[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
_____
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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
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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?
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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.]
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