.'' U.S. Association of Importers of Textiles and Apparel v.
United States, supra note 21, paragraph 5.
\21\ ``The nature of the business is such that importers typically
need lead times of 120 to 160 days to place and receive orders,'' supra
note 21, paragraph 41.
---------------------------------------------------------------------------
The USA-ITA indicated that its members had entered into contractual
relationships concerning the subject products and ``are now forced to
modify their current sourcing plans--i.e. move such orders outside
China. . . .'' \22\
---------------------------------------------------------------------------
\22\ U.S. Association of Importers of Textiles and Apparel v.
United States, supra, note 21, paragraph 42.
---------------------------------------------------------------------------
The USA-ITA also stated to the Court that its ``members purchase
and import into the United States textile and apparel products, and
have entered into or intend to enter into contractual relationships for
the purchase and import of such products. These products include goods
that are the subjects of domestic petitions--filed October 13, 2004. .
. .'' \23\ The original safeguard request concerning the subject
products was filed October 13, 2004.
---------------------------------------------------------------------------
\23\ U.S. Association of Importers of Textiles and Apparel v.
United States, supra note 21, paragraph 6.
---------------------------------------------------------------------------
The USA-ITA goes further and indicates that its members had already
placed orders for January delivery from China as it indicates that
apparel ordered now would be for delivery in the third quarter of 2005.
USA-ITA also clearly indicated its belief that imports from China of
the subject products would grow dramatically as it argued to the Court
that ``quotas covering such products may be filled and closed by the
third quarter of 2005.'' \24\ USA-ITA believes that any safeguard
limits imposed on the subject products would be filled by the third
quarter of 2005, even though those limits would necessarily be 7.5
percent greater than imports in 2004. USA-ITA, therefore, essentially
admitted to the Court of International Trade that it is convinced
imports of the subject products will increase significantly once quotas
are removed.
---------------------------------------------------------------------------
\24\ U.S. Association of Importers of Textiles and Apparel v.
United States, supra note 21, paragraph 41.
---------------------------------------------------------------------------
Other leading retail, importing and sourcing executives have
regularly expressed their own expectations regarding how China will
quickly move to dominate the U.S. market:
Bloomberg News 8/4/04--Bruce Rockowitz, an executive director at
Hong Kong-based Li & Fung, which sources clothing worldwide for
retailers including American Eagle Outfitters and Abercrombie and
Fitch, estimates that 70 to 80 percent of all clothing production will
move to China after January 1. Mr Rockowitz said that the Li & Fung has
seen a sharp rise in U.S. orders for Chinese clothing. ``The surge
probably reflects fears that the U.S. will impose anti-surge quotas on
Chinese clothing,'' stated Rockowitz.
Financial Times 7/20/04--Bob Zane, head of global sourcing and
manufacturing for Liz Claiborne, told the Financial Times that he
expects Liz Claiborne to halve the number of countries from which it
sources clothes in the next three to 4 years. In the process, China's
share of company direct overseas sourcing will go from about 15 percent
to about half, a ratio that Zane expects other big U.S. purchasers will
match. He sees China becoming ``the factory of the world.''
Textile Asia, June 2004--Alex To Man-yau, head of Chinese
operations for Hong Kong trade facilitator, Trade Easy, said: ``We are
seeing a lot of inquiries and orders for Chinese garments from the
U.S., Europe and Canada.'' Mr. To said that the average value of orders
placed through his firm for Chinese garments by U.S., Canadian and
European buyers has increased fivefold this year over last year.''
Textile Asia, July 2004--Steven Feninger, Chief Executive of
Linmark Group, a trading firm, said: ``Garment orders are rushing to
the Mainland from Southeast Asia and Central America in anticipation of
the lifting of global textile quotas next January. The scale of the
move to China is going to affect national economies.'' Linmark notes
that ``once textile quotas are eliminated under World Trade
Organization rules, buyers are expected to shift en masse to cheaper
Chinese goods.'' Linmark estimated ``that the proportion of its
sourcing from Mainland, Hong Kong and Taiwan will rise to 70 percent in
2 years.''

Statement of John Meakem, National Electrical Manufacturers
Association, Rosslyn, Virginia
NEMA is the largest trade association representing the interests of
U.S. electrical equipment manufacturers, whose worldwide annual sales
exceed $120 billion. The 380 member companies of NEMA manufacture
products used in the generation, transmission, distribution, control,
and use of electricity. These products are used in utility, industrial,
commercial, institutional and residential installations. The
Association's Medical Products Division represents manufacturers of
medical diag-

nostic imaging equipment including MRI, CT, x-ray, ultrasound and
nuclear products.
With the valuable assistance of the Commerce Department's Market
Development Cooperator Program, last year we opened a Beijing office
that is helping our companies with all aspects of their China
engagement. Our office has also been working constructively with
Chinese counterparts on matters such as energy efficiency, standards
development and anti-counterfeiting. Just now in February we conducted
an important intellectual protection event in Beijing and signed a
memorandum of understanding with the Standards Administration of China.
In May we are sponsoring a major energy efficiency conference being put
on in Hong Kong by the U.S. Foreign Commercial Service. In short, our
China Initiative is off to an excellent start.
China is the single biggest factor influencing our members'
business these days. It has quickly become their number three and
fastest growing trading partner and export market (after Mexico and
Brazil). There is enormous demand in China for the products that the
members of NEMA manufacture----from power generating equipment to
medical technology. Direct investment there by NEMA members continues
to grow, both to serve the Chinese market and to send back
low-cost components and commodity products that allow our members to
stay competitive.
Yet at the same time China is a two-edged sword that poses
challenges and concerns for our industry, among them:

Counterfeiting: the U.S. electrical industry continues to
have fundamental, ongoing concerns about Intellectual Property
protections in the People's Republic. While we recognize that the
National Government in Beijing has made moves to address the
counterfeiting problem, NEMA member companies are still all too often
victimized by repeated, vast trademark infringement and piracy. The PRC
needs to keep on strengthening its anti-counterfeiting measures and
enforcement, particularly at the regional and municipal levels.
The China Compulsory Certification (CCC) Mark: While some
NEMA members have been able to obtain this new mark, the process is
expensive, customs enforcement is inconsistent, and in some instances
it remains unclear as to whether the mark is actually required.
Further, despite the ``national treatment'' now afforded to non-Chinese
products, for many electrical items the CCC only accepts goods built to
either Chinese national (GB) standards or standards developed and
published by the International Electrotechnical Commission (IEC) and
International Standards Organization (ISO). (The latter still
frequently does not include products built to U.S. requirements.) It
should also not be necessary to obtain exemptions for non-CCC inputs
coming in to China that will soon thereafter be leaving again as part
of finished goods; plus, both the process for obtaining exemptions and
the actual length of exemptions granted appear to be inconsistent in
practice.
Potentially ``Subsidized'' Product Coming Into the U.S.:
Some of our members have noted competition from extremely low-priced
Chinese electrical imports. Since the goods in question are frequently
not labor-intensively produced, these member companies are concerned
that the Chinese government may be subsidizing the purchase of raw
materials and/or providing them below cost via state-owned enterprises.
China has made WTO accession commitments regarding state-trading
enterprises and subsidies; we trust the USG will join us in encouraging
China to meet and keep those commitments, which include eliminating
specific export subsidies and providing full information on the pricing
mechanisms of its state trading enterprises for exported goods.
Environmental Regulations: We are concerned that China
may follow Europe in imposing unjustified restrictions on the ability
of manufacturers to use materials in products and unnecessary burdens
on manufacturers in the name of environmental protection.

Our industry welcomes competition from China, provided its
companies play by the rules and Beijing fully complies with its WTO
requirements. This said, we in the U.S. must realize that we cannot
always blame the Chinese for problems of our own making. On the one
hand, we can manufacture products better here that anyone--the
productivity gains in U.S. manufacturing in recent years have been
phenomenal. Yet on the other the cumulative, redundant, regulatory and
legal burden that has been heaped upon manufacturers has become a major
problem. The current Administration has thankfully won us some relief
on this front, but there is still much that can done here at home to
boost our own competitiveness.
Again, we thank the Committee for conducting this hearing and
considering our remarks.

National Retail Federation
Washington, DC 20004
April 14, 2005
Hon. Bill Thomas
Chairman
U.S. House of Representatives
Committee on Ways and Means
Washington, DC 20515

Dear Chairman Thomas:

On behalf of the U.S. retail industry, the National Retail
Federation (NRF) submits this written statement in reference to the
hearing held on United States-China Economic Relations and China's Role
in the World Economy before the U.S. House of Representatives Committee
on Ways and Means on April 14, 2005.
The National Retail Federation is the world's largest retail trade
association, with membership that comprises all retail formats and
channels of distribution including department, specialty, discount,
catalog, Internet and independent stores as well as the industry's key
trading partners of retail goods and services. NRF represents an
industry with more than 1.5 million U.S. retail establishments, more
than 23 million employees--about one in five American workers--and 2004
sales of $4.1 trillion. As the industry umbrella group, NRF also
represents more than 100 state, national and international retail
associations.
INTRODUCTION
For most Americans, the most visible sign of the rapid growth in
trade between the United States and China is when they visit their
local stores. It is readily apparent to any shopper that China has
become a large supplier of a wide range of consumer products sold in
the United States, including clothing, shoes, toys, consumer
electronics, housewares, furniture, and so forth. Some view this
situation with alarm and point to the amount of Chinese goods in
American stores as evidence of the demise in American manufacturing and
loss of manufacturing jobs. Some even blame what they see as ``greedy''
retailers for this situation, and accuse retailers of being only
interested in exploiting coolie labor in China to get the lowest priced
goods at the expense of U.S. manufacturers and workers.
This disturbingly widespread view demonstrates a fundamental lack
of understanding about the retail industry and, more generally about
how the U.S. and global economies work. Trade in textiles and apparel
has become a central issue in this debate as China has become a major
supplier of clothing to the U.S. market. Therefore, NRF's comments will
focus on these products in attempting to explain why retailers import
from China, what impact that activity has had on the U.S. textile
industry, and what are appropriate policy options for those inclined to
think that Congress must intervene in this situation in some way.

WHY DO AMERICAN APPAREL RETAILERS IMPORT FROM CHINA?

Like any other business in the United States, retailers face the
daily challenge of creating value for their customers and shareholders.
Retailers must also grow their sales and their businesses in an
industry marked by cutthroat competition, an average profit margin of 2
percent, and downward pressure on prices as U.S. consumers spend less
discretionary income on clothing.
To meet these challenges, retailers must offer customers a fresh
selection of products--goods they want to buy at prices they are
willing and able to pay. Retailers seek out the best sources for
products that meet those requirements. Sometimes that source is a U.S.
producer. But often the best source is a foreign supplier because some
products are only available from foreign sources, and other products
are not available from U.S. producers in the quantities, timeframe, or
at the quality and price available from foreign suppliers.
In deciding where to source the goods they sell, the key
consideration for most retailers is not price, but rather finding
suppliers that provide superior customer service, and retailers are
willing to pay a premium for it. Under the current, just-in-time,
``full-package'' production and supply system, superior customer
service means textile and apparel suppliers must make the retailer's
needs the top priority, provide consistently high quality, speed-to-
market and on-time delivery, and assist the retailer along every step
in product development, from concept to market.
While there are U.S. textile companies providing good customer
service, decades of protectionism through quotas and other barriers
limiting foreign competition have had an unfortunate impact on the
business ethic of many in the textile industry. Retailers frequently
complain that too many U.S. textile companies treat them--their
customers--as ``the enemy,'' and view their business relationship with
the retailer as an entitlement, rather than something that they must
earn.
Meanwhile, Chinese suppliers, often owned by Hong Kong and
Taiwanese companies with decades of experience competing for business
in the U.S. market, have learned that the formula for success is
treating the customer as ``number one.'' China also has other key
advantages over even lower-cost countries--a work force that sets the
standard for skill and productivity, modern factories and
infrastructure built by massive foreign investment, easy access to raw
materials through integrated textile and apparel production,
competitive prices, consistently high quality, innovation, flexibility
in executing orders, and ``speed to market'' (i.e., the ability to get
goods to the customer quickly).
Although many in the U.S. textile industry blame Chinese
``cheating'' and ``unfair'' prices for lost jobs and bankruptcies,
suppliers who are unable, or unwilling to serve their customers' needs
will lose out to their competition regardless of price or how much new
technology they may have invested in.

IS CHINA DESTROYING THE U.S. TEXTILE INDUSTRY?

Many textile companies, their Washington lobbyists, and UNITE-HERE
contend that imports from China are devastating the U.S. textile
industry. But is this view really accurate?
Due to changes in the U.S. economy, imports as a whole have grown
steadily over the past 40 years so that, by value, over 70 percent of
all clothing sold in the United States is now sewn outside the United
States. Import penetration is even higher when calculated by volume--
over 90 percent. Accordingly, any increase in imports from China will
largely come at the expense of other foreign suppliers, not U.S.
production, and will not change the total import level.
While China's share of global production is growing, a look at
import mix and the apparel market shows that China is not the core
problem the U.S. textile industry claims it is:

Total U.S. apparel imports have risen only marginally
over the past 4 years from $69 billion in 2000 to $76 billion in 2004
reflecting slight sales growth in the U.S. market (2.5% per year
average);
China accounts for at most 10% of the total U.S. market
for apparel by value;
Events in the apparel market have no impact on 83 percent
of U.S. textile industry shipments, which are non-apparel related
products;
China accounts for only 1% of the U.S. market for textile
products (yarns and fabrics)--Canada, Mexico, the EU, and Korea account
for 63%;
China accounts for only 10% of the total U.S. market for
made-ups;
Imports account for only 3.7% of the total U.S. market
for carpets and rugs and 13.5% of the total U.S. market for curtains
and linens;
China is a growing export market for the U.S. textile
industry--in 2003, 8% of the total value of textile and apparel
products imported from China contained U.S. content (cotton $737m; MMF
$130m, yarn $55m, fabric $31m).

In addition, for retailers the risks of putting all their orders in
China are becoming too high for the following reasons:

U.S. manufacturers will continue to file trade cases
targeting Chinese goods;
With most imports from China coming through the West
Coast, particularly LA/Long Beach, growing port congestion and labor
strife in 2002 that resulted in a shutdown of the West Coast ports
created were wake-up calls for retailers;
During the SARS scare in 2003, retailers were unable to
send their sourcing and design staffs to China for over a month;
China is experiencing a serious energy crisis, which is
causing blackouts and factory closures;
Due to the huge influx of foreign direct investment,
labor costs along coastal China are rising;
In response, the Chinese government is pushing investment
inland, which has a backward infrastructure, creating higher costs and
potential delays in shipments.

As a result, retail orders in China have increased only 12 to 20
percent, and retailers are actively seeking alternative places to
source product in places like India, Pakistan, and Central America.

WHAT IS REALLY GOING ON WITH THE U.S. TEXTILE INDUSTRY?

With jobs declining steadily (1.1% annual average) since 1948,
regardless of profitability, textile employment is a poor indicator of
the overall health of the sector.
As in manufacturing as a whole, most textile job losses are due to
improvements in technology and productivity, not trade, as the industry
has become capitol intensive.
This change is evident in a modern textile mill--instead of the
factories of forty years ago, crowded with mill workers, there are
cavernous rooms with automated spinning, weaving, and knitting machines
making miles of yarn and fabric, all run by computer.
Textile bankruptcies are also not indicative of an industry that is
on the verge of extinction, but rather one that is restructuring,
rationalizing, and reducing capacity (plant closings, layoffs), to
improve productivity, competitiveness, and profitability.
The majority of mills, those making home furnishings, floor
coverings, automotive and industrial products and other non-apparel
products, is profitable ($1.3b in 2003).
A minority of mills, those making yarn, thread and fabric for
apparel production, is facing serious problems that have existed long
before China came on the scene:
Private-ownership with limited access to capital;
High, unsustainable debt loads (e.g., Pillowtex);
Comparatively inefficient and behind in the use of new
technologies;
Productivity further hampered by U.S. quotas and high tariffs that
limit use of a broader selection of competitively priced foreign yarns;
Resulting in a lack of flexibility, willingness and ability to
provide short runs to designer specs for their retail and apparel
customers;
Failure to adapt to fundamental changes in the U.S. apparel
industry (evolution to global marketing and branding companies; ``full
package'' production; specialty and niche production in the U.S.-
commodity production overseas); and
Failure to prepare for end of quota--most textile companies polled
in a UNC study had done nothing during the 10 years leading up to the
end of quotas.
Evidence demonstrates underlying strengths in the U.S. textile
industry:
Has attracted investment from Warren Buffet (Fruit of the Loom,
Shaw Industries), Wilbur Ross (Burlington, Cone Mills) and Koch
Industries (Invista);
While textiles and apparel are declining in terms of employment and
share of GDP, many individual companies are stronger and more
profitable as a result of restructuring (e.g., Cone & Burlington
combined into International Textile Group);
Spurred by import competition, successful, entrepreneurial
companies (e.g., Milliken) are adapting by getting out of the
production of low cost, commodity yarns and fabrics and into
specialized high-performance yarns and fabrics;
This change is creating more highly skilled, better-paying and
highly trained jobs--marketers, designers, chemists and lab
technicians, engineers--rather than low-skilled workers making
commodity apparel yarns and fabrics;
U.S. exports of fabric and yarn to Chinese clothing factories have
jumped 150 percent from $83 million in 2002 to a quarter of a billion
dollars in 2003, and China is becoming an important export market for
U.S. cotton.

WHAT ARE APPROPRIATE POLICY OPTIONS?

Even though the World Bank estimates that the increase in trade
following China's accession to the World Trade Organization has added
$75 billion to global income, some still believe trade with China is
bad for the U.S. economy, security, and jobs. Under the guise of ``fair
trade'' and leveling the proverbial playing field, some Washington
policy makers believe that limiting imports from China is necessary to
protect U.S. manufacturers and jobs and correct the bilateral trade
deficit. However, this approach raises the fundamental question whether
it is a wise or effective strategy in dealing with issues on China.
Over the past twenty-5 years, the United States has achieved an
extraordinarily high level of import penetration for clothing--over 70%
by value, 90% by volume--and shed a million textile and apparel jobs,
notwithstanding the fact that textiles and apparel have been and remain
the most protected sectors in U.S. manufacturing. Therefore, if the
objective is to protect textile jobs, history proves that limiting
imports, from China or any other country, through quotas, increased
duties, or other trade barriers is a manifest failure. The reason is
simply because job losses have been and will continue to be driven by
factors other than trade.
Moreover, decades of protectionism have also been a dismal failure
as a means to make the U.S. textile industry more competitive. Instead,
protectionism has hindered innovation, advances in productivity, and
delayed needed restructuring in the industry, while imposing a huge
cost on American consumers, taxpayers, and the economy as a whole.
Finally, with China a dominant supplier of many basic consumer
products, it is curious why would anyone think that a reasonable policy
to address our issues with the Chinese is to impose a huge, regressive
sales tax on American consumers--like legislation (S.295) introduced by
Senator Schumer (D-NY)--and punish U.S. companies and their workers who
depend on trade with China?
A more effective approach is to help the textile industry develop
new export markets, including China, and create viable sourcing
alternatives to China. This goal can be best achieved by supporting:
(1) negotiations at the WTO that will eliminate high tariffs and other
trade barriers on textiles and apparel globally on a reciprocal basis;
and (2) free trade agreements with flexible and commercially viable
rules for textiles and apparel that will provide the incentives
retailers and apparel manufacturers need to expand trade and investment
in countries other than China. Policy makers should also encourage
further rationalization and consolidation of the textile industry,
which may lead to job losses, but will ensure that the jobs that remain
or are created will be better, higher paying, and higher skilled, and
companies will be stronger and more competitive.
Respectfully Submitted,
Erik O. Autor
Vice President
Int'l Trade Counsel

Statement of William R. Carteaux and Karen Bland Toliver, Society of
the Plastics Industry, Inc.
The Society of the Plastics Industry, Inc. (SPI) is pleased to
submit comments to the House Ways and Means Committee for the April 14,
2005 hearing on United States-China Economic Relations and China's Role
in the World Economy. SPI applauds the Chairman and the Committee for
addressing this critical issue and appreciates the opportunity to
submit these comments.
Founded in 1937, SPI is the primary plastics industry trade
association with over 1,000 members representing all segments of the
supply chain--plastics products processors, manufacturers of machines
and molds, and raw material (resin) suppliers. With more than $300
billion in annual shipments and employing 1.4 million workers across
the 50 states, the plastics industry is the nation's fourth largest
manufacturing segment. SPI's members range from large multinational
corporations to small and medium-sized companies, many of which are
family owned businesses, all playing a vital role in the delivery of
myriad plastics products that enhance every aspect of our lives.
The emerging consensus that China presents both challenges and
opportunities for U.S. manufacturers confirms the importance of a
strong and cooperative relationship between the two countries. The
United States is China's second largest trading partner, and China has
become the fifth largest export market for U.S. manufactured goods.
China's rapid domestic growth spurs robust demand for plastics
products, creating opportunities for U.S. plastic companies to supply
China's large and growing market. However, many of our members who
desire to keep their manufacturing operations in the United States have
found it difficult to leverage the opportunities of China's vast market
because they are forced to compete against low-priced Chinese imports,
have lost business to customers that have moved offshore to take
advantage of lower Chinese production costs, and confront barriers that
hinder export growth. Simply put, we are concerned that the mutually
beneficial relationship between the United States and China is
increasingly becoming one-sided to the detriment of U.S. manufacturers
and workers. China reaps the benefits of an open U.S. market but fails
to live up to its international trade obligations. Below, we briefly
describe some of the challenges U.S. plastic manufacturers confront in
the context of U.S.-China trade relations.
The Plastics Industry's Trade Balance
Over the past decade, the plastics industry enjoyed a large and
growing trade surplus, peaking to $6.1 billion in 1997.\1\ This surplus
has steadily declined in recent years, reaching a record low of $2.3
billion in 2003. While a 16.2% increase in total plastic exports last
year helped boost the trade balance to $3.8 billion, the industry still
observed some alarming trends. We had a $3.3 billion overall trade
deficit with China. Only 5.5% of U.S. plastics shipments went to China,
but China accounted for 19.5% of plastic imports. Moreover, despite a
9.5% increase in plastic product imports, the plastic products trade
deficit reached an all-time high of $4.5 billion. Production of
plastics products is the industry segment representing about 60% of
shipments and over 85% of industry employment. Thus, the plastics
product trade balance is an important measure of the industry's overall
trade performance.
---------------------------------------------------------------------------
\1\ Global Business Trends, Partners and Hot Products, August 2004.
The Global Trends report is an analysis of plastic industry trade flows
prepared by Probe Economics on behalf of SPI. Unless otherwise
indicated, trade statistics cited in this submission are based upon
data contained in the Global Trends report. For purposes of the trade
data analyses, ``plastics industry'' includes four sectors: resins,
plastics products, molds for plastics and plastics machinery. In the
case of plastics products, trade data are analyzed for items
categorized under HTS 3916 to 3926, consistent with the categorization
applied by the U.S. Census Bureau.
---------------------------------------------------------------------------
China stands out as the trading partner having a significant impact
on the plastics products trade balance. Last year, China took in only
3.1% of U.S. exports, but accounted for 29.5% of plastic product
imports. Indeed, Chinese plastic product imports have grown by more
than 15% every year for the past 5 years. This analysis does not
account for the enormous quantities of Chinese imports that enter the
U.S. market as either part of, or as packaging for other products, such
as audio and video equipment, games and toys, furniture, and so forth.
To illustrate the impact of such ``contained trade,'' whereas in 2003,
the $3.3 billion deficit in plastic products trade represented only
2.2% of U.S. plastic product shipments, when ``contained trade'' is
accounted for, the deficit increased to $20.2 billion, or 13.3% of
industry shipments.\2\ Our preliminary analysis of ``contained trade''
data for 2004 shows that Chinese imports are continuing to rapidly
capture significant U.S. market share.
---------------------------------------------------------------------------
\2\ ``Contained'' plastics trade is quantified using an input-
output methodology based upon data compiled by the U.S. Bureau of
Economic Analysis.
---------------------------------------------------------------------------
In light of these trade data in which China stands out year after
year as a major contributor to the declining plastics trade surplus, it
is no wonder that SPI members identify China as a significant influence
on the industry's ability to remain competitive both in the United
States and abroad.
China's Currency Manipulation
In recent periods, many of SPI's members have experienced a
difficult cost-price squeeze that has eroded their profitability. For
some, the price pressures have stemmed from low Chinese import prices
reflected in the substantially undervalued yuan. As demonstrated above,
the U.S. plastics industry has borne a heavy burden from the distorted
yuan-dollar relationship, which has effectively made U.S. exports more
expensive and Chinese imports cheaper than they otherwise would be if
market forces determined China's yuan value. Our members believe that
the alarming bilateral trade deficit with China will continue to
increase unless China's exchange-rate system reflects fundamental
economic conditions. While we are heartened by President Bush and
Secretary Snow's recent admonishments to the Chinese government that
the time is ripe for exchange-rate reforms, we implore the Committee to
continue to press the Administration for concrete results in the near
term. The Administration and Congress should immediately pursue all
WTO-consistent measures to eliminate the unfair competitive advantage
that China enjoys from its substantially undervalued yuan. Even a small
increase in the yuan value would curb the lost sales that some U.S.
plastics companies have experienced from low-priced Chinese imports.
For example, in 2003, a plastics cutlery and housewares
manufacturer lost 14% of his sales valued at $4 million to Chinese
imports. The imported products were sold for less than the
manufacturer's raw material costs alone. The manufacturer could not
understand how this was possible given that the products had to be
produced and shipped half way around the world. Lower labor costs in
China did not account for this anomaly because the manufacturing
process for this particular product is quite automated, even in China.
It stands to reason that the undervalued yuan drove the extraordinarily
low prices this manufacturer was compelled to compete against.
This is just one example of many illustrating the growing
frustration that some plastics companies express when facing the harsh
reality of lost sales due largely to the prolonged undervalued yuan. As
Jon McClure, a SPI member and President and chief executive officer of
ISO Poly Films, Inc., attests: ``I've compared my costs to a
hypothetical Chinese film producer's costs. And based on average
selling prices of imported Chinese film sold in the U.S. market, it is
absolutely clear that the low yuan value is only way China can compete
head to head with us in films. It's not cheap labor or about being
competitive. It's the exchange rate.'' \3\
---------------------------------------------------------------------------
\3\ Mr. McClure has testified and presented this analysis before
the U.S.-China Economic & Security Review Commission's January 30, 2004
Field Investigation on China's Impact on the U.S. Manufacturing Base.
---------------------------------------------------------------------------
Severely Lax Protection of Intellectual Property Rights
The widespread illegal counterfeiting and pirating of U.S. goods
extends to U.S. plastics products. Although extremely difficult to
track down, several SPI members possess evidence of egregious
counterfeiting of their products in China. Some notable examples
include:
A medical device manufacturer makes Class II patented medical
devices which are registered with the FDA and sold globally. He
discovered that unauthorized copies of his patented products made in
China were being offered for sale in Canada.
A household goods manufacturer found his product for sale in Europe
packaged to look like it was produced by his company. The packaging
even included a counterfeited ``Made-in-the-USA'' label. However, the
company never sold this product in Europe. It was counterfeited in
China.
A molder that makes proprietary stints for the medical imaging
market saw his product knocked-off and sold in China. The counterfeited
product was of inferior quality, but was sold in China and exported to
other markets with less stringent health and consumer safety
regulations.
A manufacturer of plastic flashlights with registered design and
functional patents, trademarks, and copyrights found blatant
counterfeiting of his products in China. The illegal counterfeiters are
massively producing these knock-offs and using the company's own logo
to market and sell the flashlights around the world. The manufacturer
has been unable to stop the illegal counterfeiting in China, but after
expending enormous resources was able to ban them from importation in
the United States. The company is now having to grapple with the fact
that these knock-offs are sold by a major retailer in Canada. However,
because Canada does not offer the same protections as the United States
to ban imports of counterfeited goods, the manufacturer is hoping to
persuade the Canadian retailer to terminate its purchases of the knock-
offs.
Despite China's steps to strengthen protection of intellectual
property rights, far more work remains to be done in this area, as even
the U.S. Trade Representative's Office acknowledged in its 2005
National Trade Estimate Report on Foreign Trade Barriers. In fact, it
is in China's best interests to stop this criminal activity because the
pervasive counterfeiting is not limited to electronic and media
devices, but as shown above, extends to plastic products used for
medical purposes. Needless to say, counterfeited medical products pose
a dangerous threat to public health and safety in China.
For the U.S. plastics industry, the severely lax protection of
intellectual property rights is a de facto trade barrier that hinders
plastics exports to China. The Chinese plastics market offers great
opportunities for U.S. plastics manufacturers, who are constantly
innovating and producing superior quality products to serve a variety
of end-use markets. However, many companies are understandably weary of
even attempting to sell their products in China for fear of having
their proprietary designs and trademarks illegally ripped off. Equally
disturbing is evidence that counterfeited products are exported to the
United States and other markets around the world. The time is long
overdue for China to institute a far more stringent enforcement regime
that extends to all levels and sectors of its economy.
We recognize that stronger protection of U.S. intellectual property
rights is a top priority for the Administration, and we certainly
support the efforts to date to engage the Chinese government on this
issue. However, the unrelenting counterfeiting and pirating of U.S.
goods calls for greater urgency. For this reason, after completion of
USTR's out-of-cycle review of China's intellectual property regime--
which we believe will evidence the devastating impact on U.S. economic
interests--we encourage the Administration to seriously consider filing
a formal WTO complaint against China on this matter. We hope the
Committee will join the efforts of industry and other interested
parties in supporting this exercise of U.S. rights under the WTO.
Elimination of Remaining High Tariffs on Plastics Industry Products
Upon joining the WTO in 2001, China committed to tariff reductions
of about 10%. Although China has implemented many of these tariff cuts,
its overall tariff levels remain high, particularly on plastics
imports. For example, as a signatory to the WTO Chemical Tariff
Harmonization Agreement, China agreed to reduce tariffs on plastic
resins. China currently imposes tariffs of 9.7% on most plastic resins
even though the Agreement calls for tariffs cuts to 6.5%. China does
not intend to reduce these resin tariffs to 6.5% until 2008. Tariffs on
polytetrafluoroethylene resin (PTFE), a major input for the production
of cookware and other consumer products, remains high at 10%. In
addition, on a host of plastic products, such as tubes, pipes, bath
items, bags, kitchenware, and construction materials, China imposes a
10% tariff. Extrusion and blow molding machines enter at a 5% tariff
rate, and plastic molds at tariffs ranging from 5-10%. When combined
with the 17% VAT rate, U.S. exporters outlay significant funds to gain
access to China's market.
In contrast, these same plastic products enter the U.S. market at
tariff levels no higher than 6.5%. Tariffs on imports of machinery and
molds are even lower, with most items in these tariff headings entering
at 3.1%. The disparity between U.S. and Chinese tariff levels starkly
illustrates the relatively less restricted access that Chinese plastics
imports enjoy in the U.S. market--a competitive benefit exacerbated by
the undervalued yuan.
SPI certainly commends China for the substantial tariff cuts it
made when joining the WTO in 2001. However, we strongly believe that
further tariff reductions are warranted to help expand U.S. plastics
exports to China. Given its competitive position in the worldwide
plastics market, China is fully capable of opening its market by
cutting tariffs to levels comparable to other major plastics markets
such as the United States and the European Union. To this end, SPI will
call upon USTR to press for further tariff reductions as part of the
non-agricultural market access negotiations in the Doha Round. While we
recognize that substantial liberalization of agricultural trade is a
top priority, deep cuts in industrial tariffs, particularly among WTO
members such as China and India, are needed to obtain a good deal for
U.S. manufacturers. We would welcome the Committee's support for our
efforts to achieve parity with China on market access for U.S. plastics
goods into that market.
Strict Enforcement of U.S. Trade Laws to Combat Unfair Trade Practices
Finally, as the Committee examines the U.S.-China trade
relationship, we encourage it to ensure that our trade laws remain
effective to combat unfair trade practices. SPI supports strict
enforcement of these laws as remedial measures against injurious unfair
trade practices. In this regard, we join the National Association of
Manufacturers' support for legislation directing the Commerce
Department to apply the countervailing duty statute to China and other
countries designated as non-market economies. Despite China's WTO
commitment to discipline subsidies, Chinese manufacturers' continued
receipt of governmental assistance at the federal, provincial, and
local levels, is well-documented. Such benefits confer an unfair
competitive advantage to these manufacturers when they sell their
products in the global market. We feel strongly that U.S. manufacturers
who believe they are injured by such unfair subsidization should have
an effective mechanism to remedy their harm. Closing this loophole in
our unfair trade laws will send an unequivocal message to U.S.
manufacturers that Congress will not countenance any relaxation of the
mechanisms to combat unfair trade practices.
Conclusion
China is not the panacea to the many challenges confronting the
continued viability of plastics manufacturing in this country. Indeed,
exorbitant natural gas and health care costs, a shortage of skilled
workers and other pressures may pose an even greater threat to the
industry's survival if these domestic impacts are not addressed in the
short-term. For our part, SPI has been working on all fronts to secure
both domestic and international policies that will guarantee the
industry's health for decades to come. Our members have stepped up to
the challenge of globalization by continuing to innovate and further
increase productivity to compete in the global marketplace. They do not
want or need protectionist measures but believe strongly that all U.S.
trading partners, and particularly, China, must be held accountable for
their international trade commitments.
SPI appreciates the opportunity to present the plastic industry's
concerns regarding China on the record. We look forward to the
Committee's continued work in this area and would welcome the
opportunity to work further with you on developing mechanisms to
address the complex issues arising under U.S.-China economic relations.

Statement of Terrence B. Stewart, Esq., Stewart and Stewart
A. Introduction
Over the past 25 years, the U.S.-China trade relationship has grown
to be an important one for both countries. On the U.S. side, China is
now the U.S.' third largest trading partner, surpassing Japan in 2003.
In 2004, China was the second largest supplier of imports to the U.S.
(behind Canada) and the fifth largest purchaser of U.S. exports (after
Canada, Mexico, Japan, and the UK). If current trends continue, China
is likely to surpass Canada and become the U.S.'s largest source of
imports by 2006. On the Chinese side, the U.S. is China's second
largest trading partner overall, the number one destination for exports
from China, and the sixth largest supplier of imports into China.
The most significant aspect of U.S.-China trade, however, is that
it is seriously imbalanced. Since 1985, the U.S. trade deficit with
China has increased year by year. In 2004, the deficit reached $162
billion, the largest bilateral trade deficit ever recorded. See tables
and chart below.

U.S.-China Trade Balance U.S.$ (billion)
----------------------------------------------------------------------------------------------------------------
Year Year Year Year
----------------------------------------------------------------------------------------------------------------
2004 -162.0 1999 -68.7 1994 -29.5 1989 -6.2
----------------------------------------------------------------------------------------------------------------
2003 -124.1 1998 -56.9 1993 -22.8 1988 -3.5
----------------------------------------------------------------------------------------------------------------
2002 -103.1 1997 -49.7 1992 -18.3 1987 -2.8
----------------------------------------------------------------------------------------------------------------
2001 -83.1 1996 -39.5 1991 -12.7 1986 -1.7
----------------------------------------------------------------------------------------------------------------
2000 -83.8 1995 -33.8 1990 -10.4 1985 -0.6
----------------------------------------------------------------------------------------------------------------

[GRAPHIC] [TIFF OMITTED] 23921A.018

[GRAPHIC] [TIFF OMITTED] 23921A.019

Although China is currently the fastest growing export market for
U.S. goods, the much smaller U.S. export base means the U.S. runs an
increasing trade deficit with China, with the result that the growth in
U.S. exports to China is dwarfed by the growth in U.S. imports from
China.
The ever-growing trade deficit with China is not sustainable. The
trade deficit flows from factors that are not market-driven, such as
WTO compliance problems, currency issues, and intellectual property
violations, among others. The U.S. needs to take forceful and effective
action to shrink the trade deficit with China, to bring the trade flows
between the US and China into a realistic balance, and to work to
improve respect in China for the rule of law.
B. Summary of Presentation
This paper is largely drawn from a report prepared for the U.S.-
China Security and Economic Review Commission earlier this year and
testimony provided to that body in February. See www.uscc.gov/hearings/
2005hearings/written_testimonies/05_02_3_4wrts/
stewart_terence_wrts.pdf. The paper provides an overview of the major
trade and economic issues in the U.S.-China Relationship. It reviews
China's WTO Compliance in its first three years of membership, then
outlines the major trade remedies that the U.S. should employ to insure
more of a level playing field. The paper then examines the increasingly
important exchange rate issue. Then it comments briefly on the range of
IPR Protection issues. And finally, the paper identifies some potential
WTO cases that the U.S. could bring in the WTO where China is having
difficulties bringing itself into compliance and where a WTO challenge
could be helpful in bringing about compliance in fact.
China has made tremendous strides in meeting its WTO obligations,
but it still has a long way to go. While not all parts of the
government seem to be fully committed to full compliance, the efforts
taken by China have been extensive and are generally viewed as a good
faith effort to address the complex challenges China faces in changing
its economy to be fully in compliance. China has worked reasonably well
on many issues in a bilateral fashion to address a number of problems,
and the U.S. and other trading partners have worked hard to provide the
technical assistance and other help to permit China to achieve what it
appears to generally desire, a system in compliance. Nonetheless, given
the particularly problematic disparities in the bilateral U.S.-China
trade relationship it is critical that we use all tools available in
the WTO and within our own trade laws to help China move toward meeting
its obligations both to the U.S. and to the world trade regime
generally.
C. Overview of China's WTO Compliance
In 2004, the third year of China's WTO membership, China met its
WTO commitments in numerous areas. Nevertheless, in many areas, China
has still not achieved full compliance with its WTO commitments. For
example, in the following areas, the U.S. Trade Representative's 2004
WTO compliance report noted continuing concerns to both the U.S.
government and the U.S. private sector.

Intellectual property rights: Although China has
undertaken major efforts to revise its IPR laws and regulations, piracy
remains rampant and enforcement of IP rights is seriously inadequate.
Trading and distribution rights: China implemented its
commitment to full trading rights ahead of schedule. However, concerns
remained regarding distribution rights in that China had not issued
specific rules clarifying how distribution rights would be acquired.
Services: In many services sectors, although China met
the ``letter'' of its commitments to liberalize services, it frustrated
the ``spirit'' by imposing new and burdensome licensing and operating
requirements, such as high capital requirements and prudential rule
requirements that exceeded international norms.
Agriculture: U.S. exporters experienced continuing
problems with market access and transparency.
Industrial policies: In a number of areas such as the
following, China has continued to employ policies that effectively
limit or impose conditions on market access, or give preferential
treatment.

discriminatory VAT policies
failure to provide national treatment with respect to
price controls on medicines and drug reimbursement
preferential import duties to certain products
(particularly from Russia)
discriminatory application of SPS measures
disparate standards testing of foreign products compared
to domestic products
inadequate transparency for proposed technical
regulations and conformity assessment procedures
development of unique standards for products in spite of
existing international standards
inconsistent application of the China Compulsory
Certification (CCC) mark
investment laws and regulations that continue to
``encourage'' technology transfer
an auto industrial policy that discourages auto parts
imports and encourages use of domestic technology
government procurement policy that mandates purchases of
Chinese-produced software to the extent possible
D. Overview of Trade Remedies
When China acceded to the WTO in December 2001, its trade regime
was not fully consistent with WTO rules. As a condition of granting
China early entry into the WTO, China agreed that, for certain periods
of time following accession, other WTO members would be able to employ
two China-specific trade remedy measures to address imports from China
causing market disruption or injury to another member's domestic
industries.
1. China Product-Specific Safeguard (Section 421)
Article 16 of China's Protocol of Accession established a general
``product-specific special safeguard'' measure with respect to Chinese
goods. This measure permits WTO members, for 12 years following China's
accession (i.e., December 11, 2013), to take action to curtail surges
of imports of Chinese goods that cause or threaten to cause ``market
disruption'' to a domestic industry producing similar goods. This
product-specific safeguard, unique to China, is applicable to any type
of product (both industrial and agricultural goods).
In U.S. law, the China product-specific safeguard was enacted as
section 421 of the Trade Act 1974 (19 U.S.C. Sec. 2451). The rationale
of section 421 is that U.S. industries should not lose jobs due to
competition from Chinese imports at a time when China is adjusting to
WTO obligations. Congress indicated that the measure should be applied
vigorously to address import surges from China, noting that ``if the
ITC makes an affirmative determination on market disruption, there
would be a presumption in favor of providing relief.''
The ITC has conducted only five section 421 investigations so far:
(1) pedestal actuators, (2) steel wire garment hangers, (3) brake drums
and rotors, (4) ductile iron waterworks fittings (DIWF), and (5)
innersprings. The last active investigation was completed more than 1
year ago, in March 2004. In three of the five investigations, although
the ITC made an affirmative injury determination and recommended
relief, the President chose to deny relief to the domestic industry.
Given this track record, and the strong lobbying by China to discourage
the President from granting relief in these cases, domestic industries
have been discouraged from filing new petitions. Thus, section 421,
unfortunately, has been an ineffective trade remedy. The expectations
of its utility as a measure to provide relief to U.S. industries
injured from a surge in Chinese imports have not been realized.
2. China Textile Safeguard
The China textile safeguard is authorized by paragraph 242 of the
Working Party Report to China's WTO accession. That provision permits
other WTO members, until December 31, 2008, to impose a safeguard
measure restraining Chinese textile imports if it is shown that they
are ``threatening to impede orderly development of trade in these
products'' due to ``market disruption.'' In the U.S., the Committee to
Implement Textile Agreements (``CITA'') administers the procedures for
investigating petitions and imposing safeguards on Chinese textile
imports. If a safeguard measure is imposed, CITA may restrain Chinese
exports in the safeguard product categories to 7.5-percent growth.
To date, the U.S. textile industry has used the textile safeguard
mechanism with mixed success. Because CITA did not issue procedural
rules until May 2003, the domestic industry did not file initial
petitions until July 2003 and CITA did not impose the first textile
safeguards on three product categories until December 23, 2003.
Thereafter, in June 2004, U.S. sock producers filed a safeguard
petition and CITA imposed a safeguard on October 29, 2004.
In October and November 2004, anticipating the end of global
textile quotas on January 1, 2005, a domestic textile industry
coalition filed a series of textile safeguard petitions covering a
variety of products that were based on the ``threat'' of increased
imports rather than actual increased imports. When CITA accepted the
new threat-based petitions, retailer and importer groups filed suit in
the U.S. CIT claiming that CITA lacked authority to consider petitions
based upon threat alone and asking the court to enjoin CITA from
granting relief. On December 30, 2004, the CIT granted the motion for a
preliminary injunction and issued an order enjoining CITA from
proceeding on the threat-based safeguard requests during the pendency
of the court action. The CIT's preliminary injunction is currently on
appeal to the U.S. Court of Appeals for the Federal Circuit.
Most recently, on April 4th, CITA self-initiated China textile
safeguard investigations on three product categories based on
preliminary import data from the first quarter of 2005, and on April
6th, a domestic industry coalition filed seven safeguard petitions
covering fourteen products. Thus, after a shaky start, the textile
safeguard appears to be being used and at least initial cases suggest
it may be effective within the parameters of the provisions.
3. Antidumping Duty Law--Under-Collection of Dumping Duties on
Chinese Imports

The trade remedy of antidumping law applies to imports from China
as well as other countries. However, in recent years, it has become
apparent that, due to significant undercollection of dumping duties by
U.S. Customs on Chinese products, U.S. industries that successfully
petitioned for antidumping duty relief from Chinese imports have not
received the full benefits of antidumping duty orders to which they are
entitled under U.S. law.
U.S. Customs and Border Protection Agency reported in its FY 2003
annual report on the Continued Dumping and Subsidy Offset Act (CDSOA)
(March 2004) that it had failed to collect $130 million of antidumping
and countervailing duties, $103 million of which related to antidumping
duties on Chinese imports, such as crawfish, paint brushes, iron
castings, roller bearings, silicon metal, brake rotors, garlic and
honey. While the reasons for the duty undercollection are multiple and
complex, contributing causes include: (1) failure by importers to post
adequate cash deposits or bonds on entries, (2) CBP allowing importers
to post a continuous entry bond instead of requiring a single entry
bond as required by a Treasury Decision, (3) CBP allowing importers to
post continuous entry bonds that are too low to cover eventual dumping
liability, (4) cash deposits posted on estimated duties are lower than
finally determined duties and the importer fails to pay the difference
due to bankruptcy or disappearance, and (5) in the case of ``new
shipper'' reviews, a ``loophole'' that allows importers to post a bond,
rather than cash deposits, on estimated dumping duties.
Although the CBP has proposed a series of reforms to address this
problem (e.g., such as ensuring that surety bond companies can cover
defaults, requiring different bonding requirements where continuous
bonds are used, and closely monitoring continuous entry bonds), the
CBP's FY 2004 CDSOA Report showed that it had failed to collect $260
million in antidumping and countervailing duties in 2004, $224 million
of which related to antidumping duties owed on Chinese imports.
The CDSOA annual reports have identified the magnitude of the
undercollection problem which largely stems from Chinese product
imports. It is critical that the full amount of duties owed be
collected. Effective action by Congress, CBP, and Commerce are needed
to ensure the proper functioning of U.S. antidumping law with respect
to Chinese products.
4. Countervailing Duty Law--Non-Application of CVD Law to Imports from
China

Since 1984, the U.S. Commerce Department has not applied
countervailing duty law to non-market economy (NME) countries, such as
China. Commerce reasoned that subsidization is a market economy
phenomenon and could not exist in an NME where ``markets'' do not
exist. As a result of this policy, U.S. industries cannot petition for
the imposition of countervailing duties when injured by reason of
Chinese imports benefiting from government subsidies.
Commerce's policy, however, is not required by statute. Rather, it
was established in an administrative determination and could be
reversed or changed by administrative action. Indeed, the U.S. position
is bizarre at the present time in light of the heavy emphasis the U.S.
placed on eliminating or limiting subsidies as part of China's
accession process to the WTO. If subsidies cannot exist in China, why
did the U.S. insist time and time again that such subsidies had to be
eliminated, reduced, identified and/or reported?
The U.S.' continuing concern over Chinese subsidies belies that
premise of Commerce's policy that subsidies cannot exist in a NME. In
the most recent Transitional Review Mechanism, the U.S. inquired about
or identified a large number of Chinese subsidy programs that appeared
to constitute either prohibited or actionable subsidies under the WTO
Agreement on Subsidies and Countervailing Measures. For example, in one
submission, the U.S. asked:

Semiconductors--whether China grants VAT rebates on
semiconductor exports;
Copper--whether China grants VAT rebates on imports of
copper scrap or on exports of copper-based, semi-fabricated or finished
products;
Subsidies to State-Owned Enterprises Running at a Loss--
whether China has eliminated these subsidies as promised in the
accession agreement;
Non-Performing Loans--China's injection of U.S.$ 45
billion into the Bank of China and the China Construction Bank; China's
debt forgiveness as part of the Northeast Revitalization Programme;
Price Controls--whether certain price control programs
provide subsidies.

In another submission, the U.S. identified a number of programs and
practices that appeared to constitute prohibited subsidies, as well as
other programs that appeared to constitute actionable subsidies:
Subsidies Contingent Upon Export Performance
Honourable Enterprises--preferential benefits
Export-Contingent Tax Reduction for FIEs in Special Zones
Income Tax Refund for Foreign Investors Investing in
Export-Oriented Businesses
Special Steel for Processing Exports Policy
Export-Contingent Income Tax Reduction for FIEs or Tax
Allowance for FIEs
Export Subsidies for High-Technology Products
Customs Duty and VAT Refund on Imported Capital Equipment
Used for Production of Products for Exports
Government Assistance to Increase Fabric Exports
Tax Incentives for Dehydrated Garlic Exports
Guangdong Grants Provided for Export Performance
Low Interest Loans for Processors of Agricultural
Products in Henan Province
Subsidies Contingent Upon the Use of Domestic Over Imported Goods
VAT Rebate on Purchases of Domestic Equipment by FIEs
Enterprise Income Tax Reduction for Purchase of
Domestically Made Machinery and Equipment
Other Programs
Assistance provided to Forest Products
Assumption of Interest on Loans for Technology Upgrades
Assistance for Capacity Expansion in the Soda Ash
Industry
Assistance provided to the Textile Industry
Chendu Assistance to the Semiconductor Industry
Reduction in VAT for Sino-Russian Border Trade
Subsidies listed in Annex 5A of China's Protocol of
Accession

In sum, Commerce's policy should be changed. First, Congress could
amend the countervailing duty law to expressly provide that CVD law
applies to non-market economy countries. A number of bills (H.R. 1216;
S. 593) have been introduced in both the House and Senate to make such
a change. Second, Commerce has the discretion to change its present
policy on its own. Given that Commerce's policy is not required by
statute, a change in policy would likely be upheld by the courts as
long as Commerce supports the change with reasoned analysis.
E. Exchange Rate Policy

For 10 years, China has maintained a fixed exchange rate for their
currency relative to the dollar (8.28 renminbi to the U.S. dollar).
Despite urging by the U.S. that China move toward a flexible, market-
based exchange rate and indications both publicly and at senior levels
that it would move to a flexible exchange rate, China has not yet done
so.
Many economists estimate that China's currency is undervalued by as
much as 40% or more. This means that Chinese goods compete domestically
and internationally at prices that are artificially low, hurting U.S.
producers in the U.S. market, in the Chinese market and in third
country markets. Moreover, it is argued that China's pegged exchange
rate effectively acts as a tax on U.S. exports and a subsidy to China's
exports, which cause the loss of U.S. manufacturing jobs.
A number of attempts have been made to address this problem. For
example, Senators Schumer and Graham's bill (S. 295) would impose a
27.5% additional duty on Chinese imports unless the President certified
to Congress that China was no longer manipulating its exchange rate and
that its currency was at or near its fair market value. In addition,
two Section 301 petitions were filed in 2004 with the U.S. Trade
Representative seeking U.S. action regarding China's exchange rate
policy, but USTR rejected both petitions.
Various bases for a WTO challenge to China's exchange rate policy
have been proposed. The primary grounds for challenging China's
exchange rate policy are that China's undervalued currency (1)
constitutes a prohibited export subsidy within the meaning of GATT
articles VI and XVI, and the WTO Agreements on Agriculture and
Subsidies and Countervailing Measures, (2) violates GATT Article XV:4,
and (3) violates China's obligations under the International Monetary
Fund's Articles of Agreement. However, while these potential grounds
have prima facie merit, it is unlikely that this Administration, which
rejected similar arguments in the section 301 petitions, would initiate
a WTO challenge on these grounds.
Separately, another potential way to address the exchange rate
problem would be to modify U.S. antidumping law and/or countervailing
duty law to permit currency manipulation to be treated as a form of
dumping or subsidization consistent with the original GATT notes. This
approach is reflected in the recently introduced Ryan/Duncan bill (H.R.
1498).
F. Intellectual Property Rights Protection

How to protect intellectual property rights (IPR) is one of the
most serious issues facing U.S. companies vis-`-vis China.
Notwithstanding China's efforts to improve its IP legal regime to
comply with WTO obligations, China's IPR enforcement system is far from
adequate. The problem of intellectual property piracy and
counterfeiting is endemic in China and has caused a tremendous adverse
impact on U.S. businesses. The rate of piracy is enormous, estimated to
be about 90 percent over the last 15 years for certain types of
products. USTR's 2004 WTO compliance report notes that ``current
estimates of U.S. losses due to the piracy of copyrighted materials
alone range between $2.5 billion and $3.8 billion annually.'' The World
Customs Organization has estimated that global counterfeiting amounts
to more than $500 billion annually with the majority of that
originating in China. See Fakes!, Business Week, February 7, 2005.
At the JCCT meeting of April 2004, where the IPR issue was made one
of the highest priorities, the U.S. secured a commitment from China's
Vice Premier Wu Yi that China would undertake a series of actions to
significantly reduce IPR infringement throughout the country. In
December 2004, as it pledged at the JCCT meeting, China issued a long-
awaited judicial interpretation (Judicial Interpretations on Several
Issues Regarding Application of Law in Criminal Intellectual Property
Rights Cases) that was expected to bolster China's IP criminal
enforcement abilities and efforts. Many observers, however, view the
new interpretation as inadequate because, among other things, it
maintains thresholds which offer loopholes for potential
counterfeiters.
In USTR's special 301 out-of-cycle review on China's IPR
enforcement efforts, comments by industry groups and private sector
organizations show that IPR violations abound in virtually all
industries. It is urgently necessary that China address its many IPR
enforcement shortfalls, including lack of deterrent penalties, lack of
transparency, insufficient resources for police investigations,
reluctance to enforce IPR by regional governments, and so forth.
The U.S. should continue to emphasize the importance of improving
IPR enforcement and should work with other WTO members (e.g., EC,
Japan, and others) to provide China with effective training and
technical assistance and to coordinate increased pressure on China to
make the legal modifications necessary to improve IPR enforcement.
Should these efforts not prove effective, the U.S. should then consider
the possibility of WTO dispute settlement.
G. Potential WTO Cases

China has now been a WTO member for 3 years. USTR has noted that
while China has made impressive efforts to fulfill its WTO commitments,
China's actions to fulfill its commitments are far from complete and
have not always been satisfactory. So far, only one WTO dispute
settlement case has been filed against China--in March 2004, the U.S.
filed a case concerning China's discriminatory VAT policies.
After three years, however, the U.S. should give serious
consideration to filing dispute settlement cases at the WTO on a number
of outstanding issues where China is not fully in compliance with its
commitments. If used prudently, WTO dispute settlement cases would be a
means to induce and encourage China to come into full compliance with
its WTO commitments.
Based on USTR's 2004 compliance report, and to the extent they
remain unresolved, there are a number of potential areas where China's
non-compliance could be considered as potential topics for WTO dispute
settlement cases, such as the following:

Customs Valuation: U.S. exporters are still encountering
valuation problems at Chinese ports. These problems include: (1)
valuation based on reference pricing instead of transaction value; (2)
addition of royalties and license fees to the dutiable value of
imported software; (3) non-uniform valuation by ports of particular
digital products; and (4) valuation of high-value electronic media to
be used to produce multiple copies of products (e.g., DVDs) based on
the estimated value of the future copies instead of the value of the
carrier medium itself.
Export Quotas on Fluorspar: China has continued to impose
export restrictions on fluorspar. China imposes quotas and license fees
on fluorspar exports, but does not restrict domestic users of
fluorspar.
Nondiscrimination: U.S. pharmaceutical manufacturers have
experienced national treatment problems regarding price controls on
medicines and drug reimbursement. China has continued to discriminate
in applying SPS measures. With respect to fertilizer, China exempts all
phosphate fertilizers except DAP (a fertilizer the U.S. exports to
China) from a 13% VAT. So far, China has not changed this policy.
Consumption Taxes: The effective consumption tax rate on
imported products (e.g., spirits/alcoholic beverages, tobacco,
cosmetics and skin/hair care preparations, jewelry, fireworks, rubber,
motorcycles and automobiles) is substantially higher than the rate
applied to domestic products because China uses different tax bases to
compute consumption taxes for domestic and imported products.
Standards Testing: Despite China's changes to its
standards testing regime, in some sectors, foreign products are tested
in specially designated laboratories that are separate from those
laboratories used to test domestic products. Disparate testing can lead
to uneven treatment.
Conformity Assessment Procedures: Despite national
treatment commitments, to date, China has accredited 68 Chinese
enterprises to test for and certify the CCC mark, but has not
accredited any foreign-invested conformity assessment bodies.
Auto Industrial Policy: The new auto industrial policy
contains discriminatory provisions that discourage the importation of
auto parts and encourage the use of domestic technology.
Sanitary and Phytosanitary: Regarding raw poultry and
meat, China applies certain non-science-based standards (e.g., zero
tolerance for pathogens) to imports that are not applied to domestic
raw poultry and meat. This violates national treatment and has slowed
imports from the U.S. Regarding food additives, China imposes overly
restrictive standards that block imports of many U.S. processed food
products.
Financial Services--Insurance: China has been issuing
concurrent branch approvals (more than one at a time) for Chinese
insurers, but only approving branches of foreign firms consecutively
(one at a time).
Express Delivery Services: In July November 2003, China
circulated draft amendments to the postal services law, which (1) gave
China Post a monopoly on letters under 500 grams (a horizontal
commitment violation as it restricted existing scope of activities),
and (2) failed to establish an independent regulator. At the April 2004
JCCT, China indicated that the weight restriction would not resurface
as a problem. However, the July 2004 draft amendment still contained a
weight restriction (reduced to 350 grams).April 14, 2005, Statement for
the Record, YKK Corp. of America, Marietta, GA, Alex Gregory, statement

Statement of Alex Gregory, YKK Corp. of America, Marietta, Georgia
My name is Alex Gregory. I am president and chief executive officer
of YKK Corp. of America, headquartered in Marietta, Georgia. YKK is
best known for the billions of zippers we manufacture globally, but we
also make many other fastening products, as well as architectural
products for commercial and residential buildings. YKK is headquartered
in Tokyo, Japan, with manufacturing operations in 68 countries. YKK has
had a presence in the United States since 1960. We opened our first
significant manufacturing plant in Macon, Georgia, in 1974. I was among
the first American employees hired for that plant--a Georgia Tech
Textile Engineer just out of the Navy, so manufacturing is near and
dear to me. For going on 4 years now, I have been responsible for YKK's
16 companies in the United States, Canada, Central America, and
Colombia, South America. We employ approximately 3,000 Americans across
five time zones in the western hemisphere, 1,600 of whom live in
Georgia.
YKK has a manufacturing presence in many countries, including China
and every other major garment-producing country in the world, but I am
here today to speak on behalf of our employees in the United States. In
the past thirty years we have invested more than $1 billion in
manufacturing plants in the United States. We are very proud of the
beautiful plants we have built around this country, many of which we
continue to operate, and we are very proud of the fantastic job our
employees in the United States have done and are doing. At our peak in
production, only 5 years ago, our zipper plants were as efficient and
as productive as any others in the world.
Unfortunately, in recent years, we have suffered many painful
events caused by imports, mainly from China. Over the past decade, in
response to cheap imports from Asia, many of our customers who are
owners of major brands of jeans, pants, jackets, and many other apparel
products have transitioned from manufacturing their own products in the
United States to sourcing, in varying degrees, products from
contractors in Mexico, Central America, and, in increasing frequency,
from China and other parts of Asia.
Because our customers are sourcing their products from different
parts of the world, we in YKK have had to make significant changes in
how we do business as well. Employment in our National Manufacturing
Headquarters in Macon has declined steadily from around 1100 5 years
ago. But we are proud that we have been able to continue to provide
jobs for 950 employees in Macon, Georgia, and another 500 in Kentucky,
Tennessee, and Alabama, even though many of our customers long ago
closed their manufacturing operations in this country. From our 2.4-
million square foot facility in Macon, we now ship zippers and other
fastening products to our customers and their contractors in Central
America, Mexico, South America, and, of course, to those who remain in
the United States.
But we have had to make many other painful sacrifices as well. In
support of our customers, for the past two years we have worked
together with our employees on a Competitive YKK Macon initiative to
become as competitive as possible--right now, before all the business
moves to China. To become more competitive, we have written off
millions of dollars worth of now-excess manufacturing capacity; we have
packed up perfectly good zipper-making machines and sent them to other
parts of the world where our customers are now sourcing their garments;
we have reduced wages and salaries, including my own; as a last resort,
we also have reduced our salaried and hourly work force (sometimes
painfully, but when possible, by attrition), to reduce the cost of our
fastening products. We embarked on this initiative so that our
customers would make the decision to continue to source garments from
within this hemisphere; we want them to know they have our support in
competing with the flood of cheaper garments from China.
And believe me when I say we are petrified about the acceleration
of imports from China. Prices from China are down significantly and
imports are sky-rocketing. In the two pants categories which primarily
affect our business, 347 and 348, imports from China are up over 1600%
in the first quarter of 2005 compared with the first quarter of 2004.
There has been an absolute explosion of imports in the first quarter of
this year. Our customers tell me that if this trend continues, they
will have to make some dire decisions, including the decision to close
plants. I do not want that to happen because it means that we will lose
more jobs in America, and I am doing everything in my power to keep
that from happening. Something positive must occur going forward or
more plants will close and more jobs will be lost.
A main point I wish to make is that market forces exist today which
give garment manufacturers in this hemisphere a real competitive
advantage. This advantage is ``speed to market.'' Thanks to rapid
fashion changes and a shift from basic styles to premium, higher priced
products, the marketplace in some instances has become a friend to
garment manufacturers in this hemisphere. The key is speed, and we are
partnering with our customers to reduce dramatically the time it takes
to develop new products, sew them, and deliver them to retail shelves.
Strong clusters, or alliances, are forming among American retailers and
brandholders, and the suppliers of the materials which go into their
garments. We are participating in these alliances with enthusiasm, as
proximity to the U.S. market is one of few advantages remaining to us
in this hemisphere. Together with our customers and other vendors and
suppliers, we have reduced lead times significantly.
CAFTA can go a long way toward helping us maintain a strong garment
manufacturing presence in this hemisphere, especially if it is combined
with efforts to bring China onto a level playing field. We need relief
in the form of strong safeguards against unrestricted imports from
China. But CAFTA is an essential element--indeed it is the critical and
necessary element--to strengthening the collaborative effort within the
rapidly growing alliances in this hemisphere. Restraints on China,
coupled with fair trade under fairly valued currencies are important to
undertake, but if we do not pass CAFTA, we will do a disservice to this
industry. CAFTA can help us save the jobs of our employees in Georgia,
Kentucky, Tennessee, and Alabama.
Last week I attended a meeting with many of our top sales
professionals in this hemisphere, and each of them stressed to me how
important CAFTA is to our customers. They expressed the strong
sentiment they have heard from most of our customers, many of whom are
well-known U.S. brandholders. I have heard that same plea for approval
of CAFTA in my own discussions with customers here and in Central
America. I was in El Salvador just yesterday, as a matter of fact, and
in Costa Rica the day before that. It seems as if everyone related to
our business, and especially our customers, recognizes CAFTA's profound
importance.
On behalf of YKK's employees in the United States of America, I
urge you to support swift passage of CAFTA and also somehow to bring
Chinese imports under control.
Thank you.