[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 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 
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
----------------------------------------------------------------------------------------------------------------


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                                                                                                     [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.

                                 
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