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



                                                   S. Hrg. 102-000 
 
           CHINESE BARRIERS TO TRADE: DOES CHINA PLAY FAIR?

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

                             JOINT HEARING

                               before the

    SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE & TECHNOLOGY AND 
                SUBCOMMITTEE ON TAX, FINANCE AND EXPORTS

                                 of the

                      COMMITTEE ON SMALL BUSINESS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                     WASHINGTON, DC, JULY 20, 2006

                               __________

                           Serial No. 109-61

                               __________

         Printed for the use of the Committee on Small Business


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

                                 _____

                 U.S. GOVERNMENT PRINTING OFFICE

30-355 PDF              WASHINGTON : 2006
_________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government 
Printing  Office Internet: bookstore.gpo.gov  Phone: toll free 
(866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2250 Mail:
Stop SSOP, Washington, DC 20402-0001



                      COMMITTEE ON SMALL BUSINESS

                 DONALD A. MANZULLO, Illinois, Chairman

ROSCOE BARTLETT, Maryland, Vice      NYDIA VELAZQUEZ, New York
Chairman                             JUANITA MILLENDER-McDONALD,
SUE KELLY, New York                    California
STEVE CHABOT, Ohio                   TOM UDALL, New Mexico
SAM GRAVES, Missouri                 DANIEL LIPINSKI, Illinois
TODD AKIN, Missouri                  ENI FALEOMAVAEGA, American Samoa
BILL SHUSTER, Pennsylvania           DONNA CHRISTENSEN, Virgin Islands
MARILYN MUSGRAVE, Colorado           DANNY DAVIS, Illinois
JEB BRADLEY, New Hampshire           ED CASE, Hawaii
STEVE KING, Iowa                     MADELEINE BORDALLO, Guam
THADDEUS McCOTTER, Michigan          RAUL GRIJALVA, Arizona
RIC KELLER, Florida                  MICHAEL MICHAUD, Maine
TED POE, Texas                       LINDA SANCHEZ, California
MICHAEL SODREL, Indiana              JOHN BARROW, Georgia
JEFF FORTENBERRY, Nebraska           MELISSA BEAN, Illinois
MICHAEL FITZPATRICK, Pennsylvania    GWEN MOORE, Wisconsin
LYNN WESTMORELAND, Georgia
LOUIE GOHMERT, Texas

                  J. Matthew Szymanski, Chief of Staff

          Phil Eskeland, Deputy Chief of Staff/Policy Director

                  Michael Day, Minority Staff Director

     SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE AND TECHNOLOGY

SAM GRAVES, Missouri, Chairman       JOHN BARROW, Georgia
STEVE KING, Iowa                     TOM UDALL, New Mexico
ROSCOE BARTLETT, Maryland            MICHAEL MICHAUD, Maine
MICHAEL SODREL, Indiana              ED CASE, Hawaii
JEFF FORTENBERRY, Nebraska           RAUL GRIJALVA, Arizona
MARILYN MUSGRAVE, Colorado

                   Piper Largent, Professional Staff

                SUBCOMMITTEE ON TAX, FINANCE AND EXPORTS

JEB BRADLEY, New Hampshire Chairman  JUANITA MILLENDER-McDONALD, 
SUE KELLY, New York                  California
STEVE CHABOT, Ohio                   DANIEL LIPINSKI, Illinois
THADDEUS McCOTTER, Michigan          ENI F. H. FALEOMAVAEGA, American 
RIC KELLER, Florida                  Samoa
TED POE, Texas                       DANNY DAVIS, Illinois
JEFF FORTENBERRY, Nebraska           ED CASE, Hawaii
MICHAEL FITZPATRICK, Pennsylvania    MICHAEL MICHAUD, Maine
                                     MELISSA BEAN, Illinois

                           Adam Noah, Counsel

                                  (ii)


                            C O N T E N T S

                              ----------                              

                               Witnesses

                                                                   Page
Goodpasture, Mr. Tom, President, Pride Manufacturing Company, 
  Inc............................................................     5
Russell, Mr. George E., Corporate Legal Administrator, Auto Meter 
  Products, Inc..................................................     8
Duggan, Mr. Brian, Director of Trade and Commercial Policy, Motor 
  & Equipment Manufacturers Association..........................     9
Duesterberg, Dr. Thomas, President and Chief Executive Officer, 
  Manufacturers Alliance/MAPI....................................    13
Coley, Mr. James W. ``Will'', Warehouser, National Cotton Council    15

                                Appendix

Opening statements:
    Graves Hon. Sam..............................................    27
    Bradley, Hon. Jeb............................................    29
Prepared statements:
    Goodpasture, Mr. Tom, President, Pride Manufacturing Company, 
      Inc........................................................    31
    Russell, Mr. George E., Corporate Legal Administrator, Auto 
      Meter Products, Inc........................................    37
    Duggan, Mr. Brian, Director of Trade and Commercial Policy, 
      Motor & Equipment Manufacturers Association................    46
    Duesterberg, Dr. Tom, President and Chief Executive Officer, 
      Manufacturers Alliance/MAPI................................    56
    Coley, Mr. James W. ``Will'', Warehouser, National Cotton 
      Council....................................................    64

                                 (iii)




            CHINESE BARRIERS TO TRADE: DOES CHINA PLAY FAIR?

                              ----------                              


                        THURSDAY, JULY 20, 2006

                   House of Representatives
Subcommittee on Rural Enterprises, Agriculture and 
  Technologyjoint hearing with the Subcommittee on 
                          Tax, Finance, and Exports
                                Committee on Small Business
                                                     Washington, DC
    The Subcommittee met, pursuant to call, at 10:00 a.m., in 
Room 2360 Rayburn House Office Building, Hon. Sam Graves 
[Chairman of the Subcommittee on Rural Enterprises, Agriculture 
and Technology] presiding.
    Present from Subcommittee on Rural Enterprises, Agriculture 
and Technology: Representatives Graves, Barrow.
    Present from Subcommittee on Tax, Finance, and Exports: 
Representatives Bradley, Chabot, Lipinski.
    Chairman Graves. Good morning. I want to welcome everybody 
to the Joint Committee on Rural Enterprises, Agriculture and 
Technology Subcommittee and the Tax, Finance, and Exports 
Subcommittee joint hearing. It is my pleasure today to hold 
this hearing with Chairman Bradley as we explore the question 
of Chinese trade and fair policy when it comes to Chinese 
trade.
    I also want to announce that Representative English is not 
going to be able to testify today due to another hearing that 
he has. Unfortunately, we have conflicts and they get in the 
way sometimes. But everything should go well. We have already 
seated our panel and we will just get started with that once we 
finish with opening statements.
    Trade with China has grown faster than with any other U.S. 
trading partner. Currently, China is our third-largest trading 
partner, the second-largest source of U.S. imports, and the 
fifth-largest U.S. export market. The growth of the Chinese 
economy, in particular, their exports to the United States, has 
reached record levels and has created trade deficits of roughly 
$202 billion in 2005. Some of the reasons for these 
discrepancies are as follows.
    First, since 1994, the Chinese government has kept its 
currency pegged at 8.2 yuan to the dollar. While in recent 
years, the dollar has weakened, the yuan has remained the same 
against our currency. Many economists estimate that the yuan is 
undervalued by as much as 40 percent, which means Chinese 
manufactured goods are 40 percent cheaper than their 
competitors.
    Under intense pressure, China announced that it would 
appreciate the yuan to 8.11 yuan to the dollar, an increase of 
2.1 percent, as well as pegging its currency to a basket of 
currencies rather than only the dollar on July 21, 2005. While 
I am not an economist or mathematician, if the yuan was 40 
percent undervalued previously, then this slight adjustment 
still has the currency undervalued by 38 percent. I do 
appreciate that China has moved slightly by allowing its 
currency to increase by two percent, but much more needs to be 
done to level the playing field.
    China has experienced economic growth, gains in 
productivity, a large export sector, and increased foreign 
investment. Their currency manipulation gives their 
manufacturers an advantage and creates an enormous disadvantage 
to ours.
    Second, theft of intellectual property rights is another 
significant problem that U.S. companies must take into account 
when dealing with China. It is estimated that counterfeits 
constitute between 15 and 20 percent of all products made in 
China and account for about 8 percent of China's GDP. It is 
also estimated that US companies lose $25 billion annually to 
copyright violations.
    I have heard it said that if you are a manufacturer and the 
Chinese are not copying your products, you are not running a 
successful business. While many people believe that this 
problem is restricted to purses or polo shirts, it is only the 
tip of the iceberg. Many people believe that it is a victimless 
crime; unfortunately, Chinese counterfeits or pirated items can 
impact our safety.
    More and more often car parts, aircraft parts and even 
drugs are being copied. People buy what they believe are 
legitimate items only to find out later that their purchases 
were counterfeits. If this trend continues, more people will be 
harmed by fake medicines, faulty mechanical parts and even 
exploding batteries, whatever the case may be.
    Worldwide, the market for counterfeit goods is growing and 
expanding. Global sales exceed $500 billion annually, although 
China is the biggest culprit. Over the last two decades the 
U.S. has pressed China to improve its protection of 
intellectual property rights. While China has passed new laws 
that provide protection of intellectual property rights, it has 
done little to enforce these laws, allowing for rampant piracy 
and counterfeiting. China needs to crack down and be an active 
part of the solution.
    We need to ensure that U.S. firms compete on a level 
playing field in the global market and not be at a competitive 
disadvantage. These unfair barriers not only affect our economy 
but job growth, much of it fueled by small business, in this 
country.
    I am pleased to recognize Representative Barrow for his 
opening statement.
    [Chairman Graves' opening statement may be found in the 
appendix.]
    Mr. Barrow. Thank you, Mr. Chairman. The focus of this 
hearing is to discuss the impact of Chinese trade policies on 
the U.S. economy, specifically the impact that trade has on our 
nation's small businesses.
    I have asked a fellow Georgian to come join us today and 
talk about the cotton industry in Georgia and nationwide and 
how China's trade policies are affecting this industry. Mr. 
Will Coley is a managing partner of Savannah Warehouse Services 
headquartered at the Port of Savannah.
    I want to thank him for taking the trip up here and 
participating in this hearing.
    Exporting goods has become more and more important to our 
nation's small businesses and farmers opening up new markets 
for our products and new opportunities for American industry. 
In the emerging global market base trade has become a common 
component for any successful small business plan. In today's 
global market it is that much more important that our small 
businesses compete on a level playing field.
    Much of this country's success in the world market depends 
on small business and agriculture. Today 97 percent of 
exporters are small businesses and they make up over 50 percent 
of our nation's GDP. This includes many of our family farms. 
While access to overseas markets is important to our economy, 
we need to examine the impact that trade policy has on small 
business exporters in our country.
    China is our third largest trading partner.
    We are China's largest overseas market and China's exports 
represent 13 percent of U.S. imports. U.S. exports to China 
have been growing rapidly but competition from China is one of 
the biggest threats facing the small business sector of the 
American economy.
    In the agriculture industry trade with China has produced 
mixed results. Historically the agricultural industry has 
maintained the largest of our nation's trade surpluses. Since 
1998 that surplus has lost half its size with remaining export 
balance of only three billion and 450 million dollars.
    As Chinese farm imports continues to surge in this country, 
increasing overall by almost 20 percent since last year alone, 
it will likely decrease exports sales for domestic agriculture 
business even more and harm the entire agricultural industry.
    When it comes to setting currency regulations China isn't 
playing fair. This manipulation makes Chinese exports of the 
U.S. cheaper and U.S. exports to China more expensive. When it 
comes to honoring or depending our property rights China isn't 
playing fair.
    Piracy and counterfeiting practices in China are costing 
U.S. farms billions of dollars in lost sales. This is of great 
concern to our nation's agricultural sector. Clearly China 
needs to start playing fair if we are going to avoid future 
damage to our agricultural sector and decrease agricultural 
imports.
    Our trade policy seems to be one of letting small 
businesses have access to compete in the global marketplace but 
not giving them the means to succeed. We must give our small 
business entrepreneurs a fair chance at competing in these 
markets. It is important that we support this nation's 
entrepreneurs in all of their efforts to be successful. I 
believe members of this committee must not lose focus on how to 
guarantee the small businesses regardless of what country we 
trade with are competitive and have access to those markets.
    It is clear that trade is and will continue to be an 
important aspect of the success of small business in this 
country. In the global marketplace we have got to stand up for 
American interest and also make sure that our small businesses 
remain competitive. Standing by while small businesses, family 
farms, and American workers lose out is just not an option.
    Mr. Chairman, I want to thank you for calling this hearing 
and look forward to the testimony of the witnesses.
    Chairman Graves. Thank you, Representative Barrow.
    Next we are going to hear from Chairman Bradley, Chairman 
of the Tax, Finance, and Export Subcommittee.
    Chairman Bradley. Thank you very much, Chairman Graves. I 
will just submit my statement for the record so that we can 
more expeditiously get to the panel and I thank you for holding 
this hearing.
    [Chairman Bradley's opening statement may be found in the 
appendix.]
    Chairman Graves. Thank you, Mr. Chairman.
    Mr. Lipinski.
    Mr. Lipinski. Thank you, Mr. Chairman. As we previous 
members have talked about here, we face, and especially small 
businesses face, a terrible problem right now with our trade 
deficit, over $200 billion in trade deficit with China. I have 
many manufacturers, especially in my district, and other small 
businesses, but manufacturers are especially hurt because China 
simply does not play fair. That is all that we are asking for.
    I think it is time for us to really stand up and do 
something about this. There has been a lot of talk about it. We 
all know that the Chinese currency is terribly undervalued. No 
real steps have been taken to move forward to do anything about 
this. Also, problems with intellectual property. We know China 
is not doing anything, or doing very little to protect 
intellectual property.
    What this is doing is wiping out American small businesses. 
A lot of these are family-owned businesses. Continually in my 
district they come to me and tell me if nothing is done soon, 
we are losing these businesses. They are never coming back. It 
is not a situation where they are down now. We can wait a while 
and do something in the future and they will come back.
    Once they are gone they are gone forever. They are not 
coming back. I have seen so many small businesses close in my 
district over the years and so many more are telling me they 
are doing everything they possibly can right now just to hang 
on but it is so difficult to compete against China. All they 
are asking for is a level playing field.
    I am very happy that we are having this hearing today. I 
look forward to hearing from our witnesses here. I think it is 
time to do more than just talk. It is important that we 
continue to work to find the best way to level the playing 
field.
    I know this hearing is not specifically supposed to be 
discussing it but I also believe we should be talking about 
H.R. 1498 which I think is a bill with real teeth in it telling 
China that if they do not make their currency really--let it 
float, or, at least, unpeg it so that it gets closer to what it 
should be valued at, the United States can't respond to that 
because it clearly is--to me China is clearly giving unfair 
advantage to their businesses by having their currency at that 
level. It is very clear to me. I want to hear from our 
witnesses today what their thoughts are on this and what they 
believe we should be doing here in Congress to change the 
situation.
    The only way this is just going to go away is when our 
small businesses who are working right now when they go away, 
when they disappear because we have not done anything to stand 
up to what China has done to unfairly manipulate the system. I 
am not saying we should be protectionists. I am just saying a 
fair level playing field. I look forward to hearing our 
witnesses today and what they recommend that we should do about 
this. Thank you.
    Chairman Graves. Thank you, Mr. Lipinski.
    All these statements made by the witnesses and the members 
will be placed in the record in their entirety. We will get 
started with our panel. I will introduce you as each come up.
    First we are going to hear from one of my constituents, Tom 
Goodpasture, who is President of Pride Manufacturing Company in 
Liberty, Missouri. He is here representing the National Tooling 
and Machining Association. Tom has testified before this 
Committee before.
    Welcome back. I appreciate you being here.

STATEMENT OF TOM GOODPASTURE, PRIDE MANUFACTURING COMPANY, INC.

    Mr. Goodpasture. My name is Tom Goodpasture President, and 
owner of Pride Manufacturing Co., Inc. I started our machining 
job shop in Liberty, Missouri in 1997. Our company has grown to 
28 employees and we service the machining needs for the 
following key industries: automotive, defense, railroad, 
medical, aircraft, computer and construction.
    I appreciate the opportunity to discuss China's barriers to 
trade and its impact on manufacturing across the country and 
especially in Missouri.
    I am an active member in the National Tooling & Machining 
Association and through this testimony hopefully I can voice 
the concerns of our company and our 1,600 member companies 
across the nation.
    NTMA is one of the largest metalworking associations in 
America. It consists primarily of small-to-medium sized 
companies with average employment of 27.
    The manufacturing sectors hardest hit by the China factor 
are the tool, die and mold industry, and the precision-machined 
parts industry. Every product that is manufactured is formed by 
a tool, die, or mold made by our industry. Precision machining 
and tooling industry is truly the backbone of manufacturing.
    Our industry operates in a very competitive global 
marketplace. Many of the big name/large U.S. manufacturing 
firms have picked up and moved plants, or work to China with 
little regard for communities, employees and families. Vendor 
chains previously supplying tooling, components and assemblies 
to these plants while in the states have lost a tremendous 
amount of business.
    I visited with Kim Hayden of Supreme Tool & Die in St. 
Louis a few weeks ago. Their company was so negatively affected 
by the amount of work going to China that their employment was 
forced from 65 to 32 almost overnight. Their sales revenue was 
cut in half. By making huge adjustments they have survived and 
that is a success story.
    One small die shop in Portage, Michigan lost 30 percent of 
its business due to the recent outsourcing by the Big Three 
automakers to China. The owner estimates that labor costs in 
China are one-tenth as much as those in the United States.
    As component industries and design work follow assembly 
lines to China, key elements of the U.S. industrial base are 
beginning to erode. Nationwide, the National Tooling & 
Machining Association reports that 28 percent of the country's 
toolmakers have shut their doors since 1998. In the state of 
Missouri, we have gone from 239 shops down to 162 shops, that 
represents a 48 percent reduction of its tooling and component 
shops from 1998 to 2004.
    As I talk to shop owners across the nation the plea is 
common, ``Level the playing field. We are not afraid of 
competition, but make it fair competition.'' If U.S. 
manufacturing is to compete, we need to level the playing 
field. Manufacturing produces some of the highest paying jobs 
with the best benefits in the country. At Pride our ``cost 
burden'' over wages, with benefits, averages in excess of 35 
percent.
    A shopowner at a recent meeting who just received his 
company healthcare renewal and it was increased by 40 percent 
this year alone. We need the Small Business Health Plan 
legislation passed by Congress so we can negotiate association 
health plans to reduce costs. One employee's health issue 
should not rate an entire organization to the point that health 
care is unaffordable.
    Currently it is almost impossible to compete with the low 
wages being paid in China. The only way we can keep our costs 
as low as China is by having automation that runs unattended 
and requires zero labor. That is how many of our businesses 
have survived. At Pride, we have invested in robotic equipment 
and Swiss Turn Lathes that run unattended ``lights out.''
    Our machinists have now become technicians as well. I am 
proud to say that currently, we are producing component parts 
24/7 for our local customer, which is being sold to China to be 
used in the Light Rail being constructed from Beijing to Shen 
Yang.
    American manufacturers need the R&D Tax Credit. This 
critical tax credit, which expired at the end of 2005, needs to 
be reinstated retroactive so we can continue making investments 
in automation. This will offset high labor with zero labor so 
we can compete in the world market. After these investments 
into technology are made, we need the Estate Tax altered so 
that the next generation does not lose the business to 
taxation. These are things that could be done to level the 
playing field.
    Last fall, I spent nine days in China on a NTMA Study 
Mission. I found that what we see and hear on the American news 
does not accurately reflect the China that I saw. Most of the 
manufacturing jobs are not the slave labor sweatshop jobs that 
I would have envisioned. Technology that I was hoping we could 
keep from China, is already there in abundance. The German, 
Swiss and Japanese influence in the plants is apparent and it 
is obvious that they were there long before us.
    Although many of the laborers are young and less skilled 
that is rapidly changing. Firms from the U.S. and other 
countries, setting up plants in China, send teams of engineers 
over to accelerate plant operation, in turn accelerating the 
Chinese manufacturing economy. I came away from that trip with 
two thoughts:
    1. Whatever the United States decides to do or not do about 
manufacturing in China would make little or no difference to 
the Chinese.
    2. The United States, because of our adversarial position, 
is missing a huge opportunity to sell to the commodity market 
in China while many other countries are selling to them.
    China made a conscious decision several years ago to be a 
manufacturing community. They have been very successful in 
drawing large corporations from every major country in the 
world, to their low cost surplus labor society, while allowing 
them to escape the regulations that haunted them in their home 
countries.
    Does China play fair? No. Factor in the alleged 
subsidization of the Chinese government, currency manipulation, 
no safety and environmental standards, and low wages, it is 
clearly not a level playing field. In many cases payment terms 
are different. Chinese companies require as much as 100 percent 
to be paid for prior to shipment from China. In contrast, the 
U.S. tool shops are forced to wait long periods of time to 
collect their money. Large businesses are forcing small 
businesses to carry their debt in this country.
    Chinese manufacturers have no problem creating exact 
duplicates of components and equipment without regard for 
American intellectual property and patent laws. We have several 
area food equipment manufacturers that sell on the world 
market, whose products were reproduced and sold by China 
manufacturers. Even if the counterfeits are not sold in 
America, they have stolen these company's market share 
elsewhere that took years and large investments to create. Does 
China manipulate the currency? All evidence would say that it 
does. It is obvious that China's economic strategy over the 
past decade has been to keep the value of its currency low, 
boosting its exports and holding down imports. There is no free 
market for the yuan.
    Companies relocating to China can benefit from the currency 
manipulation that is, in reality, a tremendous subsidy. When 
this subsidy is added to the very substantial differential in 
labor costs between our two nations, Chinese products become 
irresistible, and it makes investment in Chinese manufacturing 
extremely attractive.
    I saw China prices adjusting according to what they can 
charge. A hotel room that should cost 12 cost 100 to 125. That 
is equivalent to almost a thousand dollars in the U.S. Many 
prices just do not follow the exchange rate. What to do about 
China is a complicated issue. China has made the wise choice to 
purchase their future in the world of manufacturing and thus 
far have been very successful. That is history. Now we are left 
with some hard truths.
    We do not have enough mills to produce the raw stock to 
supply our own needs. Prices are going up in some cases at a 
rate of 30 to 40 percent for steel, stainless, aluminum, brass, 
and copper or more just because there is no supply there is no 
supply.
    Although the actual numbers are being disputed, China is 
still graduating many more engineers than the U.S. We have an 
aging and depleting manufacturing employee base that will 
reduce drastically over the next decade.
    I urge our government to do what China has done. Make a 
conscious decision to keep a strong manufacturing base in 
America. We have lost ground. We must do everything that we can 
to regain our position and maintain it. In years to come 
without a strong manufacturing base our security and defense 
could be at risk.
    China has not played fair; we cannot change the past. We 
must take hold of our future, and not allow our security and 
defense to be in the hands of China or anyone else. We must 
make American manufacturing strong and competitive. Thank you.
    [Mr. Goodpasture's testimony may be found in the appendix.]
    Chairman Graves. Next we are going to hear from George 
Russell who is the Corporate Legal Administrator for Auto Meter 
Products, Inc. He is here on behalf of the Special Equipment 
Market Association.
    George, thanks for being here.

   STATEMENT OF GEORGE E. RUSSELL, AUTO METER PRODUCTS, INC.

    Mr. Russell. Good morning, Mr. Chairman, and members of the 
Committee. My name is George Russell and I am appearing on 
behalf of Auto Meter Products, a member of the Specialty 
Equipment Market Association (SEMA). SEMA has 6,817 member 
companies, represents the $34 billion specialty automotive 
industry. This industry provides appearance, performance, 
comfort, convenience and technology products for passenger and 
recreational vehicles.
    Auto Meter is a medium-sized company headquartered in 
Sycamore, Illinois that manufactures automotive measuring 
devices, gauges and tachometers, for the past 50 years, and for 
the high-performance automotive aftermarket.
    In my prepared testimony I use Auto Meter has an example to 
illustrate what can happen to a medium-sized company when faced 
with the unscrupulous copying of American design and 
manufactured goods by Chinese competitors. I hasten to say that 
the experience of Auto Meter is illustrative of the wider 
problem faced by a variety of American manufacturers ranging 
from pharmaceuticals to aircraft parts.
    Auto Meter manufacturers the highest quality performance 
automotive gauges in the world. Auto Meter's products are used 
in approximately 98 percent of all NASCAR racers, and a vast 
majority of performance racing cars on all tracks today. 
Approximately 10 to 12 years ago Auto Meter began to face 
competition from cheaply made imitations that copied its design 
and trademarks some coming from Taiwan and others from the 
People's Republic of China.
    As indicated in my written statement, Auto Meter has used a 
variety of strategies to counter this threat including sourcing 
some of its components in the far east and exercising its legal 
remedies here at home.
    Although Auto Meter has prevailed in its legal cases, the 
cost of victory has been significant. Over the last seven years 
the expense of Auto Meter defending and enforcing its 
intellectual property rights against counterfeit goods, 
primarily from China, has grown from less than a 10th of 1 
percent to over 4 percent of its gross annual revenues.
    Auto Meter has spent well over $2 million in the last three 
years pursuing infringers and counterfeiters in the federal 
courts, the International Trade Commission and the Customs 
Service, and at trade shows in cooperation with SEMA and 
others. However, unscrupulous importers continue to source 
infringing and counterfeit products from China for sale in the 
United States. This has imposed on Auto Meter a significant 
burden and expense of continued efforts to find and stop new 
infringements.
    Simply put, Chinese manufacturers have used all manner of 
duplicity to conceal their continued cloning of Auto Meter's 
products and enforcement is continually problematic and 
expensive for the victim.
    Clearly, more needs to be done to protect legitimate U.S. 
manufacturers from this sort of mugging. Small and medium-sized 
businesses need the active and aggressive support of their 
government if they have any hope of competing, even on their 
home turf.
    While Auto Meter welcomes the statements of commitment by 
the U.S. trade representative, the Department of Justice, and 
the Department of Commerce pledging to fight counterfeits, this 
is more rhetorical than real for companies such as Auto Meter.
    Negotiations with the Chinese government have yielded 
commitments on their part to do something sometime. What is 
needed at the minimum is more active enforcement of laws 
already on the books to prevent this sort of conduct. In our 
view the Chinese would get a powerful message if the Customs 
Border Patrol inspections of the imports from China were 
significantly enhanced to detect illegal products before they 
entered the United States.
    While I recognize that the first priority of Customs and 
Border Patrol is to protect the U.S. from terrorist activity, 
the cancer of imported counterfeits poses an equivalent threat 
to our economy and to thousands of jobs provided by companies 
like Auto Meter.
    Stricter border enforcement against counterfeit and 
infringing products, of course, would not address the other 
matters you are considering today such as the disparity in the 
yuan evaluation but would signal that the United States is 
serious about protecting small businesses from the deprivations 
of counterfeiters and pirates.
    I would be pleased to answer any questions you may have 
concerning Auto Meter's experience or that of other U.S. 
manufacturers in general who are facing these challenges.
    [Mr. Russell's testimony may be found in the appendix.]
    Chairman Graves. Thanks, George.
    Next we are going to hear from Brian Duggan who is the 
Director of Trade and Commercial Policy with the Motor and 
Equipment Manufacturers Association here in Washington, D.C.
    Brian, thanks for being here.

  STATEMENT OF BRIAN DUGGAN, MOTOR & EQUIPMENT MANUFACTURERS 
                          ASSOCIATION

    Mr. Duggan. Thank you very much, Mr. Chairman. My name is 
Brian Duggan and I am Director of Trade and Commercial Policy 
for Motor and Equipment Manufacturers. We represent 700 
manufacturers of motor vehicle parts, components, technology, 
tools, and related products used in the repair and maintenance 
and original production of all classes of motor vehicles and 
heavy trucks. These manufacturers are known collectively by the 
term ``automotive suppliers'' and that is a term that I will 
use in my testimony.
    What I think has already been made pretty clear here in the 
previous testimony is that the damage done by Chinese product 
counterfeiting is disproportionately serious for small 
businesses because they can least afford the lost sales on a 
limited number of brands and product lines and have fewer, if 
any, resources to protect their trademarks and patents, 
especially outside the United States in China or in third 
markets. Many of business' financial problems caused by Chinese 
counterfeiting and patent infringement in the autoparts 
industry are occurring across the board, small, medium, and 
large.
    I plan to cover just in the testimony briefly some of the 
dangers posed by trafficking in counterfeit autoparts including 
consumer safety hazards, loss of brand image, and loss of 
export markets for American suppliers. Lastly, I would like to 
provide just a few of our views on work underway through the 
STOP program, which is Strategy Targeting Organized Piracy, 
that you may be familiar with, and other Federal efforts to 
help industry.
    Product counterfeiting and other willful intellectual 
property theft is not a trade problem or a competitiveness 
problem in the usual sense. Product counterfeiting and IP theft 
is first and foremost a global crime. American automotive 
suppliers are now, on top of everything else, competing with 
global criminal networks out to steal from legitimate producers 
that play by the rules and work to provide value and service to 
their customers in the United States and abroad.
    To the extent the People's Republic of China is now used as 
a hub by criminals for production and trafficking of 
counterfeit automotive parts and components, it is essentially 
offloading the cost of law enforcement and public safety to 
American industry and the U.S. Government.
    Automotive suppliers have been targeted by Chinese-made 
counterfeit products for several years. Just as Chinese 
manufacturers have become more competent in the manufacture of 
legitimate goods over the past several years, they have also 
become more competent and aggressive in manufacture of 
counterfeit goods.
    Patent infringement and product counterfeiting, which has 
already been explained here, are the primary forms of 
intellectual property violations against all American 
automotive suppliers.
    I have brought here just a few samples. I won't go through 
them because there isn't time but later on if you or your staff 
would like to inspect any of these, you will see two things. 
First of all, you will see how similar the counterfeit and the 
real look. Visual inspection you cannot tell. Even the 
manufacturer has to go back and check the metallurgy and the 
fittings and things like this.
    But when you cut this stuff open, then it is pretty clear 
which one is counterfeit and which one isn't. Unfortunately for 
a lot of these products, whether the consumer buys them or 
whether you are a garage mechanic buying them or whoever, you 
buy by the brand, you buy by the box, you buy by the SKU 
number.
    A little bit on the measurement of the problem which I know 
is on your mind. Private companies and industries are well 
suited to measure sales, cost of production, and profits. We 
are not, however, well suited to measure global crime and, 
therefore, unfortunately no authoritative estimates of the 
production and sales of counterfeit automotive parts and 
components in China, the United States and around the world.
    The OECD is in the process of doing a study on this. The 
study is due out in the fall. We provided information for the 
study. I am sure several others did, too, and we will see what 
that produces. Nevertheless, the industry does indicate the 
parts most often counterfeited are for the repair and 
replacement market.
    They tend to be products that can sell quickly in high 
volumes. Examples of such parts would include spark plugs, 
shock absorbers, oil filters, fuel filters, fuel pumps, break 
components including pads and linings, suspension and steering 
components, windshields, tires, headlights, taillights, engine 
mounts, and other engine parts.
    There are some astonishing and disturbing examples of 
product counterfeiting in our industry, including the 
following:
    Federal agents in Queens and Manhattan seized $700,000 
worth of unsafe, counterfeit brake parts, taillights and other 
parts that were being installed by dealers on city taxicab 
fleets. The danger of installing critical safety parts on city 
taxicabs in New York is enormous.
    An investigation by one American automotive supplier found 
a company in China switching signs in front of their factory, 
making customers believe they produced legitimate branded 
parts. The Chinese producer further misrepresented itself to 
customers by using phony stationery and signs in the factory 
and they could just change these.
    As different customers came through they could change their 
identity. Investigators for the company staked this out and 
found this. This Chinese producer infringed on the trademarks 
of several American and European automotive brands. That is 
another thing to point out, the guys don't specialize. They 
will rip off anybody.
    A Midwest automotive supplier reported lost sales from 
product counterfeiting of $40 million and additional legal 
costs of $5 million annually.
    Counterfeit oil filters made in China found in the United 
States contained cardboard and foam instead of filter material 
and was illegally labeled ``Made in the USA.''
    A Chinese-based website has been barred from participating 
in America's largest automotive aftermarket trade show for 
trafficking counterfeit automotive parts and components.
    The inferior quality, durability and workmanship of 
counterfeit automotive parts leads to another very serious 
problem for legitimate producers and that is brand destruction. 
When a customer unwittingly purchases a counterfeit product, 
and the product fails to perform and provide value, the 
reputation of the brand is diminished.
    What I mean by that is if you would buy this counterfeit 
sparkplug set and after a short period of time it stopped 
working, you are probably not going to go back and buy that 
same brand, or your shop isn't. Measuring loss of customer good 
will, brand destruction caused by fake parts is very, very 
difficult.
    The losses caused by brand destruction are as great, or 
even greater, to a company than the loss of sales caused 
directly by the original sale of the counterfeit auto parts. 
This is particularly acute for small businesses where their 
whole business may be built on four or five or six products and 
two brands. That is it. If one of those gets hurt, you have 
lost half the shop.
    Product counterfeiting is destroying export markets for 
American automotive suppliers and genuine American brands. 
American manufacturers cannot export product or build their 
brands around the world if their products are already widely 
available in counterfeit form. This is a serious problem in 
China and many other developing markets.
    Looking forward to the matter of managing the problem, I 
would say that the cost, time and complexity of defending 
intellectual property rights at home and abroad is a serious 
challenge for small and medium-sized automotive suppliers. 
Federal, State and international actions aimed at addressing 
this core problem of the cost will deliver the most value to 
small businesses and we believe deserve Congressional support.
    Also, maintaining a focus on law enforcement and actions 
that do not depend entirely on near-term changes in China 
(which is highly uncertain at best) are also a priority. Just 
to be clear about it, elimination of the production and 
trafficking of counterfeit goods, auto parts and others, in 
China is an ultimate long-term goal. Absolutely no doubt about 
it. In the meantime, there are meaningful near-term action is 
necessary.
    The Federal Government has taken some very useful actions 
to combat trafficking in counterfeit goods that help industry. 
For example, the Department of Justice has increased the number 
of prosecutors and the FBI has increased a number of 
intellectual property undercover operations. These actions make 
Federal assets more accessible to small businesses. ``Victims 
Conferences'' and legal seminars organized by the Justice 
Department and the Patent and Trademark Office provide 
specialized training and guidance to small businesses at no 
charge.
    The Patent and Trademark Office in cooperation with the 
Department of State is deploying intellectual property attaches 
to trouble centers around the world, including China. These 
attaches will be a resource for small companies that cannot 
afford foreign staff. More programs of this kind deserve 
Congressional support.
    There are other Federal actions that if done properly could 
provide a valuable service to small business and help them 
manage the high cost of protecting their brands. I would like 
to get into one particular area regarding trade shows. I am 
over so I will go quickly.
    Many small and medium-sized automotive suppliers build 
their domestic and foreign sales by displaying at trade shows. 
Trade shows are a long-standing institution in the automotive 
industry domestically and abroad. Counterfeiters, 
unfortunately, also use trade shows to traffic in fake goods. 
According to our members, many foreign trade show organizers 
take little or no action to help American companies who find 
counterfeits of their products on the show floor.
    Organizers of prominent trade shows in the United States 
enforce rules against counterfeiting.
    Over half of our members, MEMA and other private sector 
organizations including the Coalition Against Counterfeiting 
and Piracy, are urging the Foreign Commercial Service to 
conduct a targeted fact-finding aimed at raising standards of 
intellectual property protection at foreign trade shows. In our 
request for assistance we would as this fact-finding to be 
conducted using the agency's overseas staff and work with the 
private sector and the Patent and Trademark Office to determine 
standards of intellectual property protection and enforcement 
at many foreign trade shows in developing markets.
    Current the FCS supports and endorses many trade shows 
abroad and has a long-standing relationship with show 
organizers. We believe that the Foreign Commercial Service can 
perform an important service by conducting this fact-finding 
requested by industry and leveraging its relationship with 
foreign show organizers to raise standards of intellectual 
property protection.
    We would ask this Committee to review this problem with the 
Foreign Commercial Service and encourage them to work 
collaboratively with industry and rights holders on this 
problem.
    In conclusion, the automotive supplier industry and MEMA 
would like to thank the Committee for turning its attention to 
this problem and I would be glad to answer any questions you 
might have. Thank you.
    [Mr. Duggan's testimony may be found in the appendix.]
    Chairman Graves. Thanks, Mr. Duggan.
    Next we are going to hear from Dr. Tom Duesterberg who is 
President and CEO of the Manufacturers Alliance here in 
Washington. Thank you for being here.

 STATEMENT OF DR. TOM DUESTERBERG, MANUFACTURERS ALLIANCE/MAPI

    Dr. Duesterberg. Mr. Chairman, thank you for having me. It 
is a pleasure to be here on this panel today discussing this 
very timely subject.
    The Manufacturers Alliance is a research and educational 
organization representing over 500 small to large companies. 
This subject is timely partly because China continues to be a 
major competitor of ours and we are estimating that this year 
China will surpass the United States as the world's leading 
manufacturing exporter.
    I am going to focus a little bit on the aggregate or the 
macro-economic questions that have been raised in the past and 
continue to be an issue with regard to trade with China. I am 
going to focus on some of the reasons why we are not exporting 
more to China. We generally are supporters of open markets but 
we have noticed that even though China is the fastest growing 
large economy in the world, China also is at this stage of 
development in huge need of capital goods. The United States 
manufacturing sector is the leading producer of capital goods 
in the world. Our exports simply should be growing much more 
vigorously than they have been.
    Some of the reasons that our exports are not growing more 
rapidly, first, is the anomalous rate of private consumption in 
China relative to investment and government spending. China has 
an unprecedented low level of consumer spending that has never 
been seen in the world, at least in the modern world.
    Only 47 percent of the Chinese economy is represented by 
the household sector and that compares with 70 percent in the 
United States. The Chinese level is about 20 percent lower than 
it is in India, Poland, and Brazil, pure countries that it can 
be compared to. Part of the reason for that is the undervalued 
currency which I will turn to in a minute.
    Second, the United States is actually losing market share 
in Asia to China and to other producers in Asia. Again, this is 
partly due to undervalued currency. I provide some figures in 
my testimony showing that our market share in the eight leading 
economies of Asia has declined from 38 percent in 2000 to 26 
percent in 2005. We have lost market share in places like Japan 
where exports have actually declined this decade partly because 
China has taken market share from us there as well.
    The Chinese are leading regional integration movement in 
East Asia trying to sign up a series of free trade agreements 
that exclude the United States. The regional identity of the 
Asians is part of the reason that we are losing market share 
there.
    Third, I note that tariffs are still high. This is a 
mundane point but Chinese tariffs are much higher than U.S. 
tariffs and these need to be lowered.
    Fourth, we have been making a case at the Manufacturers 
Alliance for years that the Chinese systematically undervalue 
their currencies. This, in turn, leads other Asian nations to 
undervalue their currencies to remain competitive with the 
Chinese.
    Finally, and this is especially important to small 
businesses, there are a number of non-tariff barriers to trade 
in addition to the theft of intellectual property which has 
been eloquently expressed here already. I listed a few things 
that are worth looking at, the hidden cost of doing business. 
We call them hiring costs, firing costs, paying taxes, 
enforcing contracts, dealing with licenses.
    All are much more difficult in China than here obviously. 
They are much more difficult for the small businesses who are 
trying to penetrate that market. That is partly why only eight 
percent of small businesses, small and medium enterprises, rely 
on exports for more than 25 percent of their revenues and that 
number is really not growing.
    Some of the things that we think should be addressed in 
order to begin to rectify this situation, we think that the 
United States must energetically seek to participate in the 
growing Asian free trade movement. We have made a good start by 
opening free trade negotiations on a bilateral basis with South 
Korea, Thailand, and Malaysia but ultimately we need to be a 
part either through APEC or some other multi-lateral 
institution we need to be part of the Asian free trade area.
    Second, the United States needs to be more aggressive in 
working with China to address some of these IPR questions and 
the fundamental question of the undervaluation of their 
currency. We believe there are mechanisms out there such as 
working with the IMF and the World Trade Organization both of 
which prohibit systematic undervaluation and manipulation of 
currency for the benefit of a domestic economy such as China 
has been doing. We need to be much more aggressive in working 
with the Chinese, working with our own partners like the 
Europeans and the Japanese to address this problem.
    Third, we continually shoot ourselves in the foot here in 
this country by imposing higher costs on U.S. suppliers than 
our competitors do. We call these ``structural costs.'' We have 
estimated that we had 22 percent or more to the cost of 
producing a product here in the United States in comparison 
with our trading partners. We need to do things like look at 
the energy crisis, look at regulatory costs, look at taxes to 
try to bring down those costs.
    Finally, as Brian mentioned, there are many things that the 
U.S. Government can do to help small and medium exporters 
especially through the commercial service at the Department of 
Commerce and through the Small Business Administration. We need 
to take a stronger look, I think, at working with the 
commercial services, especially in their programs to help small 
business.
    I would be happy to answer any further questions.
    [Dr. Duesterberg's testimony may be found in the appendix.]
    Chairman Graves. Thank you, Mr. Duesterberg.
    Mr. Barrow. Thank you, Mr. Chairman, for this opportunity 
to introduce my witness as the Ranking Member of the 
Subcommittee on Rural Enterprise, Agriculture and Technology, I 
wanted to take this opportunity to shine the light on the 
impact that China trade has on the agricultural sector of our 
economy.
    There are very few people who are in as good a position to 
address that subject for us is my friend Mr. Will Coley from 
Savannah. He is here representing the National Cotton Council. 
He is a member of their current leadership class, the National 
Cotton Council's leadership class. He is in the cotton export 
business. He is going to shine the light on the problems we are 
having with China trade as it affects agriculture in this 
country.
    Mr. Coley, thank you for being with us today.

 STATEMENT OF JAMES W. ``WILL'' COLEY, NATIONAL COTTON COUNCIL

    Mr. Coley. Thank you, Mr. Chairman. I will do what I can. I 
would like to thank you again and all the members of the 
Subcommittee for inviting me to discuss trade with China. I 
especially want to thank Representative Barrow for his courtesy 
and his recognition of the significance of trade with China to 
the U.S. cotton industry.
    As he said, my name is Will Coley. I own and operate a 
cotton port warehouse in Savannah, Georgia.
    There are few international trade relationships more 
complicated or dynamic than that of U.S. cotton and China. The 
U.S. cotton industry is exporting an ever-increasing amount of 
cotton fiber to China. At the same time, our long-standing and 
best customer, the U.S. textile industry, continues to contract 
and face of competition from textile imports.
    China is the most competitive textile and apparel 
manufacturer in the world. With the elimination of all quotas 
from January 1, 2006 and even with the imposition of special 
safeguards and a bilateral agreement covering trade in key 
textile products, China is rapidly becoming the dominant 
supplier of textile and apparel products in world trade.
    In fact, China now accounts for almost 50 percent of all 
textile imports into the U.S. This development has 
ramifications for the U.S. textile industry as well as for 
virtually every other textile producing country, particularly 
less developed countries, or LDCs, in Central and South America 
and Africa.
    A few statistics will illustrate the dynamic nature of the 
trading relationship between U.S. cotton industry and China. In 
1998, China imposed a quota on cotton imports and imported only 
359,000 bales of cotton from all those countries. In 2005 China 
imported a total of 19 million bales. At least nine million of 
those bales were supplied by the U.S. You can see the drastic 
difference there.
    At the same time China exports of cotton textile products 
to the U.S. continues to increase dramatically while U.S. mill 
consumption of cotton declined from 11 million bales to about 
5.5 million, a 50 percent reduction in cotton consumption by 
U.S. mills in just a 10-year period.
    During the same period U.S. consumers have increased their 
purchases of cotton products at retail but almost 90 percent of 
all purchases are imports. With this astounding rate of 
increase in cotton production, cotton mill use and cotton 
imports China has rapidly become the dominant force in world 
cotton trade.
    The reduction in domestic consumption has required the U.S. 
cotton producer to identify new export markets and none have 
been as challenged as south eastern producers who previously 
sold the bulk of their production domestically. In fact, my 
warehouse is located on the port of Savannah to better service 
the growing volume of exporters for producers in our area.
    With that brief background, I can better address the 
subject of today's hearing. The answer is yes, China does 
maintain barriers to fair trade and engages in practices that 
provide unfair advantages to its manufacturers. The cotton 
industry is deeply concerned by the use of tax rebates to 
encourage exports.
    We are troubled by the widespread use of subsidized or 
forgiven loans provided to China's domestic textile industry. 
We believe that the maintenance of an undervalued currency 
constitutes an unfair trade practice. As a small business 
operator I know it is impossible to compete with a firm that 
enjoys a 30 plus percent cost advantage due to undervalued 
currency and has access to free capital in the form of loans 
that never have to be repaid.
    I know that U.S. textile farms are concerned about the 
piracy of their fiber designs and unauthorized use of their 
logos and brands similar to what these gentlemen have been 
discussing. They have spent millions of dollars developing all 
these brands and logos. If these unfair practices are allowed 
to continue much longer, U.S. manufacturers simply can't 
compete to provide jobs and continue to serve as an economic 
engine for our country.
    While part of the cotton industry enjoys the benefits of a 
growing trade in raw cotton there are problems. We have 
consistently expressed concerns for the way China has 
implemented its market access commitments under the WTO 
accession agreement.
    We have worked closely with the USDA and the USTR to 
attempt to convince China to modify its administrative tariff 
rate quotas, or TRQs, so mills producing for the domestic 
market have equal access to imported cotton as do those who 
produce for export markets.
     Recently China has begun imposing a variable rate tariff 
on imports of cotton over the TRQ. This will increase the price 
of cotton to the mills compared to domestically produced 
synthetic fibers and effectively amounts to a price support 
program for Chinese cotton farmers.
    By effectively reducing demand for cotton over synthetics 
affects all cotton farmers. We have also worked with the USDA, 
USTR, and the Chinese government and industry to resolve 
contractual issues, arbitration practices and quality 
standards.
    Mr. Chairman, China is the dominant factor in the world of 
cotton and textile market and it is imperative that the U.S. 
cotton industry continue to cultivate China as a customer for 
our fiber. It is also critical that we work with Congress and 
the administration to insist that China honor her WTO 
commitments. We believe it is important that the China economy 
grows and merges into the world economy and that the U.S. 
manufacturing base does not become a casualty of that.
     That is why we are actively supporting efforts to convince 
China to move to allow her currency to be valued by the market. 
We believe support for H.R. 3004 creates an incentive for China 
to allow her currency to be valued by the market, not by 
artificial means.
    We also support the use of textile safeguards as authorized 
under the WTO accession agreement to allow the U.S. industry to 
adjust to the elimination of quotas. We urge the USTR to 
favorably respond to the proposal to conduct secretarial 
negotiations in textiles and apparel as part of the DOHA round 
to ensure that the textile and apparel industries in truly less 
developed countries are not totally displaced by the Chinese 
market.
    We have heard criticism that the U.S. industry has had 
ample opportunity to adjust. As a business operator I contend 
that the adjustment can't be accomplished as long as Chinese 
manufacturers have the competitive advantages provided by an 
undervalued currency, tariff rebates, nonperforming loans, and 
unchecked piracy of valuable designs and labeling brands.
    We welcome China to the WTO and we value her as a trading 
partner but she must be held accountable to the rules and 
commitments of the WTO membership.
    Mr. Chairman, again, thank you for allowing me to testify. 
I will be pleased to respond to any questions at the 
appropriate time.
    Chairman Graves. Thank you, Mr. Coley.
    [Mr. Coley's testimony may be found in the appendix.]
    Chairman Graves. We will start out with questions. Again, 
all the statements made by the witnesses will be placed in the 
record in their entirety.
    The first one I have, I guess, is not really directed at 
anybody. Mr. Duggan, you might want to answer it to start off, 
or Mr. Russell, or Mr. Goodpasture. You mentioned the only way 
you can tell a counterfeit from the real thing is if you cut it 
open but nobody is going to cut it open if they are buying 
something new.
    If they are buying a gauge, they are not going to cut it 
open to see if it is the real thing or not. How is a consumer 
or how is a mechanic or somebody that is operating a store, how 
are they supposed to tell or how are they supposed to know what 
is counterfeit and what is not counterfeit?
    Mr. Duggan. That is why we are so concerned about this 
because right now we don't really have a good way to tell. The 
individual consumer or the guy that runs an Auto Zone or an 
NAPA, obviously if he has a relationship with the supplier, 
that is built on some business trust there. The thing is, you 
know, the people who are trying to do this are criminals and so 
they are slipping it into the system, you know.
    A lot of times the garage mechanics and the distributors 
are duped every bit as much up and down the line as anybody 
else. I mean, I guess the answer is no, we don't really have a 
system right now. There is some practical business advice which 
is deal with people who you know. That helps but that is not a 
full solution.
    Chairman Graves. Go ahead.
    Mr. Russell. Mr. Chairman, to support what Mr. Duggan just 
said, I guess the best way to explain it from a manufacturer's 
perspective is Auto Meter has prided itself on having a 
warranty policy that is without reproach. We stand by the goods 
that we manufacture. That brand identity and that brand 
recognition is what is most appreciable by the consumer market.
    The only thing that could reasonably be done, in my 
opinion, would be that we would have to determine some way in 
which brands and brand identify would be protected up front. 
That is why I made the statements regarding Customs and Border 
Patrol inspections of incoming goods. Beyond that point it is 
very hard for the average consumer, as you can see by Mr. 
Duggan's examples, and I could speak for quite a while, about 
goods that are essentially identical in appearance that are 
counterfeit and, thus, the consumer gets defrauded.
    I guess if I could summarize to answer that question, there 
needs to be some kind of methodology developed that enhances or 
further enables Customs, Customs and Border Patrol, Immigration 
and Customs Enforcement, with the ability to discern when 
products are coming in that are not of that brand, whether that 
is intercepted at a port of entry or it is being reported by a 
manufacturing concern within the country once it has been 
discovered.
    Chairman Graves. Another question. I don't remember if it 
was Mr. Duggan or Mr. Duesterberg mentioned the added cost of 
hiring and firing, regulatory licensing. I am assuming that is 
aside from the currency issues we have. Those are just issues 
that obviously are in the United States. You don't have to deal 
or you have a lot tougher time dealing with those in, say, a 
company in China.
    Mr. Goodpasture, you actually mentioned, and I think you 
said, you have lights-off manufacturing going on. It runs all 
night long. I think I read in maybe your testimony that you 
have a shift that nobody is there but you continue to 
manufacture 24 hours. Is that in direct response to trying to 
compete?
    Mr. Goodpasture. Oh, sure. If there is no labor, it doesn't 
matter if the machine is sitting here in China. We can produce 
it equally as well and probably better and for a competitive 
price. Labor is the cost so that is a direct response to 
dealing with China on our part so we can produce at the same 
price.
    Chairman Graves. Coming back to Mr. Duesterberg, I would 
add litigation to that, too. You have litigation issues in the 
United States. You have regulatory issues and licensing issues. 
You have environmental issues. The list goes on and on and on 
that you have to deal with, regulatory in the United States 
that you don't have to deal with anywhere else.
    Dr. Duesterberg. You have to deal a lot less in some other 
places. I highlighted in my testimony that the recent rise in 
the cost of natural gas, which is on average tripled in the 
United States over the last six or seven years, we are now the 
highest cost location in the world for natural gas. That is a 
feed stock that goes into chemicals. It goes into fertilizers 
and so on and so forth.
    I think with regard to the first part of your question, the 
sort of hidden cost that occur in trying to do business in a 
place like China, a perfect example is with all this 
counterfeiting there are mechanisms available to try to pursue 
that in the Chinese courts but they are enormously opaque. They 
are enormously expensive.
    Some of the data that the World Bank is now providing 
comparative data on how much it cost to do these sorts of 
things in various parts of the world, for instance, in terms of 
enforcing contracts in China it takes on average about one 
quarter of the total amount you're seeking to recover in terms 
of a debt if you are using the court system, whereas in the 
United States that number is much less.
    That is a special burden on small businesses because the 
margins are typically thin in manufacturing to start with and 
it sometimes is just not worth the cost of doing business so 
that locks us out of the market itself.
    Chairman Graves. Mr. Barrow.
    Mr. Barrow. Thank you, Mr. Chairman.
    Mr. Coley, I want to follow up on something you were 
talking about because I have a concern about what is going on 
with our cotton trade with China. The concern I have is that we 
are exporting so much more raw material to them but we are not 
really getting into their market because they are directing the 
raw material we are exporting to their country into their 
textile export market rather than their domestic textile market 
which will allow the cotton we grow here in this country to end 
up on the backs and in the homes of Chinese which will open up 
that huge potential marketplace to us.
    They are steering our cotton into their textile export 
markets. Our raw materials are shipped from this country over 
to theirs, processed in that country and shipped back here for 
us to purchase so the only net thing we have achieved in this 
is the exporting of our manufacturing jobs, the processing jobs 
in the middle.
    What is contributing to that? How are they doing that and 
what can we do to do and get them to open up their markets so 
we get market access out of this deal?
    Mr. Coley. Well, hopefully obviously their domestic 
consumption has to increase if our cotton goes as opposed to, 
like you say, sending them back here. I think hopefully with 
them entering into the WTO we might see some changes that way. 
The biggest thing is more domestic consumption and purchasing 
by the Chinese people of the cotton goods that are being 
produced there as opposed to just turning around and being 
shipped back.
    Right now it has just been official for them to send a t-
shirt back to Wal-Mart here in the States to resell it as 
opposed to actually having it there. That ends up making their 
huge domestic product the capital of their domestic cotton 
growers and denies us access to that market. They produce twice 
as much of the cotton they currently consume themselves.
    In other words, for what they grow themselves in China they 
are actually consuming twice the amount they produce there 
locally. There is a market there certainly with the population. 
Certainly the idea that the clothing they are buying is not 
being marketed and U.S. cotton is not being directly marketed 
to those people and they are getting to use their own domestic 
consumption more or less.
    Mr. Barrow. I hear you and I will tell you what I hear from 
other folks. Membership in the WTO has its opportunity and also 
has its responsibilities. Floating currency is one of the 
things that is part of the deal. We are not getting that.
    Enforcement of our intellectual property rights in their 
economy is supposed to be part of the deal and we are not 
getting that. My concern in particular as it affects 
agriculture is we are exporting our own materials but we are 
not getting any excess of their market and that is something we 
are also supposed to be getting out of that deal. I have been 
hearing that a lot. Thank you very much.
    Chairman Graves. Mr. Lipinski.
    Mr. Lipinski. Thank you, Mr. Chairman. Mr. Goodpasture had 
said in this statement that China really made a decision to--I 
don't remember the exact words but potentially become a 
manufacturing country to really support manufacturing jobs, 
made a conscience decision to do that. I feel that China makes 
this decision. They put the policies in place.
    We sit here and we say, ``We are just going to have a free 
market.'' A free market means if someone else is exploiting it 
on the other end. Free market means jobs freely flowing out of 
out country because China is unfairly manipulating its currency 
and not enforcing intellectual property. They have something 
they are trying to do and they have been very good at doing it.
    Now, one thing I wanted to ask Mr. Goodpasture to expand on 
a little bit is the impact on national defense. You had talked 
about tool die and mold industries are really being especially 
hurt. I have Atlas Tool and Die in my district and I am always 
hearing about the difficulties that they are having. When we 
lose these manufacturers what does that do to our ability to 
defend ourselves? How does that have an impact?
    Mr. Goodpasture. I think right now we have a lot of defense 
equipment and storage that has been made. For example, in 1994 
we were producing, I think, 840 tanks a year, M1A1 tanks. Right 
now we are not producing any. I work for General Dynamics. That 
was for another company I previously worked for. I was at a 
meeting at General Dynamics about a year ago to just begin the 
process of doing work with Pride and I was told they could not 
get armor steel.
    There are shortages of steel so, I mean, if we actually get 
into a situation that we need to produce tanks again, the 
Defense program has dropped. We have made a lot of things and 
we have dropped off production on a lot of items. If those 
situations would take off, No. 1, we don't have enough 
material. No. 2, we are losing our manufacturing base to 
produce. If that needed to pick up in a big hurry, we would be 
in trouble. As you can see by my testimony how many shops we 
have lost in this country. That will not be gained back.
    Once we lose that employee base, we don't just say we are 
going to be a manufacturing country again. Again, we have to 
take away the attractiveness of the large businesses going over 
to China and setting up shop because it is further taking away 
from our ability to manufacture here.
    Mr. Lipinski. And once we cannot produce those things we 
need to defend ourselves, we really have lost our defense if we 
are relying on other countries for those types of things.
    Now, the other thing I want to get into is the currency 
manipulation. It made news recently that there is essentially a 
battle in NAM. The small manufacturers were able to win over, 
at least up to some point and it is still in process, support 
for H.R. 1498, the Hunter and Ryan Bill, that would apply U.S. 
countervailing laws to countries that manipulate their 
currencies.
    The question I want to ask each one of you is do you 
think--this is certainly a bill that I support. Do you think 
that this is good legislation? Would this definitely be 
helpful? Obviously it is a battle between the small 
manufacturers and the larger manufacturers. The small ones are 
the ones who really supported this in NAM, the larger ones did 
not. I just want to ask each of you what you think of that 
bill.
    Mr. Goodpasture.
    Mr. Goodpasture. There is a good reason NAM wouldn't 
support that is because a lot of the large business. They have 
really become an organization that are large business, not 
NTMA, small business. A lot of NTMA used to be part of NAM and 
they have dropped out because a lot of their customers have 
picked up and moved to China so there is a reason, I think, 
they would not be in support of that.
    How much that would help, I think it is a start. I still 
think there are a lot of issues as far as controlling and how 
much the yuan is actually--I saw so many prices being 
structured when I was in China that didn't go along with the 
yuan rate so I don't know. I think the whole thing is we have 
to make it less attractive for our major corporations here in 
this country to go to China.
    Mr. Lipinski. Mr. Russell.
    Mr. Russell. Unfortunately, sir, I must apologize. I am not 
familiar with that house bill but, if given the opportunity to 
review it, I would be glad to respond at a later time.
    Mr. Lipinski. Thank you.
    Mr. Duggan.
    Mr. Duggan. Sure. I was at that NAM meeting, as a matter of 
fact. The collective position of NEMA as an umbrella 
organization is that the currencies of major economies should 
be set by market forces. At that meeting, though, NEMA has 
members on both sides. I think we all agree that congressional 
pressure is helpful to all manufacturers, administrative 
pressure on China and talking to China is helpful but we 
unfortunately could not arrive on a consensus and NEMA 
abstained on that vote so I am afraid I can't give you a good 
answer.
    Mr. Lipinski. Mr. Duesterberg.
    Dr. Duesterberg. Mr. Lipinski, I think it is an excellent 
question.
    Dr. Duesterberg. We are not a member of NAM. We are an 
independent organization and not part of that discussion. It is 
my view that the Hunter Ryan Bill is a very blunt instrument 
and I don't believe we are ready to use that yet. The problem 
is we have other instruments available to us and we simply 
haven't tried to use them. It is very clear in the articles of 
both the international monetary fund and the World Trade 
Organization that currency manipulation is a prohibited action.
    The administration every six months has an opportunity to 
make a declaration. In fact, they are required to make a 
declaration to the Congress about whether or not any countries 
are manipulating their currencies with a view to enhancing 
their own commercial advantage. They have systematically hunted 
on that decision. It is quite remarkable that they have. I 
think the pressure needs to be on the administration.
    We do have a new Treasury Secretary who at least has made 
some preliminary signals that he is sensitive to the problems 
created by currency manipulation. We could be smarter about 
trying to attract some international support for this position. 
The Europeans, for example, have hid behind us for years on 
this issue. Now they are facing a trade deficit of as much as 
$150 to $175 billion this year with China so it is becoming in 
their interest.
    The Japanese are losing market share to the Chinese. We 
don't have to do this alone. We could go to the World Trade 
Organization, bring an action and try to get some international 
support for us. I think we ought to go that route first and try 
in a vigorous and systematic way to use the tools that are 
already available to us before we go down the path of a really 
blunt instrument.
    Mr. Lipinski. Thank you.
    Mr. Coley.
    Mr. Coley. Yes, Mr. Chairman. I also have to apologize that 
I know little or next to nothing about NAM or how it relates to 
my particular industry if it does at all.
    Mr. Lipinski. I certainly understand if you came up to me 
and honestly asked me about some bill that I may not know 
anything in particular about either. If you ask me about cotton 
I couldn't tell you a whole lot about that so I understand. 
Thank you all.
    Chairman Graves. Mr. Chabot.
    Mr. Chabot. Thank you, Mr. Chairman. I want to apologize 
for not being here to hear the testimony but, as oft times 
happens around this place, we have several hearings going on at 
the same time and I will review your testimony. Just a couple 
of questions.
    First, relative to counterfeiting, Mr. Duggan, could you 
comment on what actions private companies are taking in the 
U.S. and abroad to combat counterfeiting? How big a problem is 
it?
    Mr. Duggan. Private companies are doing things like, for 
example, if a product like this when it gets counterfeited 
sometimes they undergo--often they will undergo the expense of 
changing the packaging and then they inform the distribution 
chain that, ``Look, the new packaging looks like this. If it is 
not this, it is not genuine.'' That strategy worked for a 
while.
    The problem is that the counterfeiters got very good at 
very rapidly intimating the packaging so that didn't work. What 
they are doing is expending money where they can on 
investigations. In other words, their sales force will go 
around the United States, around the world, and they will see 
something that is not quite right. Then they will do some 
investigating on their own and then if they think it is serious 
enough, they will actually go to professionals, someone in 
country or someone in the United States that is in the business 
of chasing this down.
    I think Tom referred to before they get into the problem of 
cost benefit. In all these companies brand protection is not a 
revenue center. It is an overhead. While over the long-term it 
certainly makes sense to do it, in the near and mid-term they 
go, ``Well, we know we are getting ripped off but how much do 
we spend to solve this problem and then what about the next 
one?''
    Some of the other things they are doing is inscription 
technology. You probably have seen holograms. I haven't seen 
this so much in the auto parts industry necessarily but some 
where you will see holograms or other types of inscripted 
material actually built into the product.
    Then what you do is give the people in your distribution 
chain some sort of a reader so they can wave it across and they 
can tell.
    Those are the services and the kind of products that they 
are doing. They are spending resources on it but, again, in 
some companies, medium companies in particular, but as well as 
in big companies it is not a revenue center and margins are 
small and it is very difficult to manage the cost of protecting 
your brand.
    Mr. Chabot. Thank you. My other question I would ask any of 
the panel members to comment on this if they would. If you 
already touched on this in your testimony, again, I apologize, 
but relative to the expectation by some Chinese either 
government officials or otherwise that they be, for lack of a 
better term, paid off or bribed, that sort of thing.
    Some of the other countries are much more willing to look 
the other way than the United States is. Could you either 
comment on any instances that you have experienced in your own 
companies or yourselves and in your own experience, or stories 
that you have heard that you believe are credible from others 
where they have had a situation where this is something they 
have had to face. I will invite anybody who wants to talk about 
this.
    Mr. Russell. How much time have you got?
    Mr. Chabot. I will ask the Chairman. I am sure he will give 
us enough to hear the response.
    Mr. Russell. I will ask my counsel to nudge me if I start 
to digress or chase rabbits in too many different directions at 
once. I have had opportunity to have conversations with my 
peers professionally with Oakley sunglasses, Nike shoes, 
Anheuser Busch, Harley Davidson. Those last two entities don't 
have the level of irritation that Oakley and Nike and Auto 
Meter have encountered. I know that the gentleman at Oakley has 
a budget for IP rights enforcement that has gone from zero 
dollars.
    I don't know the years. Don DeKeefer, my counsel, could 
probably better speak on this. It is now over $5 million a year 
that he spends just investigating or examining counterfeit 
infringing goods worldwide, primarily manufactured in China.
    Oakley is not necessarily a small business but I use that 
as a--he has told me in personal conversation on the phone that 
his budget now is over $5 million just for the investigation 
and enforcement of his rights worldwide. If you are a small 
business manufacturer, like I really have a strong degree of 
empathy for Mr. Goodpasture here, innovation is the key that is 
going to drive our economy. There is no two ways around that.
    Mr. Goodpasture is presented with an opportunity here to 
develop a product or a service and he can find a way to be cost 
advantageous or cost competitive and still maintain a good 
profit margin which enables him to hire people to put dinners 
on tables in homes in Liberty, Missouri. That is part of the 
American dream.
    He can't afford necessarily to hire, to expand, to become 
more competitive because he is spending money that instead of 
going to R&D to serve his purposes is going to brand 
protection, or IP protection or investigation. That has 
diminished his capabilities as a business enterprise. That is 
the affect that a lot of American companies are feeling right 
now.
    You spend anywhere from $15,000 to $30,000, I will say, in 
my experience securing a utility patent. That is an investment, 
especially if you are a small manufacturer, if you are 
employing 20 people. Auto Meter employs 200.
    After you have made that investment for that patent, the 
idea that you have to spend 10 times that amount simply to 
enforce it as well as the costs that are incurred going around 
trying to find out who is infringing it and the litigation cost 
involved, it would give, I am certain, a number of small 
manufacturers good cause to say, ``What is the point?''
    My personal feeling, sir, is if we lose small manufacturing 
in the United States, we have lost a basic bedrock element of 
the American economy. It was the small manufacturers going back 
to the times of the Revolution that decided they weren't going 
to pay the Stamp Tax. It was the small manufacturers that 
decided to leave their homes for the time being to their sons 
while they fought in the Civil War.
    It was the small manufacturers that really provided 
services to the big companies because the big companies aren't 
flexible enough, don't have the knowledge, don't have the 
experience or whatever. The cost of intellectual property 
rights enforcement against counterfeiting and pirating, and 
let's not even stop to consider what should happen if a small 
manufacturer is named in a litigation for a wrongful death, per 
se.
    Even though he may be vindicated after a considerably 
expensive defense trial, what has happened to his brand as a 
result of the negative PR that has gone with that, how does he 
recover that? I can't emphasize enough this issue.
    Mr. Chabot. Mr. Chairman, I don't know if I have any time 
left or not and I appreciate the response. The one thing that 
wasn't covered that I was interested in was basically the 
desire of Chinese officials or others to require bribes, for 
lack of a more politically correct term here, in order to do 
something that one would expect a person to do in this country 
because it is their job.
    They want to be paid off basically and my understanding is 
our rules and laws, etc., are much stricter than are being 
enforced by the French and others and, therefore, we have a 
competitive disadvantage as a result of that. If any of the 
other members have heard instances or have some sort of 
knowledge about that, I would be interested to hear your 
comments.
    Mr. Duggan. In our brand protection meetings, and this is a 
collection of peer group of executives that are involved in 
brand protection and intellectual property. They do talk about 
things like that but I think, at least in the companies I have 
encountered, it seems strange but they may not even know that 
there is a law against bribes but they are not going to pay 
them because they generally--again, my impression of the people 
I talked to is, ``I can't do this in the U.S. so I am not going 
to do it here.''
    You know, I think if you ask they would say, ``I don't know 
if there is a law against it but we are not going to do it.'' 
Do they compare notes with their competitors, the Germans and 
the French? I think some do. You do hear talk like that, ``Oh, 
everything is fraudulent. We don't do that.'' I don't really 
know about others, German, French, Japanese.
    It is my general understanding that, yeah, you are right, 
they are more lose about that and more strict about it. It is a 
factor. It is hard to say how much of a factor that it is. They 
will refer to more, particularly in provinces and towns and 
cities, where basically things are run, you know, you can tell 
that the business owners and the mayor and the municipal 
authorities and the people doing licensing.
    They have all lived in the same village or province for 
generations. They all know each other and you are an outsider. 
You are at a disadvantage even if you are providing jobs and 
even if you do have a partner.
    One thing that does happen, I don't know if it is a cash 
bribe but it is very common that, let's say, you want to do 
business in a particular area, either sell or invest or 
something like that, they basically hook you up like some kind 
of a shotgun wedding and say, ``If you want to do anything 
here, sell or manufacture, you are going to have to work 
through this person.'' Very often that person is someone who is 
acquainted with the local officials.
    Dr. Duesterberg. Could I comment, Mr. Chairman? I have 
heard lots of anecdotes about activities of various sorts. In a 
political environment like that of China, which is basically an 
authoritarian system, there are ample opportunities and you see 
even the local people who are affected by mal-administration of 
justice and favors being given to local officials and riots all 
over the place that are not widely reported.
    There is a group Transparency International that you 
probably know of that endeavors to have a systematic measure of 
how much bribery is going on. I don't have at the tip of my 
tongue the latest rankings but I know that China doesn't rank 
very highly in that regard. I provided a number in my testimony 
about how long it takes to get the average licenses to open a 
business in China compared to the United States it is 363 days 
basically a year. The average in the United States is 70 so 
each day provides an opportunity for a local official in an 
authoritarian economy to exercise some mischief.
    I think Brian's point, the last point that he made, is also 
an important one. There are other ways that are sometimes above 
board and sometimes not above board that the Chinese try to 
extract some advantage out of companies doing business there. 
Perhaps that is even a bigger problem. General Electric wants 
to sell power plants. The Chinese will negotiate until the cows 
come home to try to get a transfer of the most sensitive 
technology that General Electric has.
    That is a very common practice. You want to set up a cell 
phone factory. You want to sell them Boeing aircraft. They want 
to produce part of it and they want to have the technology that 
goes along with that. Because it is an administered licensed 
based economy, companies have to make a determination whether 
or not it is worth succumbing to their demands for transfer of 
technology or taking on local partners which frequently will 
steal the technology that they learned. I think it is still a 
rather large problem.
    Mr. Chabot. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman Graves. I want to thank all the witnesses for 
coming in today. Some of you have traveled a long ways. I think 
it was very good testimony. This is actually the second hearing 
we have had on this particular issue and we want to continue to 
shed light on the problem and continue to try to pressure 
ourselves, the administration, Congress into paying more 
attention to this issue and try to get something done about it.
    I think we have some great opportunities with China when it 
comes to trade but we have to have a level playing field as 
many of you have pointed out. Again, I want to thank you for 
being here. I appreciated all your testimony.
    [Whereupon, at 11:32 a.m. the Subcommittee adjourned.]
    [GRAPHIC] [TIFF OMITTED] T0355.043
    
    [GRAPHIC] [TIFF OMITTED] T0355.044
    
    [GRAPHIC] [TIFF OMITTED] T0355.045
    
    [GRAPHIC] [TIFF OMITTED] T0355.046
    
    [GRAPHIC] [TIFF OMITTED] T0355.001
    
    [GRAPHIC] [TIFF OMITTED] T0355.002
    
    [GRAPHIC] [TIFF OMITTED] T0355.003
    
    [GRAPHIC] [TIFF OMITTED] T0355.004
    
    [GRAPHIC] [TIFF OMITTED] T0355.005
    
    [GRAPHIC] [TIFF OMITTED] T0355.006
    
    [GRAPHIC] [TIFF OMITTED] T0355.007
    
    [GRAPHIC] [TIFF OMITTED] T0355.008
    
    [GRAPHIC] [TIFF OMITTED] T0355.009
    
    [GRAPHIC] [TIFF OMITTED] T0355.010
    
    [GRAPHIC] [TIFF OMITTED] T0355.011
    
    [GRAPHIC] [TIFF OMITTED] T0355.012
    
    [GRAPHIC] [TIFF OMITTED] T0355.013
    
    [GRAPHIC] [TIFF OMITTED] T0355.014
    
    [GRAPHIC] [TIFF OMITTED] T0355.015
    
    [GRAPHIC] [TIFF OMITTED] T0355.016
    
    [GRAPHIC] [TIFF OMITTED] T0355.017
    
    [GRAPHIC] [TIFF OMITTED] T0355.018
    
    [GRAPHIC] [TIFF OMITTED] T0355.019
    
    [GRAPHIC] [TIFF OMITTED] T0355.020
    
    [GRAPHIC] [TIFF OMITTED] T0355.021
    
    [GRAPHIC] [TIFF OMITTED] T0355.022
    
    [GRAPHIC] [TIFF OMITTED] T0355.023
    
    [GRAPHIC] [TIFF OMITTED] T0355.024
    
    [GRAPHIC] [TIFF OMITTED] T0355.025
    
    [GRAPHIC] [TIFF OMITTED] T0355.026
    
    [GRAPHIC] [TIFF OMITTED] T0355.027
    
    [GRAPHIC] [TIFF OMITTED] T0355.028
    
    [GRAPHIC] [TIFF OMITTED] T0355.029
    
    [GRAPHIC] [TIFF OMITTED] T0355.030
    
    [GRAPHIC] [TIFF OMITTED] T0355.031
    
    [GRAPHIC] [TIFF OMITTED] T0355.032
    
    [GRAPHIC] [TIFF OMITTED] T0355.033
    
    [GRAPHIC] [TIFF OMITTED] T0355.034
    
    [GRAPHIC] [TIFF OMITTED] T0355.035
    
    [GRAPHIC] [TIFF OMITTED] T0355.036
    
    [GRAPHIC] [TIFF OMITTED] T0355.037
    
    [GRAPHIC] [TIFF OMITTED] T0355.038
    
    [GRAPHIC] [TIFF OMITTED] T0355.039
    
    [GRAPHIC] [TIFF OMITTED] T0355.040
    
    [GRAPHIC] [TIFF OMITTED] T0355.041
    
    [GRAPHIC] [TIFF OMITTED] T0355.042
    
      

                                 
