[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]








                         U.S. TRADE WITH CHINA

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON TRADE

                                 of the

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

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                           FEBRUARY 15, 2007

                               __________

                           Serial No. 110-15

                               __________

         Printed for the use of the Committee on Ways and Means















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                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California       JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            DAVE CAMP, Michigan
JOHN LEWIS, Georgia                  JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York         PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee            JERRY WELLER, Illinois
XAVIER BECERRA, California           KENNY HULSHOF, Missouri
LLOYD DOGGETT, Texas                 RON LEWIS, Kentucky
EARL POMEROY, North Dakota           KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio          THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California            PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois               JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon              DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL JR., New Jersey        JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama

             Janice Mays, Chief Counsel and Staff Director
                  Brett Loper, Minority Staff Director

                                 ______

                         SUBCOMMITTEE ON TRADE

                  SANDER M. LEVIN, Michigan, Chairman

JOHN S. TANNER, Tennessee            WALLY HERGER, California
JOHN B. LARSON, Connecticut          JERRY WELLER, Illinois
EARL BLUMENAUER, Oregon              RON LEWIS, Kentucky
BILL PASCRELL JR., New Jersey        KEVIN BRADY, Texas
SHELLEY BERKLEY, Nevada              THOMAS M. REYNOLDS, New York
JOSEPH CROWLEY, New York             KENNY HULSHOF, Missouri
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida

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

























                            C O N T E N T S

                               __________

                                                                   Page

Advisory of February 6, 2007, announcing the hearing.............     2

                               WITNESSES

Dan Glickman, Chairman and Chief Executive Officer, Motion 
  Picture Association of America.................................     8
Patricia Schroeder, President and Chief Executive Officer, 
  Association of American Publishers.............................    15
Geralyn Ritter, Senior Vice President of International Affairs, 
  Pharmaceutical Research and Manufacturers Association..........    21
Peter Baranay, Chief Executive Officer, ABRO Industries, Inc., 
  South Bend, Indiana............................................    26

                                 ______

John H. Goodish, Executive Vice President and Chief Operations 
  Officer, United States Steel, Pittsburgh, Pennsylvania.........    43
Franklin J. Vargo, Vice President of International Economic 
  Affairs, National Association of Manufacturers.................    53
John D. Bassett, III Chairman and Chief Executive Officer, 
  Vaughan-Bassett Furniture Company, Galax, Virginia.............    62
James C. Tyrone, Senior Vice President of Sales and Marketing, 
  NewPage Corporation, Dayton, Ohio..............................    64
Peter Navarro, Ph.D., Professor, University of California, 
  Irvine, The Paul Merage School of Business, Irvine, California.    67

                                 ______

The Honorable Karan K. Bhatia, Deputy U.S. Trade Representative, 
  Office of the U.S. Trade Representative........................    81

                       SUBMISSIONS FOR THE RECORD

Advanced Medical Technology Association, statement...............    98
American Forest and Paper Association, statement.................   101
Americans For Fair Taxation, Conyers, GA, statement..............   105
Burke, Kevin M., American Apparel and Footwear Association, 
  letter.........................................................   105
Coalition of Service Industries, statement.......................   108
Haley, Usha C.V., University of New Haven, West Haven, CT, 
  statement......................................................   116
National Electrical Manufacturers Association, statement.........   122
Stewart and Stewart, statement...................................   124
Theriault, R. John, Pfizer, New York, NY, statement..............   138
United States Chamber of Commerce, statement.....................   140
U.S.-China Business Council, statement...........................   146
























 
                         U.S. TRADE WITH CHINA

                              ----------                              


                      THURSDAY, FEBRUARY 15, 2007

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

    The Subcommittee met, pursuant to notice, at 10:30 a.m., in 
room 1100, Longworth House Office Building, Hon. Sander M. 
Levin (Chairman of the Subcommittee), presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON TRADE

                                                CONTACT: (202) 226-0158
FOR IMMEDIATE RELEASE
February 06, 2007
TR-1

                   Trade Subcommittee Chairman Levin

                Announces a Hearing on Trade with China

    Ways and Means Trade Subcommittee Chairman Sander M. Levin today 
announced the Trade Subcommittee will hold the first in a series of 
hearings on the U.S.-China trade relationship. The hearing will take 
place on Thursday, February 15, in the main Committee hearing room, 
1100 Longworth House Office Building, beginning at 10:00 a.m.
      
    Oral testimony at this hearing will be heard from both invited and 
public witnesses. Witnesses are expected to include a representative 
from the Office of the U.S. Trade Representative. However, any 
individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Subcommittee or for 
inclusion in the printed record of the hearing.
      

FOCUS OF THE HEARING:

      
    This hearing is the first in a series on U.S.-China economic and 
trade relations. The hearings will focus on the impact of U.S.-China 
trade on jobs, wages, prices, manufacturing competitiveness, and other 
aspects of the U.S. economy; the causes of the U.S. trade deficit with 
China; China's compliance with its WTO commitments; and China's role in 
the world economy. This hearing will be divided into two panels. The 
first panel will focus on the role and effect of subsidies in the 
Chinese market and their impact on competition with U.S. products in 
China. The other panel will focus on China's enforcement of 
intellectual property rights.
      

BACKGROUND:

      
    Trade flows between the United States and China are substantial and 
growing. U.S. exports to China in the first 11 months of 2006 were more 
than $50 billion, up from $42 billion in all of 2005, and up from just 
$19 billion in 2001, the year China acceded to the World Trade 
Organization. Notwithstanding this substantial growth in U.S. exports, 
the U.S. goods trade deficit with China in 2006 is expected to approach 
one-quarter of a trillion dollars--the largest trade deficit in U.S. 
history. China accounts for roughly 12 percent of total U.S. trade and 
one-third of the total U.S. goods trade deficit with the world. At the 
same time, U.S. imports from other East Asian countries have fallen $10 
billion between 2001 and 2005. The United States had a services trade 
surplus with China of $2.6 billion in 2005.
      
    It is widely recognized that China has a large number of subsidy 
programs that distort the Chinese market and trade with the United 
States. In 2006, China submitted a long-overdue subsidies notification 
to the World Trade Organization. China identified over 70 subsidy 
programs (including some subsidies that appear to be prohibited under 
WTO rules), but even that notification was incomplete.
      
    China has a dismal record of enforcing intellectual property 
rights. For example, China's market access restrictions and resulting 
pirate market growth have been estimated to cost the U.S. copyright 
industries about $2.4 billion in 2005. The piracy rates of physical 
copyright products remain virtually the highest in the world, at 85-95 
percent depending on the industry sector and product format (e.g., 95 
percent of DVDs in China are pirate).
      

DETAILS FOR SUBMISSION OF REQUESTS TO BE HEARD:

      
    Requests to be heard at the hearing must be made by telephone to 
Cooper Smith at (202) 225-1721 no later than the close of business 
Friday, February 9, 2007. The telephone request should be followed by a 
formal written request faxed to Janice Mays, Chief of Staff, the 
Committee on Ways and Means, U.S. House of Representatives, 1102 
Longworth House Office Building, Washington, D.C. 20515, at (202) 226-
0158. The staff of the Committee will notify by telephone those 
scheduled to appear as soon as possible after the filing deadline. Any 
questions concerning a scheduled appearance should be directed to the 
Committee staff at (202) 225-1721.
      
    In view of the limited time available to hear witnesses, the 
Committee may not be able to accommodate all requests to be heard. 
Those persons and organizations not scheduled for an oral appearance 
are encouraged to submit written statements for the record of the 
hearing in lieu of a personal appearance. All persons requesting to be 
heard, whether they are scheduled for oral testimony or not, will be 
notified as soon as possible after the filing deadline.
      
    Witnesses scheduled to present oral testimony are required to 
summarize briefly their written statements in no more than five 
minutes. THE FIVE-MINUTE RULE WILL BE STRICTLY ENFORCED. The full 
written statement of each witness will be included in the printed 
record, in accordance with House Rules.
      
    In order to assure the most productive use of the limited amount of 
time available to question witnesses, all witnesses scheduled to appear 
before the Committee are required to submit 200 copies and email their 
prepared statement for review by Members prior to the hearing. Please 
attach your statement as a Word or WordPerfect document and email to 
[email protected]. Testimony should arrive at 
the Subcommittee office, 1104 Longworth House Office Building, no later 
than close of business on Monday, February 12, 2007. The 200 copies can 
be delivered to the Subcommittee staff in one of two ways: (1) 
Government agency employees can deliver their copies to 1104 Longworth 
House Office Building in an open and searchable box, but must carry 
with them their respective government issued identification to show the 
U.S. Capitol Police, or (2) for non-government officials, the copies 
must be sent to the new Congressional Courier Acceptance Site at the 
location of 2nd and D Streets, N.E., at least 48 hours prior to the 
hearing date. Please ensure that you have the address of the 
Subcommittee, 1104 Longworth House Office Building, on your package, 
and contact the staff of the Subcommittee at (202) 225-6649 of its 
impending arrival. Due to new House mailing procedures, please avoid 
using mail couriers such as the U.S. Postal Service, UPS, and FedEx. 
When a couriered item arrives at this facility, it will be opened, 
screened, and then delivered to the Committee office, within one of the 
following two time frames: (1) expected or confirmed deliveries will be 
delivered in approximately 2 to 3 hours, and (2) unexpected items, or 
items not approved by the Committee office, will be delivered the 
morning of the next business day. The U.S. Capitol Police will refuse 
all non-governmental courier deliveries to all House Office Buildings. 
For questions, or if you encounter technical problems, please call 
(202) 225-1721.
      

WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
page of the Committee website and complete the informational forms. 
From the Committee homepage, http://waysandmeans.house.gov, select 
``110th Congress'' from the menu entitled, ``Hearing Archives'' (http:/
/waysandmeans.house.gov/Hearings.asp?congress=18). Select the hearing 
for which you would like to submit, and click on the link entitled, 
``Click here to provide a submission for the record.'' Once you have 
followed the online instructions, completing all informational forms 
and clicking ``submit'' on the final page, an email will be sent to the 
address which you supply confirming your interest in providing a 
submission for the record. You MUST REPLY to the email and ATTACH your 
submission as a Word or WordPerfect document, in compliance with the 
formatting requirements listed below, by close of business Thursday, 
March 1, 2007. Finally, please note that due to the change in House 
mail policy, the U.S. Capitol Police will refuse sealed-package 
deliveries to all House Office Buildings. Those filing written 
statements who wish to have their statements distributed to the press 
and interested public at the hearing can follow the same procedure 
listed above for those who are testifying and making an oral 
presentation. For questions, or if you encounter technical problems, 
please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
including attachments. Witnesses and submitters are advised that the 
Committee relies on electronic submissions for printing the official 
hearing record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons, 
and/or organizations on whose behalf the witness appears. A 
supplemental sheet must accompany each submission listing the name, 
company, address, telephone and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman LEVIN. Good morning. We have two buttons here. One 
is red and the other is green. Mr. Herger and I want to start 
on time, knowing that Members who have other Committee 
assignments, other work, will have to come in and out. Also, we 
have the debate on the floor on Iraq, which overshadows 
everything.
    This is an important hearing. So, let me, if I might--Mr. 
Herger and I discussed briefly the procedure. We thought we 
would do it this way. We have two panels, the first on 
Intellectual Property Rights (IPR) and the second is on the 
subsidy issue. We have four witnesses here on intellectual 
property, and then I believe we have five witnesses.
    So, we thought we would do this--and then the U.S. Trade 
Representative (USTR). We thought we would change the usual 
order. Usually, an Administration goes first and then the panel 
of witnesses. I thought often that wasn't particularly 
productive, that it would be useful to have an experiment where 
we would have the panels first and then call on the 
representative of USTR. That is agreeable to them, but they 
wanted some assurance as to time. So we told them 1:00.
    So, if we leave a half an hour for not lunch but a munch, 
that would mean an hour and a quarter for each of the panels. 
If you take your 5 minutes, and we will try to abide by the 
five-minute rule as we ask questions, I think that is workable, 
that we can do that.
    We will also follow the rule that was established some 
years ago, and we will call on Members by the order they came 
in. Hopefully, that will work out. Now, for those who will come 
later, if they don't get a crack at you, the first panel, they 
will have the first crack at the second panel. Okay?
    So, now Mr. Herger and I will give our opening remarks. We 
have looked forward to this hearing. The first panel, as I 
said, will be on IPR and the second will be on subsidies. China 
joined in December of 2001. That has been over five years ago.
    When China joined, they made commitments regarding 
intellectual property. I am going to speak on both subjects, 
and then Mr. Herger will, and then we will go on. They made, as 
I was saying, these commitments regarding intellectual 
property. Unfortunately, they have not maintained or followed 
their commitments. We will hear from the panel testimony about 
the violations.
    We have data that in 2005, between 85 and 93 percent of 
music CDs, business software, entertainment software, and 
movies in China were pirated, costing billions of dollars. Of 
course, the problem affects not only that kind of intellectual 
property, but also auto parts, electrical equipment, you name 
it, affecting businesses and workers throughout this country.
    We in October of last year wrote to the Administration and 
urged that there be action taken through our World Trade 
Organization (WTO) remedies. That hasn't happened yet. So the 
issue becomes, why has there been this period, this half 
decade, of inaction by the Administration?
    I am reminded of another provision under the China 
Permanent Normal Trade Relations (PNTR), of standard pipe under 
section 421. The 421 provision is a general surge provision 
that we inserted into PNTR so that if there was a major problem 
of influx of imports into this country from China, that we 
would have a remedy on a number of occasions.
    On a number of occasions, a matter was filed. International 
Trade Commission (ITC) in four cases recommended action, and 
the Administration decided against it. Standard pipe, as I was 
mentioning, was one of these. In terms of thousands of net tons 
at the time of this attention to this important surge 
provision, there were being shipped by China 274,000 net tons. 
Just two years later--I am looking at the figures--that has 
more than doubled. So the price of inattention has been a very 
significant one.
    There has been a similar problem regarding their subsidy 
regime. When they joined WTO, they promised to give some annual 
reports regarding their subsidies. It did not happen year after 
year after year. Finally, in 2006, they gave a report that had 
been required many years before.
    What has happened now is that a case has been brought by 
the Administration, and it will testify as to that. It has 
brought a case against a small number of the 70-odd subsidies 
listed by the Chinese in the report that had been required 
years earlier. I think, in a word, what is happening now, after 
years of inattention, the Administration has filed a case but 
only against a relatively small number of their subsidies 
listed by them.
    What we are doing now on a bipartisan basis is to work on 
legislation that essentially will apply the Countervailing Duty 
(CVD) law, the countervailing duty laws, to non-market 
economies so that companies that are being hurt by the Chinese 
subsidies will be able to file a complaint with Commerce, and 
if injury is shown, the Commerce Department will conduct a CVD 
investigation.
    As I said, this is being worked on on a bipartisan basis. I 
hope that the legislation will be introduced within the next 
few weeks. I mention this because it is critical that we move 
from years of inattention and inaction to true action. Trade 
has to be a two-way street. Attention to subsidies is the 
opposite of protectionism on our part; it is really action 
against the protectionism of other countries.
    So, we welcome this panel. The IPR panel will be first. I 
think you are going to give us graphic illustration of how 
trade hasn't worked when it has been a one-way street, and how 
these countries needs to, as it expands trade, as we must, be 
sure that it operates both sides, both ways.
    I now turn to you, Mr. Herger, for your opening statement.
    Mr. HERGER. Thank you, Chairman Levin. I look forward to 
our discussion on the importance of trade with China from U.S. 
economy-wide perspective.
    A recent Wall Street Journal editorial noted that: 
``China's economic growth is a dual-edged sword for its trading 
partners like the United States, which desires trade on fair 
terms but not at the price of jeopardizing entry into one of 
the world's fastest-growing markets.''
    I think this is a perspective that we must maintain, one of 
balance, that views China not only in terms of our trade 
deficit, but also its importance to our economy as a whole. 
China is our fourth largest export market, accounting for a 4.6 
percent overall U.S. exports. Chinese exports of U.S.-
manufactured goods have grown from $9.3 billion in 1994 to 
$41.8 billion in goods in 2005.
    Our top export categories to China are machinery, aircraft, 
medical instruments, and agricultural goods, which provide jobs 
to tens of thousands of American workers. Although we run a 
deficit in trade of woods with China overall, we currently 
maintain trade surpluses in both agricultural goods and 
services. Our exports of private commercial services accounted 
for $9.1 billion, including professional, technical, 
educational, and transportation services, supporting an 
estimated 37,000 U.S. jobs.
    On the import end, China was the second largest supplier of 
goods in 2005, accounting for 14.6 percent of overall U.S. 
imports. The primary reason for the recent increase in the 
overall U.S. trade deficit in goods is the relative strength of 
the U.S. economy.
    Strong consumer demand has led to an increase in imports, 
while slower growth in much of the industrialized world has 
limited U.S. export growth. The value of imports to our economy 
cannot be understated, however. They provide U.S. manufacturers 
the opportunity to source internationally, allowing them to 
maintain competitiveness by keeping final prices down. By 
exerting down pressure on prices, imports lead to more choices 
for consumers, increasing purchasing power and real income for 
American workers and families, and keeping inflation in check.
    The size of the U.S. deficit in goods with China is 
somewhat misleading because China has become a significant 
assembler of other countries' components. In fact, this is 
estimated to account for 60 percent of Chinese exports that 
were previously completed and shipped from other Asian 
countries directly to the United States
    Underscoring this point, as our goods deficit with China 
has increased, other East Asian imports have dropped by $10 
billion. China's economic growth has also kindled new 
opportunities for U.S. foreign direct investment, which reached 
$16.9 billion in 2005, compared to China Foreign Direct 
Investment (FDI) in the United States of $481 million.
    Still, as important as China's economic growth is for our 
own economy, it is essential that China plays by the rules. We 
must see that it complies with the WTO obligations, such as 
protecting IPR and ending subsidies that violate its WTO 
obligations. To be blunt, I am disappointed at the slow pace of 
reform in China on these issues. While we have seen some 
improvement on IPR enforcement, it is not enough. I encourage 
the USTR to maintain the pressure.
    I am pleased at the announcement that the United States is 
bringing a case against China's export subsidies and import 
substitution. This case is truly about standing up for 
America's workers, as has been done before on semiconductors 
and auto parts and in achieving positive outcomes in 
semiconductors and kraft liner board, by threatening cases.
    In our pursuit of balance in this debate, I believe the 
United States must continue to press China to open its markets 
to our goods and services. Further, we must urge the world's 
most populated Nation to adopt stable, pro-growth policies 
which will lead to an increasingly large export market for U.S. 
producers and investors.
    Thank you, Mr. Chairman.
    Chairman LEVIN. Thank you very much.
    [The prepared statement of Mr. Reynolds follows:]
Opening Statement of The Honorable Thomas M. Reynolds, a Representative 
                 in Congress from the State of New York
    Thank you, Mr. Chairman.
    Today's hearing gives this subcommittee an opportunity to discuss 
an issue I've worked to highlight for several years--China's failure to 
protect intellectual property rights, particularly on manufactured 
goods.
    Two years ago, the Ways and Means Committee heard testimony from 
Robert Stevenson, the CEO of Eastman Machines, a small- to mid-sized, 
family-owned manufacturer in Buffalo, New York. Mr. Stevenson vividly 
highlighted one of the most glaring, unfair trade practices we see from 
China--its blatant disregard for intellectual property rights on the 
patents of U.S. manufactured products.
    In Mr. Stevenson's view, China's contempt for intellectual property 
rights is the single biggest disincentive to small- and medium-sized 
manufacturers seeking to export their products to that huge and growing 
Chinese market. In the case of Eastman Machines, which makes high-
quality cloth cutting machines, the company's Chinese competitors--and 
in some cases, even its business partners--are pirating its designs and 
producing low-cost knockoffs for sale in the Far East and Pacific Rim.
    When China was permitted to join the World Trade Organization in 
2001, there was an implicit promise made to American businesses, 
workers, and consumers--that we would get a fair deal in our trade 
relations with the Chinese. Yet, in so many areas--intellectual 
property rights, currency valuation, subsidies, trade barriers, you 
name it--we see China failing to uphold its end of the bargain by 
ignoring its international trade obligations. But when companies like 
Eastman Machine seek relief for their legitimate grievances, they too 
often find themselves getting the short end of the stick.
    We need to do much more to combat China's unfair trade practices, 
and I look forward to working with all of my Ways and Means colleagues 
to push for better enforcement of our trade laws, particularly against 
countries like China that continually cheat on trade.
                                 

    Chairman LEVIN. All right. The first panel--and I think 
what I will do is to introduce the four of you together, and 
then you will proceed. We are not being very chivalrous. We 
have Mr. Glickman first, but I guess we will follow that 
practice. I am not sure who seated you which way.
    I welcome all of you, and especially welcome back Mr. 
Glickman and Ms. Schroeder. Both Dan Glickman and Pat Schroeder 
served with such distinction in this body. Your contributions 
were invaluable, including the sense of humor of both of you, 
and we miss that.
    Dan Glickman went on to be, of course, a Secretary of 
Agriculture, among other distinguished services, and is now 
Chairman and CEO of the Motion Picture Association (MPAA). So, 
we welcome you, Dan Glickman.
    Pat Schroeder, who always had a way with words--sometimes 
not always humorous, sometimes very much to the point, as Mr. 
Glickman's were--her distinguished service here has been 
followed by work in many pursuits, and is now President and 
CEO, as we know, of the Association of American Publishers. So, 
a special welcome to you, Pat.
    Geralyn Ritter is the Vice President for International 
Affairs of PhRMA. We know the importance of pharmaceuticals in 
this country and this world. So we are especially thankful that 
you could come and give us your perspective.
    Peter Baranay is CEO of ABRO Industries, and he is going to 
give us his perspective from that of a business person.
    So, if each of you would take 5 minutes. Your statements 
will be in the record. I think the way this is working out, we 
will have ample time, if you can adhere to the 5 minutes, for 
each of us, or close to that, to have our 5 minutes. So, 
proceed.

            STATEMENT OF DAN GLICKMAN, CHAIRMAN AND

                    CHIEF EXECUTIVE OFFICER,

             MOTION PICTURE ASSOCIATION OF AMERICA

    Mr. GLICKMAN. Thank you very much, Mr. Chairman. It is a 
pleasure to be here in this great august room. I served with 
both you and Mr. Herger. It is a great honor to be here, and 
with the other distinguished Members on this panel. I will make 
my comments and then be willing to answer questions afterward, 
but let me make the following points.
    One, China is the most difficult market in the world for 
the U.S. motion picture industry. It is impossible to travel to 
one of China's major cities and not encounter street hawkers 
pushing pirated versions of the latest movies. I have brought 
many of them here with me. More than nine out of every ten DVDs 
in the China market is fake. A comprehensive analysis of the 
piracy problem estimates that our members lost $244 million to 
piracy in China in the year 2005 alone.
    While you can see virtually any U.S. film you want in China 
in pirated form, the legitimate market to American movies is 
one of the most restricted. The pirates have a thriving market, 
but our companies, who invest millions and employ hundreds of 
thousands of American workers, are throttled because the 
Chinese government decides which movies can get in or not.
    These problems reinforce each other, making China nearly 
too frustrating to deal with. At the same time, as one of the 
fastest-growing markets in the world, China is indeed too 
potentially lucrative to ignore.
    Their government has committed to fight piracy and 
strengthen its protection of intellectual property, but it has 
neither met its unilaterally announced objectives nor its 
international obligations.
    In connection with access, we will not be successful 
fighting piracy in China unless we have fair access to a fair 
China market. That we do not have. The Chinese government needs 
to clean the level playingfield and remove the artificial 
protectionist barriers that restrict legitimate companies from 
supplying Chinese audiences the film entertainment they desire.
    Our research indicates that almost half the pirated product 
is actually Chinese. We also find stolen copies of Japanese, 
Korean, French, and Indian movies in China. The world's film 
industry, including the Chinese industry, lost $2.7 billion in 
2005 in China. Half of that losses were to the Chinese film 
market.
    In addition, our analysis of pirated DVDs from around the 
world trace their production back to 50 plants in China that, 
because of the modern global Internet and the capability of 
moving movies around the world, find themselves all over the 
world.
    Let me give you an example. During my first trip to China 
in this role, I visited a shop near the hotel where I stayed. 
To my astonishment, I found a copy of one of my son's movies. 
My son is a film producer. I met with the Mayor of Beijing the 
next day. The next day, the shop was raided and closed.
    During my next trip to China, I visited the same shop. It 
was full of more pirated disks. We alerted the authorities. It 
was raided again and closed.
    Last December, our staff met with Ministry of Culture 
officials, who touted the closure of the shop and its 
conversion to a clothing store. The MPAA staff visited the 
store, and from the outside, it did look like a clothing store. 
However, inside in a back room, pirated versions of virtually 
every current U.S. movie remained available.
    So, that is a key problem we face, the will and commitment 
of the Chinese authorities to enforce their laws. We have 
problems with the adequacy of many of their laws, but as strong 
as these laws might be, if the authorities do not enforce them, 
we will be no better off than we are right now.
    The next problem is access to a fair market. China only 
permits 20 foreign films into its market each year on a 
revenue-sharing basis, the normal way films are distributed. 
Typically, U.S. audiences may have the opportunity to see as 
many as 20 new films over a week or two.
    Those films must be imported and distributed through a 
government-controlled entity which dictates the terms by which 
we share box office revenues, and these terms are the most 
unbalanced in the entire world. We also must contend with a 
censorship process that at times seems to be very much part of 
the protectionist movement over there.
    In China last year, our U.S. films earned $109 million in 
box office. In comparison, over the last weekend the U.S. 
domestic box office was $108 million. Notwithstanding these 
figures, the 2006 Chinese box office was 30 percent more than 
2005. Box office is moving up in China; it is just that our 
companies and American motion pictures are not permitted to in 
fact participate in that.
    We spend a lot of money fighting piracy in China and around 
the world. We work with governments to enact and enforce the 
laws. We are all on the ground in China. We survey the market 
for information. We work with Chinese authorities on 
intellectual property and enforcement, and we do have some 
cooperation with the Chinese authorities.
    The support we have received from China in actually 
implementing what they promise to do is indeed lacking. Our 
support from the Congress has been tremendous, and frankly, the 
work the Administration has done and is doing is invaluable in 
this regard.
    The market is not open. The piracy rates are incredible. As 
you can see from all these DVDs that I brought you from a 
variety of movies that are not out legitimately in DVDs in the 
United States, all the way from ``The Pursuit of Happyness,'' 
``Night at the Museum,'' ``Babel,'' ``Blood Diamond,'' ``Flags 
of Our Fathers''--and by the way, those movies are not 
permitted to even be shown in China. There are only two movies 
on DVDs that are being permitted to be shown in China, ``Casino 
Royale'' and ``Happy Feet,'' but again, they are not out in DVD 
legitimately in the United States as well.
    So, I say to you that this is a problem that needs 
addressing. In many cases, we are the poster boy for this 
particular problem. There are some folks in the Chinese 
authorities who want to help us, but for the most part, we need 
your help and we need it as quickly as possible. Thank you very 
much, Mr. Chairman.
    [The prepared statement of Mr. Glickman follows:]
    Statement of Dan Glickman, Chairman and Chief Executive Officer,
                 Motion Picture Association of America
    Mr. Chairman: ``China is too frustrating to deal with, too 
lucrative to ignore.'' That quotation, attributed to a film industry 
executive, appeared in a story Variety carried this past Monday 
describing the problems the U.S. motion picture industry faces in the 
China market. It captures the situation perfectly, almost. For the 
reasons I will cite, the numbers show that China has been far from 
lucrative, though still a market with enormous potential.
    China is the most difficult market in the world for the U.S. motion 
picture industry. It is impossible to travel to one of China's major 
cities and not encounter street hawkers pushing pirated versions of the 
latest U.S. movies. More than 9 of every 10 DVDs in the China market is 
fake. A comprehensive analysis of the piracy problem estimated that our 
members lost $244 million to piracy in China in 2005 alone.
    While you can see virtually any U.S. film you want in China, in 
pirated form, the legitimate market is one of the world's most 
restricted. The pirates have a thriving market, but our companies--who 
invest millions and employ hundreds of thousands American workers--are 
throttled. The Chinese government decides which U.S. films Chinese 
audiences will see, when they will see them, and dictates the terms of 
getting those films into China.
    These problems reinforce each other; they make China nearly ``too 
frustrating to deal with.'' At the same time, as one of the fastest 
growing markets in the world populated with audiences who genuinely 
like and flock to U.S. films, China is indeed ``too [potentially] 
lucrative to ignore.''
    Let me frame the three key points in the U.S.-China trade agenda 
from our perspective:
    One, the U.S. motion picture cannot continue to absorb losses of 
the magnitude it suffers in China. The Chinese government has committed 
to fight piracy and strengthen its protection of intellectual property, 
for the motion picture industry as well as other U.S. copyright 
industries. It has met neither its unilaterally announced objectives 
nor its international obligations.
    Two, the U.S. motion picture industry will not be successful 
fighting piracy in China until it has fair access to a fair China 
market. We are not seeking preferential treatment, we are seeking fair 
treatment. Movie pirates invest nothing in creating the content they 
peddle, yet they enjoy virtually unfettered access to Chinese 
audiences.
    The Chinese government needs to clean then level the playing field, 
remove the artificial, protectionist barriers that restrict legitimate 
companies from supplying Chinese audiences the filmed entertainment 
they clearly desire.
    Three, success in achieving these goals will depend, in part, on 
the continued support of our agenda from the Congress and the 
Administration.
Movie Piracy in China
    Regrettably, to coin a phrase, if you did not see a counterfeit 
DVD, you were not in China. Too many, especially some around the world 
who should be allies in the fight against piracy in China, view this as 
an American problem, or a Hollywood problem. While we certainly bear 
the disproportionate brunt of the burden of this problem, movie piracy 
in China affects film makers all around the world.
    Our research indicates that almost half the pirated product is 
actually Chinese. We also find stolen copies of Japanese, Korean, 
French, and Indian movies in China. The world's film industry, 
including the Chinese industry, lost $2.7 billion in 2005, according to 
the research we commissioned.
    I recall a conversation with a young Chinese film producer who 
recently visited my office. When asked to define his number one 
problem, he did not mention financing, distribution, or any of the 
other obstacles film producers must overcome: He said piracy is his 
biggest problem--the theft of his movies, in China.
    Movie piracy is a problem afflicting film makers no matter where 
they live and make movies, in more than one way. Not only are the 
pirates sapping legitimate movie makers in the China market, they are 
encroaching on legitimate markets all around the world. Our analysis of 
pirated DVDs seized from around the world traced their production back 
to over 50 plants in China.
    Piracy in China it is also a problem with global reach. A pirated 
disc made in China can, in a day or two, be on the streets of Los 
Angeles. Someone can illegally camcord a movie in Montreal, send the 
file by way of the internet to someone in Guangzhou who then dubs and 
subtitles the dialogue, and then illegal presses thousands of DVDs.
    In June of last year, the first research conducted in China 
examining the effect of piracy on the country's motion picture industry 
from the perspective of industry participants revealed that Chinese 
film producers, exhibitors, and distributors are suffering badly from 
widespread film piracy, and that few are optimistic that the situation 
will improve any time soon.
    Asked about the future of movie piracy in China over the short 
term, 61 percent of industry respondents surveyed in this study said 
they believe movie piracy will continue to increase, while 39 percent 
said they believe piracy levels will hold steady. No one interviewed 
believes that the market for pirated films will shrink.
    The researchers concluded that meeting consumer demand--through 
increased variety and availability of legitimate movie titles as well 
as improved legitimate distribution networks--is to some extent a 
precursor of the eradication of piracy.
    Over the last several months, senior Chinese officials have stepped 
up their rhetoric about intellectual property rights enforcement. We 
have seen several pronouncements of enforcement campaigns, the most 
recent being the so-called 100 Day Campaign launched last summer, 
extending through the fall of 2006.
    We undertook our own survey of the effects of the campaign on the 
availability of pirated product. In general, we found that in some 
cities, in some shops, at some times, the availability declined; 
however, pirated discs were still available at virtually the same 
level. In some instances, we were asked to come back later in the day, 
or were squirreled to back rooms.
    Let me give you an example: During my first trip to China in this 
role, I visited a shop near the hotel. To my astonishment, I found a 
copy of one my son's movies. I met with the mayor of Beijing later that 
day. The next day, the shop was raided and closed. During my next trip 
to China, I visited the same shop. It was full of more pirated discs. 
We alerted the authorities; it was raided, again, and closed. Last 
December, our staff met with Ministry of Culture officials, who touted 
the closure of the shop and its conversion to a clothing store. They 
visited the store, and from the outside, it did appear to be a clothing 
store. However, inside, in a backroom, virtually pirate versions of 
every current U.S. movie remained available.
    Therein lies a key problem we face: The will and commitment of the 
Chinese authorities to enforce their laws. We have problems with the 
adequacy of many of the provisions of their laws. But as strong as the 
laws might be, if the authorities do not enforce them, we will be no 
better off than where we are right now.
Fair Access to a Fair Market
    Unfortunately, there are several territories around the world where 
the rate of piracy of U.S. motion picture rivals the rates we endure in 
China. However, China stands unequalled in the barriers it places on 
the U.S. industry's ability to enter the market. Let me cite six of the 
most visible, and frustrating, barriers we face.
    First, China only permits 20 foreign films into its market each 
year on a revenue sharing basis. Typically, U.S. audiences may have the 
opportunity to see as many as 20 new films over a week or two; China 
only allows 20 foreign films into its cinemas a year.
    Second, those films must be imported and distributed through a 
government-controlled entity. We have an extremely limited role in the 
normal commercial activities of distributing and promoting our own 
films.
    Third, China's state-controlled film importer and distributor 
dictates the terms by which we share box office revenues with Chinese 
theaters; these terms are the most unbalanced in the world and return 
to the U.S. industry rates far below normal commercial terms.
    Fourth, we must contend with a censorship process that at times, we 
believe, can be arbitrary and motivated more by political or 
protectionist concerns than by making judgments about the suitability 
of the film.
    Fifth, when we do get our films in the market, around and over 
these obstacles, we frequently find ourselves subjected to blackout 
periods, as we term them. They are periods when the Chinese authorities 
reserve local cinemas for Chinese films, only. To make our exclusion 
from cinemas even worse, blackout periods usually occur during periods, 
when audiences are most likely to be on holiday from work or school, 
such as the upcoming new year holiday.
    Sixth, we also face restrictions on our ability to invest and 
control film production, distribution, and exhibitions businesses in 
China. Like other businesses, we are subject to arbitrary decisions 
affecting our businesses, a lack of transparency about the way those 
policies are set, and policies that favor local companies at our 
expense.
    Consequently, in China last year U.S. films earned $109 million in 
box office. In comparison, over the last weekend, the domestic box 
office was $108 million. Notwithstanding these figures, the 2006 
Chinese box office was 30% more than 2005. A recent industry analysis 
projected that box office revenue will double within the next 4 years.
    Over the last few years, the U.S. motion picture industry has 
stepped up its investment in the Chinese industry. We have invested in 
cinemas as well as film and television production facilities. We are 
interested in continuing that investment; however, as we have told the 
Chinese authorities, we must be assured of the ability to return a 
sufficiently attractive return on that investment to justify it.
    Some of our members have also adjusted their marketing practices to 
compete with the pirates. But no matter how aggressively we price our 
products, we cannot compete with pirates who have no investment in the 
content of the product and we cannot compete against the pirates who 
have the market to themselves, not hindered by the government 
regulations and restrictions we encounter.
The MPAA China Agenda
    MPAA invests millions every year in fighting piracy, in China, and 
around the world. We go after the pirates, we work with governments to 
enact and then enforce adequate laws. We work to educate the public 
about the consequences of piracy, and the legal alternatives, and we 
are constantly seeking new ways to address the problem through 
technology, education, and changing business practices.
    We are also on the ground in China. Our representatives survey the 
market for information about the incidence of piracy and pass on this 
information to the Chinese authorities. In many cases, this information 
helps Chinese authorities formulate cases for raids on sellers and 
distributors, and often, those authorities invite our representatives 
to accompany them on such raids.
    We operate and participate in training sessions for Chinese 
authorities and jurists on IPR laws and enforcement, in the U.S. and in 
China.
    We have executed a memorandum of understanding with the Chinese 
Ministry of Culture, National Copyright Administration, and State 
Administration of Radio, Film, and Television to improve protection of 
home entertainment products. We just recently executed, with other U.S. 
copyright trade associations, another agreement with the National 
Copyright Administration of China to enhance our collective efforts to 
combat internet piracy.
    The support we have received from the Congress is tremendous. The 
work the Administration has done and is doing is invaluable.
    I want to note the work, in particular, of Secretary Gutierrez and 
Ambassador Schwab. The Secretary has been one of our most powerful and 
articulate advocates; his team, here and in Beijing, are top-rate. 
Ambassador Schwab approaches our China agenda with a clear and forceful 
strategy for success, and she has deployed some of the best and most 
effective officials in the executive branch to our cause. We are deeply 
appreciative of these efforts.
    In the 5 years since China joined the World Trade Organization, 
since taking on the obligations and responsibilities that organization 
demands of its members, we have, regretfully, seen little meaningful 
progress from China towards protecting U.S. motion pictures as the WTO 
requires. The market continues to be tightly controlled, in violation 
in some aspects of the letter of the WTO and certainly in spirit.
    We will continue our work inside China, with the officials there, 
with the industry, and our members will likely do so, too. However, our 
patience and our pocketbooks are not limitless.
    We have walked a long way down the China road, looking and hoping 
for improvement. We may be nearing the end of that course and deciding 
on whether to take another, another which calls China into account for 
its WTO obligations and responsibilities, and, we believe, its failure 
to abide by them.
Olympic Leverage
    Before coming to my current position, I spent a fair amount of time 
in China and working on matters affecting China while I was in Congress 
and as Secretary of Agriculture. In particular, with respect to the 
latter, I was deeply involved with President Clinton in fighting, 
successfully, for PNTR for China.
    When I traveled first to China under the MPAA mantle, I was greeted 
as a friend of China for that work. I was able to secure meetings at 
the most senior levels and enjoyed candid and productive conversations 
with those officials. Since then, I have worked hard to maintain good 
relations with the Chinese government and industry.
    In addressing our problems with the Chinese officials, I told them 
that I am struck by the fact that when, and if, they want to protect 
intellectual property, they can be remarkably successful. While fake 
DVDs litter Beijing, fake Olympic-logo materials are impossible to 
find. The government has made it abundantly clear that it will not 
tolerate Olympic rip-offs, and it has enforced that edict, effectively. 
In sum, when the Chinese authorities want to protect intellectual 
property, they can.
    As the world's eyes begin to turn to Beijing in the run-up to the 
2008 Olympics, I have asked the authorities if they want the world to 
see a China of which they can be proud, or do they want the world to 
see a China of fake DVDs--a China which pays no heed to intellectual 
property, a China which countenances theft, theft of ideas, creativity, 
and of the livelihoods of the working men and women who make those 
movies.
    My views on how we can use the pressure of the Olympics to further 
our agenda are explained more fully in the attachment to this 
statement. In your discussions with Chinese officials, I urge you to 
make the same points. I believe we must step up enforcement, open the 
market, possibly take legal action at the WTO, and we must also shine 
the powerful light of world public opinion on the Chinese.
    Mr. Chairman, I appreciate the fact that you have decided to call 
attention to our China problems as one of the first matters on your 
agenda this Congress. I look forward to your questions and to working 
with you and your colleagues in advancing our agenda in China.
    Thank you.
                                 ______
                                 
      
Is China ready for its close-up?
As the world focuses on the Beijing Olympics, will the government drop 
        the curtain on entertainment pirates?
By Dan Glickman
From: The Los Angeles Times
    AS BEIJING begins preparing for the 2008 Olympic Games, we will see 
more and more of the Olympic logo, one of the most widely recognized 
pieces of intellectual property--and one of the best protected.
    To be sure, fake depictions of the five rings and the logos of 
individual Games have plagued the International Olympic Committee and 
host country Olympic committees. But the integrity of the logo will be 
tested like never before when the torch enters Beijing.
    China is arguably the world's largest marketplace for pirated 
goods--from copied luxury items and medicines to bootleg versions of 
the latest films. Will knockoffs of Beijing's running-man logo for the 
2008 Games become as commonplace?
    A recent news story cited a Chinese manufacturer who observed that 
his government was implementing strict control over the production and 
distribution of Olympics materials ``to protect the value of the 
logo''--and it's working. Will China translate its apparent will to 
protect the integrity of its Olympic logo to movies, music, 
publications, television, entertainment and business software, 
pharmaceuticals and other industries that are built and dependent on 
effective protection of their intellectual property?
    In a little less than two years from now, hundreds of thousands of 
people will travel to China for the Games that billions of people will 
watch on television. I know the kind of China I want them to see: a 
responsible great power, a leading player in the world's affairs 
abiding by the rules of the community of nations. I also want to see 
China as welcoming of movies and other entertainment from around the 
world as the government will be of fans and athletes from around the 
world.
    Indeed, China has actively sought such recognition, most pronounced 
in its successful bid to join the World Trade Organization. Along with 
recognition, that membership carries responsibility, a duty that China 
has failed to meet in opening its market to legitimate entertainment 
industries and protecting intellectual property and the value of 
creativity. This deficiency is not just an intolerable burden to the 
U.S. motion picture industry; it afflicts filmmakers worldwide, 
including those in China. An independent Chinese film producer recently 
told me that his single biggest problem is the piracy of his work by 
his fellow countrymen.
    During my last trip to China, I heard from Chinese officials--all 
too frequently--that the rest of the world must be patient, that we 
must give China more time to develop a sophisticated, comprehensive and 
effective system of protections for intellectual property rights. The 
authorities said that modern China has a mere 20 years experience--a 
small fraction of that of the United States.
    I reject this explanation. My first trip to China was more than 20 
years ago. The transformation of the nation and its economy since then 
has been astonishing, made possible by a commitment to purpose and a 
purposeful will--both of which have been lacking in its approach to 
intellectual property rights. Although China has opened itself to the 
world in many remarkable ways, the U.S. motion picture industry still 
faces a bewildering array of restrictions, hobbling its fair access to 
China's market. At the same time that China effectively permits pirates 
unfettered access to Chinese movie consumers--93% of the film market is 
pirated goods, according to Motion Picture Assn. of America research--
it severely restricts the ability of legitimate moviemakers who have 
invested enormous capital in producing the filmed entertainment that 
the pirates steal. This gives the pirates a monopoly.
    I challenge Beijing to use the 2008 Games to showcase a new 
commitment to movie rights. Beijing has enlisted the help of some of 
the greatest American film directors to create projects to showcase 
China and the Olympics. Yet these same directors have repeatedly had 
their films rejected for exhibition in China. But make no mistake, 
their films are widely known and viewed in China, thanks to the sales 
of millions of pirated DVDs.
    In 2008, the world could see China as a nation of fake goods, a 
nation running roughshod over respect for intellectual property. Or it 
could be seen as a respected member of the international community that 
welcomes a diversity of entertainment products while protecting and 
valuing the integrity of intellectual property.
    China is a great power. Will it act like one?

FOOTNOTE
---------------------------------------------------------------------------
    The Motion Picture Association of America (MPAA) represents the 
major U.S. producers and distributors of motion picture and television 
programs; its members are NBC Universal City Studios, Paramount 
Pictures Corporation, Sony Pictures Entertainment, The Walt Disney 
Company, Twentieth Century Fox Film Corporation, and Warner Bros. 
Entertainment

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    Chairman LEVIN. Thank you very much.
    Pat Schroeder. Welcome.

STATEMENT OF PATRICIA SCHROEDER, PRESIDENT AND CHIEF EXECUTIVE 
          OFFICER, ASSOCIATION OF AMERICAN PUBLISHERS

    Ms. SCHROEDER. Thank you. It is so wonderful to see 
Chairman Levin and Chairman Herger--or Ranking Member Herger up 
there. Both of you got great promotions. It is great to see all 
of my friends up there. Those of us who weren't on Ways and 
Means are always in awe when we are in this room. So, I will 
try not to be too awestruck.
    Thank you for----
    Chairman LEVIN. It may not last long.
    Ms. SCHROEDER. Yes. Yes.
    Mr. CROWLEY. Mr. Chairman, can I also say that so are we.
    Ms. SCHROEDER. That is great. Well, I want to say for the 
book industry--we know. You earned it.
    Chairman LEVIN. All right. We won't take that away from 
your 5 minutes.
    Ms. SCHROEDER. Terrific. Well, I just want to say for the 
book industry, we really thank you for including us. America's 
book industry is about a $25 billion industry. It is very, very 
large. We have all the same problems of the movie people.
    Obviously, our publishers desperately want to get into the 
Chinese market and have not been able to. That's not just 
talk--people say, of course you want to get in, but last 
January 30th, or this January 30th, Danny and I and some other 
copyright folks were over here on the Hill releasing the 2005 
statistics on the copyright industries in America.
    I just want to remind people, we are over 11 percent of the 
gross national product of this country. We are one of the major 
exports of this country. What we also showed is that the wages 
of the average person in copyright was 40 percent over the 
average worker in America. These are the middle class wages 
Americans want, and we really think that intellectual property 
is where America's future jobs are in this global economy. So, 
we really need to work together to protect them.
    Obviously, we can't get into the Chinese market as long as 
they keep cratering that market with this rampant piracy that 
our book industry is up against. We have no idea what the true 
value is. We estimate just for higher ed, it is conservatively 
$52 million.
    We are also getting hit very hard by digital piracy, the 
downloading of entire books. Digital piracy is growing by leaps 
and bounds. We have no estimate for how broad-based that is, 
nor do we know how deep it is for all of the general pirated 
books that we have out there, just the regular market books.
    Let me say what we are working on first in China is the 
schools. Universities are reproducing entire books. They do it 
at the university. They often put their stamp on it. Sometimes 
they put hard covers on it. Obviously, the Chinese government 
has to know about this. This is very shocking to us. That is 
where we really can get some figures as to what piracy looks 
like. So, American publishers are trying to educate the 
Chinese, but we are not getting paid for any of our textbooks 
being used everywhere. It is really kind of strange.
    Then obviously, just as Danny had, all of our book 
publishers find their books over there, and that is very 
frustrating. We have no idea the value of overall piracy of 
books in China. Kite Runner, Bill Clinton, they are all out. 
You can buy illegal copies on any corner.
    Then they do trademark piracy, too. Harvard University has 
got so many books over there with the Harvard symbol on it, and 
other universities are the same. All the books are frauds. They 
are all total frauds. One of our favorites even had a 
recommendation from Einstein. It is pretty hard to give a 
recommendation from the grave, but nevertheless, that is what 
is happening.
    So, we have been very frustrated by this problem. We work 
with the local Chinese publishing association. They are equally 
as frustrated by it. We had a gigantic conference on piracy at 
the international Beijing book fair in 2005. Interestingly 
enough, right out on the street in front they were selling 
pirated books, so clearly, the pirates aren't worried about any 
kind of enforcement at all if you can do it right outside the 
book international show.
    So, finally, we have gotten the Chinese to pay a little bit 
of attention. They raided some universities. They raided six of 
them. Many of them they raided when universities were closed 
down, so obviously, they didn't find much. Secondly, if they 
did find much, the fines were so de minimis it didn't mean a 
lot, but at least it was an attempt. It is kind of the 
frustration that you talk about. They have put out some memos 
saying, thou shalt not do this. Well, will they follow up? Will 
they really pursue that? We don't know.
    We have been working with our Government. Our Government 
desperately needs to help. As I say, we work with the local 
industry. We talk to the Chinese officials. We keep pushing, 
but we don't seem to get very far.
    Finally, book publishers can't even get into the Chinese 
market. Under the WTO Agreement, they were supposed to be 
allowed in, but we are not allowed to import our own books in 
the legitimate market at all. No Amercican publisher are 
allowed unless they align themselves with a local government 
official or a sanctioned publishing house. Our publishers are 
not allowed to set up and publish internally. Nor can our 
publushers distribute. We can't bring them in. We are shut out 
of the market. We want to be in the market. We see our stuff 
being sold and pirated all over the market. So, that is it. 
Thank you very much, Mr. Chairman.
    [The prepared statement of Ms. Schroeder follows:]
Statement of Patricia Schroeder, President and Chief Executive Officer, 
                Association of American Publishers, Inc.
    The Association of American Publishers (AAP) thanks Chairman Levin 
and the Ways and Means Trade Subcommittee for the opportunity to 
participate in today's public hearing on the matters related to the 
protection of intellectual property rights in China. The pervasive 
problems of copyright piracy and trademark counterfeiting in China, 
exacerbated further by severe restrictions on market access for several 
industries including publishing, are some of the most important issues 
facing China and the U.S. today.
About AAP
    The Association of American Publishers is the national trade 
association of the U.S. book and journal publishing industry--an 
industry with 2006 sales exceeding $25 billion. AAP's more than 300 
members include most of the major commercial book publishers in the 
United States, as well as smaller and non-profit publishers, university 
presses and scholarly societies. AAP members publish books in every 
field, educational materials for the elementary, secondary, 
postsecondary, and professional markets, scholarly journals, computer 
software, and electronic products and services. The protection of 
intellectual property rights in all media, the defense of the freedom 
to read and the freedom to publish at home and abroad, and the 
promotion of reading and literacy are among the Association's highest 
priorities.
Introduction to Book and Journal Piracy in China
    In 2006, AAP estimated losses to U.S. publishers in China at $52 
million, not including losses due to piracy on the internet. Visits to 
China and discussions with our member publishers reveal a staggering 
amount of book piracy plaguing this most promising of markets.
    Book piracy manifests itself in a number of different forms in 
China. Illegal commercial scale photocopying of academic materials is 
the industry's most immediate concern. Print piracy (unauthorized 
reprints approximating the quality and appearance of the original) and 
illegal translations have profound effects on the market as well. 
Internet piracy in the form of sites offering illegally scanned books 
for download, peer-to-peer trading and unauthorized access to 
electronic journals and other database compilations, is growing by 
leaps and bounds. Furthermore, trademark counterfeiting, especially 
with regard to books produced by university presses, misleads Chinese 
consumers. All of this is exacerbated by market access barriers that 
deny foreign publishers the ability to freely import into the Chinese 
market, distribute their own materials, obtain local Chinese book 
publication numbers or print for the local market.

      Commercial photocopying

    One of the most destructive forms of book and journal piracy is 
commercial-scale illegal photocopying of academic materials, an 
activity that takes place on and near school and university campuses 
all over the world. The mechanisms differ slightly from place to place. 
In some cases, most of the photocopying takes place at small copyshops 
lining the campuses. These shops often appear to be minute, independent 
operations, but in reality are frequently linked in ownership and 
highly organized. Campus facilities are often used to make illegal 
copies as well, including library books, copiers in libraries, student 
centers and academic buildings and commercial operations leasing space 
on the premises of the institutions.
    In China, this is taken one step further. Almost every Chinese 
university has at least one ``textbook center'' on campus, in most 
cases run by the university itself and charged with distributing 
textbooks to students at the start of each term. In some cases, these 
textbook centers are distributing legitimate texts, legally printed or 
imported for the use of the students. In the vast majority of cases, 
however, these centers are distributing photocopied or illegally 
printed texts in large quantities. These illegal copies are generally 
made on the campus--at or near the textbook center, presumably at the 
request of the university authorities or the lecturers adopting the 
books. It is often a highly organized practice, complete with stock 
lists, storage warehouse, bar codes and colorful covers bearing the 
name of the department or the university crest.
    It is important to note two things when discussing these textbook 
center practices. First, being mindful of the notion of ``fair use'' or 
``fair dealing'' in academic materials--legal provisions stipulating 
that a certain amount of copying is permissible for purposes of private 
study or research--I must emphasize that the copying taking place at 
these textbook centers far exceeds the possible bounds of fair dealing. 
Routinely, books are copied in their entirety. Large portions of books 
or journals included in ``compilations'' go well beyond ``fair use'' as 
well. AAP respects the balance reflected in the fair use provisions 
contained in international agreements. These practices, however, 
disrespect that balance greatly. Second, it is important to recognize 
that these textbook centers hurt Chinese publishers just as much as 
foreign publishers. Many of the illegally copied books found in 
textbook centers are Chinese language, Chinese published books. This 
results in massive losses to a local industry that is trying to 
establish itself in an international marketplace.
    The practices of these textbook centers, undertaken with either the 
tacit or active consent of the universities themselves, are destroying 
the market for English and Chinese-produced textbooks alike. AAP and 
the Publishers Association (PA), its sister association in the U.K., 
have been working with authorities in the General Administration of 
Press and Publication (GAPP), the National Copyright Administration of 
China (NCAC), regional copyright authorities and the Ministry of 
Education (MOE) to bring light to these issues.

      Print piracy and translations

    Print piracy and unauthorized translations have a profound effect 
on the market as well. Bestsellers such as the Harry Potter' 
series, Dan Brown's novels and political autobiographies are pirated in 
English and Chinese within days of their home country releases. These 
books--of varying quality--are readily available in retail markets and 
street stalls, apparently without fear by the vendors of any government 
action. AAP representatives have routinely seen pirate books sold by 
street vendors outside the Beijing International Book Fair venue! 
Clearly, the boldness of the pirates suggests that enforcement measures 
to date have not been effective.
    Until a few years ago, print piracy of all books was the prevalent 
form of piracy in China. This was due, in part, to the high cost of 
photocopy paper and implements--it was more profitable to undertake an 
entire print run of a bestselling commercial or professional book. 
While photocopying has caught up and perhaps surpassed this problem in 
prevalence, the issue of print piracy remains significant. Print 
piracy's effects are especially severely felt among publishers of high-
end technical books, reference books and English language teaching 
books, as well as commercial fiction.
    Print piracy exists primarily in two forms. The first involves 
print overruns by an otherwise legitimate Chinese printer. This 
licensing issue is exacerbated by the market access restrictions in 
place (see below) that prevent U.S. publishers from engaging in direct 
contracts for printing for the Chinese market. Instead, U.S. publishers 
must partner with a Chinese publisher, who handles all contracts for 
book production. This lack of control over the contractual relationship 
makes it difficult for U.S. publishers to control licensees who violate 
the contract terms by printing more copies than licensed and selling 
the ``rogue'' copies for an extra profit. They then return the unsold 
legitimate copies to the publisher, who bears the full risk of 
estimating market demand under the industry's ``remainder'' system. 
Foreign publishers will remain vulnerable to this practice until market 
access barriers as to printing are removed.
    The second form is outright piracy by an entity that has no license 
to print the book at all. In some cases, book pirates target an English 
language book that they are able to replicate almost exactly, thus 
being able to print a book that is virtually indistinguishable from the 
original. In other cases, books are clearly pirated--the quality varies 
greatly. Most translation piracy involves print piracy of this type--
often, poor quality translations, bound at a printing press. This hurts 
not only the original foreign publisher, but also the Chinese publisher 
who was granted the legitimate translation rights.
    Recent studies suggest that underground dealing of pirated 
bestsellers, especially at places such as the Beijing Book Market in 
Tianshuiyuan, is flourishing. AAP suspects that Tianshuiyuan is the 
primary source for pirated books sold in the street vendor network in 
Beijing.

      Internet piracy

    The industry's fastest growing problem--a problem we share with 
many of our fellow copyright industries--is internet piracy. Just in 
the last six months, complaints from publishers about scanned books 
being traded online have increased significantly. Clearly, this is a 
practice that threatens to do more harm to our industry than all other 
problems combined.
    Web sites offering free book downloads are thriving. These books in 
most cases do not originate in electronic form, but are scanned 
versions of hard cover books. Sites offering pay or free downloads join 
traditional peer to peer trading sites as serious threats to the book 
market. Too often, takedown notices are ignored and government action 
against these operations is slow.
    Internet piracy is affecting publishers of academic and 
professional journals in a different way. These journals, which unlike 
most of the books originate in electronic form, are usually made 
available by publishers to institutional subscribers through use of 
passwords or similar ``gateway'' mechanisms. Increasingly, journals 
publishers are seeing evidence of these electronic ``gateways'' being 
left open or accessed by unauthorized users. Publishers have also 
reported evidence of abuse of ``trial'' samples of electronic goods 
sent to libraries through extensive unauthorized sharing of these 
samples among institutions. All of this activity--in violation of both 
copyright laws and subscriber agreements, opens the doors for pirate 
operations to access these materials, reproduce them and sell them in 
competition with the legitimate vendors.
    Electronic piracy is in some cases replacing photocopying as well. 
Reports indicate that often, scanned versions of academic titles are 
reprinted and bound for distribution by second hand bookstores, with 
the label ``e-book.'' Indeed, this is an increasingly frequent 
phenomenon throughout the world, as more and more enforcement actions 
against traditional copyshops are yielding computers full of ``e-
files'' ready to print at customer demand.

      Trademark counterfeiting

    While most book publishers are primarily focused on copyright 
piracy, trademark counterfeiting affects the industry as well. 
Counterfeiting is often incidental to copyright piracy, as pirates use 
the famous imprints of American publishers to get attention from 
readers. This is taken to a new level when well-known publishers' names 
are used on books that bear no content produced by that publisher at 
all! These books, available at mainstream bookstores in China, mislead 
consumers as to the origin of their content.
    In addition, book publishers suffer from a sort of ``passing off,'' 
by which books bearing titles and fictional authors' names similar to 
bestsellers are marketed at the expense of the legitimate authors and 
publishers. By one example, former President Bill Clinton's book was 
marketed, before release in China. One version contained long excerpts 
of Senator Hillary Clinton's book in place of President Clinton's 
writings.

      Market access

    One will never effectively tackle a piracy problem without ensuring 
that legitimate product is available for the market in question. We 
cannot divorce the concept of market access from the question of 
piracy. In no case is this more apparent than in China. Activities 
essential in the publishing chain of events are off-limits to foreign 
publishers. Many of the restrictions in place violate the commitments 
China made in acceding to the World Trade Organization (WTO). For 
instance, foreign publishers cannot import, hold stock and distribute 
their own materials in the Chinese market, resulting in delays in 
delivery and increased costs. Some of these activities are restricted 
to State-owned enterprises; others are limited in such ways as to keep 
them effectively entirely closed. Foreign owned enterprises are also 
prohibited from making final decisions about content to be published in 
the market, or obtaining the necessary Chinese book number that is a 
prerequisite for publishing in China. Foreign publishers cannot print 
for the Chinese market, but only for export. AAP believes 
wholeheartedly that, in order for publishers to be able to tailor a 
product to the market--in substance and in price--foreign publishers 
must have greater access to the market than they do today.
    Publishers understand the needs of a local government to exercise 
some degree of content control, and remain willing to abide by China's 
censorship process. Yet, the censorship process should not be coupled 
with such severe restrictions on activities in the market.
    Market access issues affect the ever-growing market for online 
content as well as hard goods. High fees charged for access to foreign 
material on the China Education and Research Network (CERNET) result in 
high costs to publishers of electronic materials (such as academic and 
professional journals) in making their products available in China, and 
fewer, lower quality options available to Chinese scholars and 
students.
    China's lack of transparency with regard to the laws and 
regulations governing market access further exacerbate an already 
frustrating situation. This must be improved. AAP calls on China to 
increase its transparency with regard to all provisions pertaining to 
implementation of its obligations under international agreements.
Industry Efforts and Activities
    AAP, along with the Publishers Association of the U.K. (PA), has 
been working hard to engage the relevant Chinese authorities on the 
various issues facing the industry. The association has worked 
extensively with the National Copyright Administration of China (NCAC), 
the General Administration of Press and Publication (GAPP), the 
Ministry of Education (MOE), the Ministry of Information Industry (MII) 
and regional copyright authorities to address the problems of illegal 
reproduction at university textbook centers and internet piracy.
    Between June and October 2006, NCAC and GAPP, together with 
regional authorities, investigated and took action against textbook 
copying at six universities, including some of Chinese most prestigious 
institutions. These organizations and the Ministry of Education also 
issued a series of notices to be disseminated to universities mandating 
that the infringing activities be halted. AAP and PA are working with 
authorities to verify the effects of these notices and actions. Since 
copying of academic materials in particular is cyclical in nature, it 
is especially important that the authorities monitor campus activities 
at the beginning of the academic terms. The starting points of classes 
this year--in March and September--therefore present excellent 
opportunities for the Chinese government to show that it is serious 
about stopping this form of piracy.
    In addition, AAP and the PA are working with NCAC, MII and regional 
authorities to ensure that sites infringing our materials receive 
adequate attention. The associations have had at least one early 
success but progress has been slow on a second complaint.
    These enforcement efforts have been complemented by a number of 
educational programs and dialogues that have allowed foreign and local 
publishers to join voices in the fight against piracy. On May 19, 2006, 
AAP and PA partnered with the Publishers Association of China (PAC) to 
bring a dialogue on these efforts to BookExpo America, the largest book 
publishing trade show in the United States. The program featured 
speakers from the GAPP, the Chinese Institute of Publishing Science, 
the U.S. Patent and Trademark Office, the Office of the U.S. Trade 
Representative and many industry bodies from China, the U.S. and the 
U.K. AAP was pleased to see the recognition that piracy is a common 
problem affecting many economies and a host of book-related industries.
    The May 19 program followed a groundbreaking event held at the 
Beijing International Book Fair in September 2005. Also cosponsored by 
the Chinese, British and U.S. publishing associations, the program was 
entitled ``Intellectual Property in the Global Economy: China's Place 
in the World Publishing Community'' and featured speakers from the U.S. 
Embassy Beijing, the NCAC, the GAPP, the Beijing Municipal Copyright 
Bureau, Renmin University, the Chinese Academy of Social Sciences and 
several publishing associations and companies. Again, all came away 
with the clear conviction that there was a common goal to pursue.
Conclusions and Industry Suggestions
    The industry is working hard to inform itself, speak to the 
authorities and make a dent in this landscape of piracy. AAP and its 
members firmly feel, however, that government-to-government dialogue is 
essential in bringing about meaningful change in the Chinese market 
place. We encourage the Administration and Congress to keep engaging 
the Chinese government in a variety of venues, consistently emphasizing 
the need for strong intellectual property rights protection for China's 
local industry as well as foreign industry, and the need for greater 
market opening in this sector so important to Chinese culture and 
scholarship. China is a country that boasts millions upon millions of 
eager potential readers and scholars, and these readers are largely 
being supplied with illegal goods.
    AAP asks that government-to-government discussion of book piracy--
including in the Joint Commission on Commerce and Trade (JCCT) talks, 
the Strategic Economic Dialogue (SED), and other appropriate venues be 
stepped up. AAP also joins its fellow copyright industries in asking 
that the U.S. government continue to pursue strong laws and regulations 
governing internet infringement, in hopes of saving the market from 
utter destruction by file-sharing and downloading sites. Third, AAP 
emphasizes the need for more effective enforcement against hard goods 
pirates, through the administrative, civil and criminal systems. 
Finally, AAP stresses that market access for foreign companies is 
imperative in the fight against spreading piracy, that transparency of 
laws and regulations affecting both market access and intellectual 
property protection must be increased and that China must bring its 
laws and regulations into compliance with the commitments it made upon 
acceding to the WTO. AAP looks forward to working with all relevant 
parties to ensure that the market becomes increasingly viable for 
legitimate businesses.

                                 

    Chairman LEVIN. Thank you so much, Ms. Schroeder.
    Your turn. Thanks.

     STATEMENT OF GERALYN RITTER, SENIOR VICE PRESIDENT OF 
     INTERNATIONAL AFFAIRS, PHARMACEUTICAL RESEARCHERS AND 
                    MANUFACTURERS OF AMERICA

    Ms. RITTER. On behalf of PhRMA, I would like to thank you 
very much, Mr. Chairman and other Members of the Subcommittee, 
for organizing today's hearing and giving us a chance to speak 
about this very important issue.
    IPR drive innovation in the biopharmaceutical industry, and 
that is what makes possible the development of new medicines 
for patients around the world. Nowhere, I think, is that more 
important and more under threat than in China.
    My testimony today is going to focus on two of our top 
issues. That is pharmaceutical counterfeiting, and also the 
absence of reliable clinical test data protection in China.
    Pharmaceutical counterfeiting is an intellectual property 
(IP) enforcement concern, of course, but first and foremost, it 
is a safety concern. Counterfeit medicines take several forms, 
but in every form they are dangerous. Some of the most 
insidious counterfeits actually do contain chemical compounds 
that are the same as the legitimate product, but in quantities 
that are far too high or often far too low, both of which can 
cause serious effects.
    Oftentimes the counterfeits are just sugar pills. They are 
placebos, with no active ingredients at all. Of course, the 
worst kinds of counterfeits are pure poison, and even one of 
those, I think we can all agree, is too many.
    The Chinese government has undertaken a series of actions 
to try to deal with this problem. Raids and seizures are up in 
2006, but still, China remains the number one global source of 
counterfeit medicines in the world.
    They have got two real, serious weaknesses in their 
regulatory scheme that cause us a lot of problems and hamper 
enforcement in China. The first is that even though the laws 
prohibit fake medicines, criminal liability is generally 
conditioned on showing some sort of actual harm to a patient. 
So, if you become aware of a shipment of counterfeit drugs and 
stop it before it actually reaches the patient and hurts 
someone, then you have just made it far harder to get a 
criminal conviction.
    A much better way to deal with drug counterfeiting in China 
would be for the Chinese government to amend its drug laws to 
make it a crime to manufacture or distribute any medicine that 
is deliberately mislabeled. It shouldn't matter how much, and 
it shouldn't matter whether or not someone has actually been 
hurt yet. If you make a drug and you call it something that it 
is not, that should be a crime, full stop.
    China also needs to improve coordination among their 
various government agencies that have oversight and enforcement 
responsibilities in this area. They need to make sure that 
those agencies have sufficient authority and resources to 
prosecute every link in the counterfeiting supply chain.
    Which brings me to my second point on counterfeiting. There 
is a missing link in enforcement against counterfeits in China, 
and the missing link is the very first one, the most upstream 
producers. Chemical manufacturers in China are freely selling 
and shipping the active pharmaceutical ingredients, the bulk 
chemicals that make a medicine work, within China and around 
the world with no oversight by that country's food and drug 
authority.
    This is important because these are the chemicals that are 
sold to the downstream counterfeiters that may process them 
into pills or tablets for worldwide distribution, but at 
present, although the authorities can go after pharmacies and 
other distributors, and even the manufacturers of the finished 
product, it is far more difficult and they don't really have 
good legal authority to go after the chemical companies that 
are supplying those counterfeiters. So, China's law needs to be 
amended so that those chemical companies that produce the 
unregulated active ingredients are subject to far more 
stringent regulation.
    The second major IP problem that we are facing in China 
relates to clinical test data protection. When China joined the 
WTO in 2001, they promised to do this. They revised their laws 
and indicated that they would be enforcing Trade-Related 
Aspects of Intellectual Property Rights to protect the client 
test data that is submitted when a drug application is filed. 
Unfortunately, the way they have implemented those laws has 
made that protection meaningless and works to provide an unfair 
advantage to local Chinese companies.
    What is supposed to happen is that when an innovator files 
an application for a new drug at the Chinese Food and Drug 
Administration, the test data that takes years and millions of 
dollars to develop to prove that the drug is safe and effective 
is supposed to be protected for a period of time so that no 
other company can rely on that data until the protection 
expires.
    What happens in reality is that an innovator files its data 
for a new drug, often in the United States first, and almost 
instantly multiple Chinese companies are filing for approval in 
China based on a reference to the U.S. data. The result? 
Multiple Chinese companies entering the market at the same time 
as the innovator with the same product based on the same data 
and no period of protection at all.
    So, let me sum up here and say that PhRMA Members are 
committed to the Chinese market. We are committed to Chinese 
patients. We want to work and we do work with the Chinese 
government to address these problems, and we have appreciated 
the support we have received from the U.S. Government, but the 
problems are very serious and they remain. We look forward to 
working with you to try to provide a better business 
environment for U.S. companies in China. Thank you.
    [The prepared statement of Ms. Ritter follows:]
 Statement of Geralyn Ritter, Vice President of International Affairs, 
         Pharmaceutical Research and Manufacturers Association
    On behalf of the Pharmaceutical Research and Manufacturers of 
America (PhRMA), I thank Chairman Levin and the Subcommittee members 
for organizing today's hearing on intellectual property rights 
enforcement in China. Intellectual property rights drive innovation in 
the bio-pharmaceutical industry and enable the development of new and 
improved medicines for patients. PhRMA strives to uphold and defend 
these rights around the world. China is no exception.
    My testimony will focus on the top three IP concerns for our 
industry in China: Specifically, pharmaceutical counterfeiting, 
protection of clinical data and patent reform. We estimate that the 
economic damage resulting from poor IP enforcement costs the industry 
approximately 3.4 billion dollars in lost sales annually. This is, in 
fact, a conservative estimate because it only captures quantifiable 
losses due to the lack of patent protection and data exclusivity for 
many products. It is impossible to know what percentage of the 
legitimate pharmaceutical market in China is supplied by counterfeits.
Pharmaceutical Counterfeiting
    While the Chinese Government has undertaken a series of actions to 
combat drug counterfeiting, the prevalence of counterfeit drugs within 
and originating from China nevertheless remains a substantial concern. 
Indeed, China is believed to be the world's leading exporter of 
counterfeit drugs and bulk chemicals.
    Although pharmaceutical counterfeiting is subject to criminal, 
administrative and civil remedies under China's trademark laws, the 
effectiveness of such remedies is undermined by burdensome evidentiary 
requirements and weak enforcement. Anti-counterfeiting efforts are 
hindered by the general reluctance of administrative authorities to 
impose deterrent penalties and transfer cases to criminal authorities. 
Moreover, border enforcement is undermined by excessive bond 
requirements, a lack of transparency and short filing deadlines.
    Significant weaknesses in China's drug safety regime contribute to 
the proliferation of counterfeit pharmaceuticals in China and the 
global export of inherently dangerous products. Pharmaceutical 
counterfeiting is first and foremost a drug safety violation. Thus, the 
adequacy of China's response to pharmaceutical counterfeiting must be 
measured against the framework of laws that regulate the various links 
in the drug manufacturing and supply chain. In that regard, China has 
yet to enact laws that address all aspects of drug counterfeiting 
activity or to provide the kind of enforcement resources and commitment 
necessary to combat this growing problem. For example, although China's 
drug laws prohibit ``fake'' medicines, criminal liability is 
conditioned upon proof of harm, a statutory requirement that, in 
practice, requires evidence of a serious defect in quality. This 
burdensome and excessive evidentiary requirement all but precludes 
criminal prosecution against counterfeiters under China's drug laws.
    Another significant deficiency is the fact that China's drug 
regulatory authorities lack sufficient investigative powers and 
resources to take effective action against upstream manufacturers and 
suppliers. As a result, regulators are forced to rely upon criminal 
authorities to target counterfeiters; as noted above, however, criminal 
authorities are hamstrung by excessive evidentiary requirements. The 
net effect is a system of drug safety laws that provide no meaningful 
deterrence against the manufacture and distribution of counterfeit 
pharmaceuticals. Moreover, once counterfeit drugs reach the border, 
there are virtually no checks in place to prevent their export to other 
markets.
    To rectify these problems, it is imperative that China amend its 
drug laws to prohibit and criminalize the manufacture, distribution, 
import or export of any pharmaceutical that is deliberately mislabeled 
as to source or identity (consistent with the WHO definition of a 
counterfeit medicine), without the need to prove harmful effects or 
deficient quality. In addition, China should create an interagency, 
pharmaceutical task force of law enforcers, regulatory authorities and 
customs agents to ensure adequate coordination among the various 
authorities with relevant oversight and enforcement responsibilities. 
Each of these officials must be given the investigative powers and 
mandate to prosecute all links in the counterfeit drug chain, including 
manufacturers, wholesale and retail distributors and exporters of 
counterfeit medicines and related packaging and raw materials.
    An important factor contributing to the pervasiveness of drug 
counterfeiting is that Chinese chemical manufacturers are producing 
bulk active pharmaceutical ingredients (API) which are being used in 
the manufacture of counterfeit drugs.
    China has thousands of chemical companies, and there is evidence 
that some are producing and selling API in bulk form to downstream 
counterfeiters, often via the internet. The downstream manufacturers 
further process the chemicals into counterfeit pills and tablets sold 
within and outside of China, including the United States. 
Unfortunately, under current Chinese law, the chemical suppliers who 
are conducting such activities are not operating illegally under 
Chinese law.
    According to Chinese Drug Administration Law, a chemical company is 
subject to government oversight by the SFDA when it ``chooses'' to 
register a specific API product with SFDA. It is only when the chemical 
company declares that it is making an API to be used in a finished 
pharmaceutical good and after the SFDA grants a product registration 
number that the company is legally permitted to supply API for 
inclusion in a finished pharmaceutical product. Under the current 
regulatory framework, if a chemical company manufactures an API, but 
elects not to declare that the API will be used in a finished 
pharmaceutical good, there is no government agency that possesses 
authority to preclude this activity from occurring.
    The SFDA recognizes the importance of patient health and safety by 
regulating chemicals that will be used in finished pharmaceuticals. 
However, clear evidence exists that chemical companies are ignoring 
SFDA requirements by advertising their API products on commercial 
websites in the bulk form under the category of ``(for) medicinal use'' 
while not adhering to SFDA GMP regulations. Chemical manufacturers are 
freely selling and shipping API products to locations within China and 
abroad with either no regard for the intended use of the API or 
flagrantly choosing not to comply with existing Chinese regulations 
that would bring them under the oversight of the SFDA. These 
unregulated and unethical practices by chemical companies contribute 
significantly to, and, in some cases, aid and abet the counterfeit drug 
trade.\1\ More troubling is that the unregulated distribution of API 
exposes patients to serious and significant health risks as well as 
degrades consumer confidence in the global medicinal supply chain.
---------------------------------------------------------------------------
    \1\ Under U.S. law, a supplier of active ingredient for a drug that 
will be marketed in violation of the Federal Food, Drug, and Cosmetic 
Act (FDCA) may, if the supplier is knowingly involved in the illegal 
activity, be charged with a conspiracy to commit that offense, 18 
U.S.C. 371. In addition, the supplier who knowingly helps its customers 
in violating the counterfeit prohibition could be charged for aiding 
and abetting a violation of a U.S. federal statute, 18 U.S.C. 2.
---------------------------------------------------------------------------
Addressing the Most Prevalently Counterfeited Medicines
    PhRMA recommends that the SFDA impose special requirements on the 
API substances of the 10 most commonly counterfeited pharmaceutical 
products in China (the ``Listed API Product(s)'') according to the data 
compiled and updated jointly by SFDA and the Ministry of Public 
Security on an annual basis. SFDA could require all chemical companies 
manufacturing one or more of the Listed API Products to comply with all 
SFDA Good Manufacturing Practices (GMP) requirements, as if it were to 
be used in a legitimate finished pharmaceutical good.\2\ Additionally, 
SFDA could require that the chemical companies certify that they will 
maintain detailed records of the recipients of each shipment, the 
quantity, the intended use of the Listed API Product being shipped and 
the Business License showing the business scope of the recipient. These 
records could be made available to SFDA officials should they ask to 
review the records. If the chemical company fails to maintain 
appropriate GMP, provides a false certification and/or fails to keep 
accurate records, the SFDA should have the authority to impose 
deterrent penalties, including a fine and a notice of its violation to 
the local Administration of Industry and Commerce (AIC) to whom the 
chemical company is registered and the possible revocation of the 
company's operating license should multiple violations occur.
---------------------------------------------------------------------------
    \2\ Active Pharmaceutical Ingredient (API), for this purpose, 
should include those components and intermediates of the product that 
may undergo chemical change during the manufacture of the drug product 
and be present in the drug product in a modified form intended to 
furnish the specified activity or effect.
---------------------------------------------------------------------------
    PhRMA supports the formation of a working group between industry, 
SFDA, the Ministry of Commerce and the Ministry of Public Security to 
address the problem of counterfeit API and to discuss the proposal 
outlined above.
Clinical Data Protection
    Following accession to the World Trade Organization in 2001, China 
revised its laws to incorporate concepts from Article 39.3 of the WTO 
Agreement on Trade-Related Aspects of Intellectual Property Rights 
(TRIPS). Article 39.3 provides that a country must protect data 
submitted in the context of a drug registration application from unfair 
commercial use. Loopholes in China's current regulatory environment 
allow for unfair commercial use of safety and efficacy data generated 
by PhRMA member companies.
    One such loophole exists because China defines ``new drug'' as any 
drug not previously marketed in China. Chinese domestic companies can 
file a ``new drug application'' for approval of a compound if that 
compound was previously approved by a regulatory agency in another 
country. Although the SFDA requires some limited clinical data on local 
populations for drug marketing approval, it relies heavily on published 
material generated by originator companies in the country of first 
launch. The published data, however, is insufficient by itself to prove 
the safety and efficacy of the product. But for the full clinical 
dossier that was submitted to the FDA in the U.S. or EMEA in Europe, 
China would not grant marketing approval on the basis of the limited 
clinical data required for regulatory approval. This is evident from 
the fact that China distinguishes products that have never received 
marketing approval anywhere in the world from those that are simply 
``new to China.'' Products that have never been approved anywhere in 
the world require considerably more safety and efficacy data than 
products that have received prior marketing approval.
    PhRMA views China's deference to published material and regulatory 
decisions by agencies outside of China as reliance on clinical data 
developed by originator companies. The published data alone are usually 
insufficient to prove the safety and efficacy of a product. The 
published data merely summarize the data included in the original 
filing. The original data were necessary to demonstrate the safety and 
efficacy of the product. Reliance on summary data or approvals in 
countries outside of China conveys an unfair commercial advantage to 
non-originator companies because non-originator companies do not incur 
the cost of generating their own clinical data.
    In practice, the SFDA receives numerous applications for marketing 
approval of a compound once it is approved in the United States or 
Europe. The originator's application may or may not be the first 
application SFDA receives. SFDA has interpreted the data protection 
provision of the Drug Registration Regulation to apply after marketing 
authorization is granted in China. Marketing authorization can take up 
to four years. During this period additional applications from Chinese 
companies can be submitted to the SFDA. Any company that receives 
authorization to begin limited, local clinical trials before marketing 
approval is granted to the first company is permitted to complete the 
regulatory process. This can result in multiple companies entering the 
market with the same product--and no effective data exclusivity for the 
originator.
    In the United States, any non-originator company can seek 
regulatory approval during the data protection period if it submits a 
full data package consistent with requirements of a New Drug 
Application (NDA). China, however, grants marketing approval for 
products based on incomplete data filings. Applications in the United 
States during the data exclusivity period must include all elements of 
the NDA. An abbreviated application is not accepted during the data 
exclusivity period.
    For the above mentioned reasons, we encourage China to revise its 
regulations to close the loopholes that permit the unfair commercial 
use of clinical data generated at considerable cost and risk by U.S. 
companies.
Patent Reform
    We encourage China to ``link'' its patent system and the regulatory 
approval system. Such linkage would ensure that the SFDA does not grant 
marketing approval to third parties without authorization of the patent 
owner if the products are still covered by a patent. Linking the patent 
system and the regulatory approval system will not only facilitate 
effective enforcement of pharmaceutical patents, but will avoid the 
need for infringement actions in these types of cases.
Conclusion
    In conclusion let me stress that we are committed to the China 
market and to Chinese patients. We want to work with the Chinese 
Government to resolve problems in a collaborative fashion and welcome 
the U.S. Government's support of these initiatives. I have limited my 
remarks today to the industry's IP concerns in China. I have not 
touched on the very substantial market access barriers the industry 
faces. China is a dynamic and complex market that warrants the 
attention of this Committee and the Administration. We look forward to 
working with you to foster a better business environment for American 
companies operating in China. The U.S. pharmaceutical industry houses 
some of the best scientific minds in the world and is the global leader 
in biomedical innovation. With respect to innovation, the goals of this 
industry are consistent with the goals of this Congress: To quote House 
Speaker Nancy Pelosi, we share ``a steadfast commitment to being the 
most competitive and innovative nation in the world.'' China seeks to 
become a world leader in many innovative industries. Allowing them to 
steal the intellectual property of U.S. companies only encourages the 
shift of high paying, high skilled jobs in the pharmaceutical industry 
from the U.S. to China. We seek your support in upholding intellectual 
property protection around the globe and here at home to sustain the 
innovative nature of our industry--and to ensure that new and improved 
medicines are available in the future.

                                 

    Chairman LEVIN. Thank you very much.
    Mr. Baranay.

   STATEMENT OF PETER BARANAY, CHIEF EXECUTIVE OFFICER, ABRO 
             INDUSTRIES, INC., SOUTH BEND, INDIANA

    Ms. BARANAY. Good morning, Mr. Chairman and Members of the 
House Committee on Ways and Means on Trade. Thank you for 
giving me an opportunity today to testify regarding China's 
enforcement of IPR. My name is Peter Baranay, and I am 
President of ABRO Industries of South Bend, Indiana.
    I am here representing the Motor & Equipment Manufacturers 
Association, known as MEMA, and the Brand Protection Council of 
MEMA, whose purpose is ``to provide a forum for manufacturers 
to discuss counterfeiting, IPR, grey market or diversion, share 
best practices, recommend solutions, formulate future seminars, 
and promote networking.''
    This group was started about three years ago and has over 
50 members. Most of the names you will recognize--Ford, General 
Motors, Dana, Delphi, Tenneco, to name a few. You may be 
wondering why I am here today instead of one of those big name 
companies. The answer is simple. Many companies do not want to 
talk publicly about their counterfeiting problems, and 
specifically with respect to China and its booming automotive 
industry. These companies are concerned the publicity will have 
a negative impact on their customers.
    As a member of the President's Advisory Committee on Trade 
Policy and Negotiation, I know this failure to disclose 
counterfeit issues facing American companies was a problem when 
the USTR office tried to build an out-of-cycle WTO complaint 
against China.
    I am pleased to be here with you today to share with you 
some details of the types of counterfeit problems and issues 
ABRO and other members of MEMA are facing.
    ABRO traces its corporate roots back to 1939, when our 
founder started as a translation service. By 1944, he had 
incorporated and was working with manufacturers in the United 
States selling their products in the international marketplace. 
By the mid-seventies, the ABRO brand was developed as part of a 
long-term strategy to continue to sell U.S.-manufactured 
products overseas.
    ABRO is perhaps unique in that 100 percent of our business 
activity is conducted overseas. Although we do business in over 
165 countries, not one dollar of ABRO products is sold in the 
United States. We began to trademark the ABRO name beginning in 
the United States, followed by Singapore, in 1980. Twenty-seven 
years later, the ABRO trademark is registered in 167 countries, 
and we own nearly 1100 registrations in numerous international 
classifications.
    ABRO considers intellectual property protection of 
paramount importance. Although we can point to many examples of 
counterfeiters throughout the world, the one company who was 
the most egregious and a dangerous economic terrorist with 
respect to intellectual property is Hunan Magic of China. 
Beginning as early as 2001, on the heels of the WTO, Hunan 
Magic not only began to counterfeit ABRO products, but began to 
represent themselves as ABRO Industries itself, a brazen 
example of corporate identity theft.
    Hunan Magic manufactures in China and exports throughout 
the world, markets that ABRO Industries developed. This story 
was the subject of a page 1 article in the Wall Street Journal 
in November 2004.
    The last 5 years have been enormously frustrating in that 
in spite of ABRO holding numerous valid Chinese registrations 
and Hunan Magic holding none, they have operated with relative 
impunity in their local community and have shipped tens of 
millions of dollars of counterfeit ABRO products around the 
world and have destroyed many American jobs.
    Fortunately, with aggressive legal action and the support 
of the USTR office and the U.S. Patent & Trademark Office, ABRO 
has initiated numerous legal actions and we have prevailed 
against Hunan Magic on a number of fronts. We have succeeded in 
stopping Hunan Magic from registering the ABRO mark, although 
Hunan Magic continues to claim their application as a legal 
basis for continuing to counterfeit. Hunan Magic has gone so 
far as to claim that they independently created the ABRO mark 
and our packaging, a claim that is rather far-fetched as the 
photograph on one of our often-counterfeited products is the 
wife of our corporate vice president. She has become rather 
famous throughout the world.
    ABRO has received fair hearings in China at the Trademark 
Office, and on the Federal level we are prevailing in China. We 
have conducted a series of raids against Hunan Magic's 
manufacturing operations, during which ABRO's counterfeit 
products were seized. We aggressively pursued Hunan Magic 
within China's legal system, and the case was ultimately 
decided in our favor in December of 2006 with damages of 
$64,000 awarded to ABRO, a small fraction, of course, but a 
start.
    Again, at the Federal level, ABRO registered the ABRO mark 
with Chinese customs, and a significant number of export 
containers from Hunan Magic and others have been seized, with 
the goods ultimately destroyed and fines levied against the 
exporters and Hunan Magic. We have been extremely satisfied 
with the cooperation we received from Chinese customs.
    Regrettably, business is ultimately local in nature, and 
Hunan Magic operates openly within Hunan Province as they 
employ individuals and pay taxes.
    Many American companies have found themselves victimized in 
China and other than countries because they failed to 
adequately protect their intellectual property. Other 
companies, such as ABRO Industries, have been proactive but 
still find ourselves the victims of counterfeiters, some of 
whom are just as audacious and tenacious as Hunan Magic.
    I believe that senior members of the Chinese government 
fully recognize the need to be compliant with respect to 
intellectual property, but in many respects actions have not 
followed their words.
    Thank you for giving me the opportunity to testify today, 
and I look forward to any questions you may have.
    [The prepared statement of Mr. Baranay follows:]
          Statement of Peter Baranay, Chief Executive Officer,
               ABRO Industries, Inc., South Bend, Indiana
    Good morning Chairman Levin and members of the House Ways and Means 
Subcommittee on Trade.
    Thank you for giving me an opportunity to testify today regarding 
China's enforcement of Intellectual Property Rights.
    My name is Peter F. Baranay and I am President of ABRO Industries, 
Inc. in South Bend, Indiana. I am here representing the Motor Equipment 
Manufacturer's Association known as MEMA and the Brand Protection 
Council of MEMA whose purpose is to ``provide a forum for manufacturers 
to discuss counterfeiting, intellectual property rights, gray market or 
diversion, share best practices, recommend solutions, formulate future 
seminars and promote networking.''
    This group was started nearly three years ago and has over 50 
members. Most of the names you will recognize: Ford, General Motors, 
Dana, Delphi, and Tenneco to name a few.
    You may be wondering why I am here instead of one big name company. 
The answer is simple. Many companies do not want to talk publicly about 
their counterfeiting problem and specifically with respect to China and 
its booming automotive industry. These companies are concerned the 
publicity will have a negative impact on their customers. As a member 
of the President's Advisory Committee on Trade Policy and Negotiation 
(ACTPN), I know this failure to disclose counterfeit issues facing 
American companies was a problem when the U.S. Trade Representative's 
Office tried to build an out-of cycle WTO complaint against China.
    I am pleased to be here today to share with you some details of the 
types of counterfeit problems and issues ABRO and other members of MEMA 
are facing.
    ABRO Industries traces its corporate roots back to 1939 when our 
founder started a translation service. In 1944 he had incorporated and 
was working with manufacturers in the United States selling their 
products in the international market place. In the mid 1970's, the 
``ABRO'' brand was developed as part of a long term strategy to 
continue to sell U.S. manufactured products into the International 
market place.
    ABRO is perhaps unique in that 100% of our business activity is 
conducted overseas. Although we do business in over 165 countries, not 
one dollar of ABRO products are sold in the United States. We began to 
trademark the ABRO name beginning in the U.S. followed by Singapore in 
1980. 27 years later the ABRO trademark is registered in 167 countries 
and we own 1,085 registrations in numerous international 
classifications. ABRO considers Intellectual Property Protection of 
paramount importance. Although we can point to many examples of 
counterfeiters, the one specific company who is the most egregious and 
a dangerous economic terrorist with respect to Intellectual Property is 
Hunan Magic of China. Beginning as early as 2001, Hunan Magic Power 
Inc. Company Ltd. not only began to counterfeit ABRO products, but 
began to represent themselves as ABRO itself. A brazen example of 
Corporate identify theft.
    This story was the subject of a Page One article in the Wall Street 
Journal in November 2004.
Intellectual Property Piracy in China
    The last five years have been enormously frustrating in spite of 
ABRO holding numerous valid Chinese registrations and Hunan Magic 
holding none. They have operated with relative impunity in their local 
community and have shipped tens of millions of dollars of counterfeit 
ABRO goods around the world.
    Fortunately, with aggressive legal action and the support of the 
U.S. Trade Representative's office and the U.S. Patent and Trademark 
Office, ABRO has legal action on a number of succeeded fronts against 
Hunan Magic. We have succeeded in stopping Hunan Magic from registering 
the ABRO mark, although Hunan Magic continues to claim their 
application as legal basis for continuing to counterfeit. Hunan Magic 
has gone so far as to claim that they independently created the ABRO 
mark and our packaging. A claim that is rather far fetched as the 
photograph on one of our often counterfeited products is the wife of 
our corporate Vice President.
    ABRO has received fair hearings by the Chinese Trademark Office, 
and on the Federal level we are prevailing in China. We have conducted 
a series of raids against Hunan Magic's manufacturing operations during 
which counterfeit ABRO products were seized. We aggressively pursued 
Hunan Magic within the China legal system, and the case was ultimately 
decided in our favor in December 2006 with damages of $64,000 awarded 
to ABRO Industries, Inc. Again at the Federal level, ABRO registered 
the ABRO mark with Chinese customs and a significant number of export 
containers from Hunan Magic and others have been seized with the goods 
ultimately destroyed and fines levied against the exporter, and Hunan 
Magic.
    We have been extremely satisfied with the cooperation we received 
from China customs.
    Regrettably, business is ultimately local in nature and Hunan Magic 
operates openly within Hunan Province as they employ individuals and 
pay taxes.
    Many American companies have found themselves victimized in China 
and other countries because they failed to adequately protect their 
intellectual property. Other companies such as ABRO Industries, Inc. 
have been pro-active, but still find themselves the victims of 
counterfeit some of whom are just as audacious and tenacious as Hunan 
Magic.
    I believe that senior members of the Chinese Government fully 
recognize the need to be compliant with respect to Intellectual 
Property, but in many respects actions have not followed their words.
    Thank you for giving me the opportunity to testify today and I look 
forward to any questions you may have.

                                 

    Chairman LEVIN. Thank you very much.
    The Olympics are in Beijing in 2008. I would hope that we 
would set as a goal some major compliance by China by the year 
of the Olympics. That is going to be a test not only for China, 
but also for the United States. It is going to be a challenge 
and a test whether those who are supposed to be enforcing our 
laws take the steps necessary that there be a dramatic change 
in China by next year.
    If that doesn't happen, people who go to the Olympics will 
find the same as in my last trip to China. I left the hotel to 
just walk around, and I met somebody with a DVD, one dollar. He 
felt really chagrined that I did not buy the good for one 
dollar. It was a total counterfeit, of course. So, I do hope 
that we will set this as an objective.
    Mr. Herger.
    Mr. HERGER. Thank you very much, Mr. Chairman. Again, I 
want to thank you for this very important hearing on an 
incredibly important hearing.
    Mr. Glickman, it is good to see you. As you mentioned, both 
of us knew each other in our youth in a different life on the 
House Agriculture Committee.
    Mr. GLICKMAN, but you still have your hair, Mr. Herger. I 
don't.
    Mr. HERGER. Anyway, it is good to have you in your new 
capacity appearing before us. At this point, I would like to 
direct my question to you, if I could.
    At this point, I believe that everyone on this Committee 
certainly acknowledges that China is not abiding by its WTO 
obligations on IPR protections, but it would appear that there 
have been some simplistic criticisms of the USTR for not 
instantly filing such a case.
    Could you tell us, Mr. Glickman, have you supported USTR'S 
efforts to handle this matter initially through negotiation 
with the Chinese officials, although those efforts may not bear 
fruit ultimately? Or was USTR mistaken to negotiate with the 
Chinese over these problems?
    Mr. GLICKMAN. Well, first of all, we have been working 
closely with Susan Schwab and USTR. We know they are talking to 
the Chinese government in a variety of venues and number of the 
problems. We support their efforts. If the discussions do not 
prove fruitful within a reasonably short period of time, we 
will support their efforts in litigation. We have told them 
that.
    So, we would prefer that it be resolved through 
negotiation, but if it is not, then it is time to fight with a 
WTO case. We have been working quite closely with Susan Schwab 
and her team. So, that would be my answer to you.
    Mr. HERGER. Good. I appreciate that.
    Could you also describe the many efforts that you and your 
members have made to develop facts and evidence to use by the 
USTR in any potential WTO case in the future?
    Mr. GLICKMAN. Yes. We have spent a great deal of resources 
in China and in the United States to determine the levels of 
criminal activity, the thresholds of criminal activity, to 
develop the factual basis by which a case can be brought, both 
in terms of enforcement on piracy as well as market acts as 
issues, not only working with ourselves but with our colleagues 
up here as well.
    This is a potentially incredibly lucrative market, but it 
is the most extraordinarily frustrating market in the world to 
get into. China is now in the WTO. I had some role in that 
because in the Clinton Administration, I was actively involved 
in the whole debate on PNTR.
    So now that they are in this rules-based organization, they 
have an obligation to follow it. If we don't, we are going to 
have to litigate it.
    Mr. HERGER. Absolutely. I would like comments from any of 
the other panelists in this same area.
    Ms. SCHROEDER. Well, I would totally concur with what Danny 
says. We are working with USTR. We have been very pleased that 
they have been working so hard. I think all of us want to make 
sure that these negotiations aren't just more stalling or 
humoring us. We have all been humored by the Chinese government 
over and over again, as you pointed out and I pointed and 
others. They promise they are going to fix it, but the fix is 
for like maybe 3 hours or 24 hours, and then everything is back 
to normal.
    So, we really want to make sure this is really serious. I 
think everybody is prepared to take action if we can't get 
somewhere and get something that is real.
    Mr. HERGER. Good. I think that point is so well taken. I am 
sure the Chinese are listening.
    Ms. SCHROEDER. I hope so.
    Mr. HERGER. That we have been trying to work with them.
    Ms. SCHROEDER. That is right.
    Mr. HERGER. We prefer working with them first, but we are 
preparing the case. They are in the WTO. We do have a format 
now that we can move forward on. That is exactly what I 
believe, on a bipartisan--this is not a Republican/Democratic 
issue--that we as the United States are going to do.
    Ms. SCHROEDER. You are so right.
    Mr. GLICKMAN. Can I just reinforce what Mr. Levin said 
about the Olympics? They are going to have a billion people, 
maybe more, watching this on TV. They are going to have 
millions of people going there. They have an opportunity to 
show the world they want to play by the rules, or they have the 
opportunity to show the world that they want to be an outlaw.
    They protect their Olympic logo very, very visibly and very 
aggressively because it is important to them. We have got the 
Olympics coming there, and we have got to make it important to 
them that they play by the rules.
    Mr. HERGER. Absolutely. My time is about up, but anyone--
Ms. Ritter?
    Chairman LEVIN. You have about 10 seconds.
    Mr. HERGER. Ten seconds? Five seconds?
    Ms. RITTER. Particularly for the complex issues in our area 
that straddle intellectual property and the drug regulatory 
regime, we appreciate the efforts that have been made by USTR 
and the Commerce Department to try to work out, through 
collaborating and negotiating with China, a better resolution 
here.
    Chairman LEVIN. All right. Let me just say--and Mr. 
Blumenauer is next, someone who is involved with China PNTR a 
bit, to understate it. It has been over five years. It is a 
long time of noncompliance and of inaction.
    Mr. Blumenauer.
    Mr. BLUMENAUER. Thank you, Mr. Chairman. I appreciate your 
punctuating that point. There are a number of us who spent a 
lot of time and energy in lesser roles here in Congress working 
on PNTR, with the expectation--making the argument that in fact 
this would give us leverage to protect the abuses that we had 
seen in this country. I share your frustration.
    Mr. Baranay, I remember the article in the Wall Street 
Journal. It paralleled pretty graphically something that we had 
in Oregon, where a little company was hijacked lock, stock, and 
website and replicated in China. It is extraordinarily 
frustrating. I admire your tenacity and the success, 
apparently, that you are having in starting to move this 
forward.
    I guess I am curious about the push-backs that we have got. 
In each case, there are some examples you have described of 
working with the Chinese government. Mr. Glickman, you 
mentioned that Chinese intellectual property is abused, and 
again, this was part of the rationale we had with the 
development of these Chinese industries that relied upon 
protection of intellectual property, that there may be some 
leverage that we get over time. Chinese consumers are at risk 
because of a lack of protection. It tends to be self-
reinforcing.
    I am curious if any of you have an idea of ways that we 
have got leverage with the Chinese themselves to sort of 
harness the forces that you are talking about, that we can in 
some fashion use to sort of push and reinforce that effort. I 
love, Dan, your example of the Olympic logo, that they are 
zealous in their protection. Are there other areas, in academic 
exchange, for example, where we have leverage or that there are 
some of these collaborative areas in the industries that you 
represent that we could be more aggressive?
    Ms. SCHROEDER. I think you point out something very 
important. For Democrats who are free traders, as I am and you 
are, this is a very difficult thing because we all thought they 
were going to play by the rules, and they didn't.
    When you look at where we have some pressure points, I 
think the main pressure point is when we can point out that 
they could do something if they wished to. At every Chinese 
university, for example, the government knows what is going on. 
If they are pirating books at the university and putting the 
university's seal on them, the government could stop that. They 
can stop the pirated stuff being sold on the street. They are 
selling these books on the street right under the nose of 
officials.
    Mr. BLUMENAUER. Right.
    Ms. SCHROEDER. If they can shut the store down for 24 hours 
until Danny leaves town, they can shut it down for good. Same 
with the drug thing.
    Mr. BLUMENAUER. Yes. Let me----
    Ms. SCHROEDER. They can do these things.
    Mr. BLUMENAUER. Let me be a little more specific. Using the 
example of the university, we are involved, a number of us are 
involved, with university exchanges. They are things that the 
Chinese care deeply about. Is there a way that we can or should 
be more aggressive in terms of, before these exchanges are 
considered, that there is some sort of threshold understanding, 
or that we work this into the discussion on some of these 
agreements?
    Ms. SCHROEDER. Well, we would love it if you would find out 
that if they are pirating books at the university copy center 
or that they are downloading electronic journals, like the New 
England Medical Journal or whatever. That would certainly be 
one pressure point you could put on with universities.
    Mr. GLICKMAN. I might say that this is one area I think 
that Secretary Gutierrez has been particularly effective in 
articulating this every time he is over there. At whatever 
levels he meets, he talks about this, the need, for example, to 
improve enforcement of intellectual property, the need to work 
in the Chinese legal and judicial system.
    We ourselves have done a lot of training sessions for 
Chinese jurists and lawyers, copyright officials, because it 
true that they have a much more limited legal system than we 
do. We are trying to help them bring that up to date.
    One other thing I would point out is that there is a 
rapidly growing Chinese indigenous film and music industry. 
Those people are being affected very much as we are. We are 
beginning to see them speak out because the creative rights are 
being trampled.
    Mr. BLUMENAUER. Mr. Chairman, I know my time is about 
expired, but this is an area that I would hope that we might be 
able to explore. I look in my State, where we have got Nike 
with some interesting interrelationships. We have technology; 
we have the largest Intel facility in the world, and there are 
some partnerships there, and the academic exchanges.
    Maybe there are ways that we could help refine ways with 
some of these relationships, that we can find more constructive 
ways to put in ground floor understandings that might give us 
some traction.
    Chairman LEVIN. All right. We will do that. There are also 
the abilities to file complaints with the WTO, which tends to 
turn talk into action.
    All right. Mr. Weller.
    Mr. WELLER. Thank you, Mr. Chairman. Good morning to our 
panel. Mr. Glickman, I never had the privilege of serving with 
you in the House, but I had the opportunity to work with you 
while you were in President Clinton's cabinet. You and I share 
a common interest in tall grass prairies in our responsive 
States. I enjoyed our conversations on those particular 
concerns.
    In your testimony, Mr. Glickman, you make the comment that 
while fake DVDs litter Beijing, fake Olympic logo materials are 
impossible to find. So, you are saying that the Chinese 
government is capable of enforcing IPR laws. Is that true?
    Mr. GLICKMAN. Absolutely. Even with the decentralization of 
the Chinese economy--I am not telling you everything comes out 
of Beijing because it doesn't. It is a complicated society, and 
there are multiple power centers throughout this country.
    If they were to choose to fight this problem, they would do 
it. In fact, we have seen it. In the area of DVDs, before major 
events, film festivals, you will find the streets of China 
empty of fake creative product from the movie industry, film, 
television, or even music. Then it reappears again. So, they 
can do it.
    In discussions with Chinese local officials like Mayors of 
cities, they talk about the fact that they recognize that it 
can be done. In fact, on a couple of occasions, they have 
mentioned the Olympics again as a hook, that they hope that 
their country----
    Mr. WELLER. Are you suggesting then that their enforcement 
is selective?
    Mr. GLICKMAN. It is selective. It is arbitrary. It is 
intentionally vague in some cases. In some cases, it is just 
not very well developed.
    Mr. WELLER. You mentioned earlier in your opening comments 
that there were 50 facilities that manufacture pirated DVDs. Do 
you know the locations and addresses of these facilities?
    Mr. GLICKMAN. In most cases we do. In most cases we have 
given that information to the authorities. In some cases they 
have taken action, and in most cases they haven't taken it as 
aggressively as we would like. Some of these are run 
decentralized fashion. Some of them are run by remnants of the 
old People's Liberation Army. It is a complicated way to get 
at.
    Mr. WELLER. So, when it comes to enforcement, do they only 
enforce when they are reminded that they need to? Or do you see 
any proactive efforts other than Olympic logos that they are 
proactive?
    Mr. GLICKMAN. There has been, as Pat said--and I don't know 
about in the pharmaceutical area--but there has been some, I 
would say, less than full effort over the last year or so to 
engage in enforcement actions, but I would have to tell you 
they are not satisfactory.
    Mr. WELLER. Mr. Baranay, you shared your experience with 
going through the litigation process to address, and you were 
successful. $64,000 doesn't seem like a lot of money from the 
standpoint of an award, considering probably the impact of lost 
business.
    Do you believe that there is an unspoken acceptance of 
intellectual property right violation by the Chinese 
government, that they accept it unless they are reminded that 
they need to do something about it as part of their agreements?
    Ms. BARANAY. I think it is clear that as the Chinese 
economy develops from, shall we say, the world's manufacturing 
floor or the world's factory floor to an economy where they 
themselves have intellectual property worthy of protection--I 
would challenge most people to identify two or three Chinese 
branded companies. People hesitate. It is very difficult.
    Most Chinese products come into this country as private 
label products of other manufacturers. As such, the Chinese 
don't have a great incentive at the local level to protect 
intellectual property. I see that changing with manufacturers, 
particularly in the automotive industry developing their own 
brand, or the appliance industry developing their own brands, 
or in our case the automotive industry, automotive chemicals.
    Yes, I think the selection--the enforcement is selective, 
depending on the circumstances and depending on the pressure 
that is brought to bear. I would say, though, that from a 
systematic standpoint, when we have gone up against the Chinese 
in the Chinese system, we have been treated fairly.
    So, in that case, the laws seem to be in place and they 
seem to be enforced, but we are an exception. We just maybe a 
little more tenacious than others.
    Chairman LEVIN. Ms. Ritter, do you agree?
    Ms. RITTER. Well, I am----
    Chairman LEVIN. You have got 20 seconds this time.
    Ms. RITTER. I do agree that we have been able to get some 
collaboration from the Chinese authorities. As I mentioned in 
my testimony, raids and seizures are higher than they have ever 
been, but you see a real falloff in whether cases make it all 
the way through the system, and you don't see a lot of criminal 
sanctions, especially at deterrent levels, actually getting 
imposed at the end of the process.
    So, I think the Chinese recognize the safety consequences 
of counterfeit drugs, but there is a lot more to be done.
    Mr. WELLER. Thank you.
    Chairman LEVIN. Okay. Thank you, Mr. Weller.
    Mr. Pascrell.
    Mr. PASCRELL. Thank you, Mr. Chairman. Good morning, panel.
    Ms. Ritter, China is seeking to build its own domestic 
pharmaceutical industry. It already has manufacturing the 
chemical capacity, as well as the workforce. Due to poor 
intellectual property protection laws--we are talking about 
that this morning--in many areas, and obviously due to the lack 
of enforcement, much of the costly development of funding is 
not required for that.
    I don't know who is following the rules and what the rules 
are and why they are even made. This is important, I think, 
from a safety standpoint, and a worldwide threat, as many of 
these drugs are exported, as you know. I don't want to get into 
too much of that aspect of where those drugs are going, but 
that is fascinating to look at that stream.
    Second, from a trade perspective, it hurts the American 
economy. It hurts New Jersey, and I have been there all my 
life, so I am concerned about that. We employ about 62,000 
people in New Jersey in the pharmaceutical industries, good 
paying jobs.
    The average job, Mr. Chairman, in New Jersey in the 
pharmaceutical industry is $116,000. We don't want to lose 
those jobs. They are very important, very significant. That 
adds about $7 billion to New Jersey's economy, wages and 
salaries.
    The industry pays over $750 million in taxes in New Jersey. 
So, a loss of these jobs and a loss of the industry is going to 
be devastating, no less devastating than what we did to the 
textile industry in New Jersey and a lot of other places, but 
that horse is out of the barn, isn't it?
    My question to you is this. The Chinese market is vital. A 
mutual cooperation is therefore essential. Is this the wave of 
the future if nothing is done about intellectual property 
protection? Is that what we can expect 10, 15, 20 years from 
now? What do you think?
    Ms. RITTER. I think you have said it extremely well. We are 
at a critical time in China. China does want to develop this 
industry. They have got the science base to do it, to develop a 
vibrant domestic industry.
    For that industry to be legitimate and produce quality 
products, they are going to have to address the counterfeiting 
situation and the protection of intellectual property. Right 
now, you have got a very dangerous situation, where we are 
facing massive competition in that market from a host of 
unregulated, unsafe suppliers.
    Our estimates are that it is costing the industry several 
billion dollars every year as a result of the lack of 
protection in China. Just as you said, we employ hundreds of 
thousands of people in the U.S., very good high tech jobs, very 
good salaries, and there is absolutely a direct impact there.
    Mr. PASCRELL. Yes. Those jobs are significant, no more 
significant than the person who works in a textile factory or 
in a small parts factory that, on the average, would be making 
between 45,000 and 65,000. So, one job is not more important 
than the other to me. I can only speak for myself.
    Mr. Chairman, this is like how we built railroads in the 
United States. We didn't allow every town to veto. We would 
never have any railroads. So, we passed Federal legislation 
dealing with communication. I don't expect every congressman is 
going to be able to put his two cents in to whether or not a 
trade bill makes sense or does not make sense.
    I would think under Article I, section 8, that we should 
have some input and not be willing to fast track our own 
responsibilities, our own responsibilities, in putting a 
decent, mutually respectful bill together. I am pro-trade. I am 
not free trade, but we should be able to come to some 
agreements on this and insist that the other party follow the 
law.
    If we don't do that, then is there teeth in the law? Is 
there teeth enough in the law? Are we sincere enough to follow 
up our own part, or we don't want to make any enemies? We don't 
want to make anybody in the Chinese government angry at what we 
are doing? I am not interested in making people angry. I want a 
mutual agreement that is respectful of all of our 
responsibilities. I thank you for your testimony.
    Chairman LEVIN. Thank you.
    Mr. Brady.
    Mr. BRADY. Thank you, Mr. Chairman. Thanks to the panel. 
These aren't new issues, but you have made very compelling 
arguments why we need to turn the volume up on the enforcement 
side of it.
    Two questions, one dealing with WTO, another with Trade 
Promotion Authority (TPA). We hear around here even today that 
allowing China Most Favored Nation status in accession to WTO 
was a huge mistake, that our problems with China began on that 
day and our participation and engagement is causing us problems 
because of our involvement in WTO.
    I see it a bit differently than that, looking at the 
enforcement mechanisms that have been used, are available as 
the best way to level the playingfield. Do any of you believe 
that America's allowing China to enter WTO was the wrong thing 
to do?
    Mr. GLICKMAN. I do not think it was the wrong thing to do. 
I, as I said before, was somewhat involved in this when it 
happened.
    Mr. BRADY. Absolutely.
    Mr. GLICKMAN. I was involved with a different industry 
then, where I think the benefits were more clear than they are 
in other industries, but I would rather have them in the tent 
and subject to the laws and go after them--because, let me tell 
you, the problems far preexisted the WTO accession, and the 
imbalance of trade far predated that. We just now have to use 
that law and use those rules to protect ourselves.
    Mr. BRADY. Those tools are the ones that got us progress in 
the advance to micro systems, computer boards, and in the fiber 
board issues already. Your point is be more aggressive using 
those tools to combat piracy in all those areas.
    Let me ask another question. Trade promotion authorities 
will expire July 1st of this year. You are all in industries 
that have major markets overseas, have a big impact on whether 
we are out there leveling the field for you to sell your books 
and your pharmaceuticals and your movies and your air 
conditioners.
    In your belief, would it be wise for Congress to allow TPA 
to expire July 1st? Does that level the playing field for your 
industries?
    Ms. SCHROEDER. I think that is a hard one. You ask a very 
difficult question. I have always been a free trade Democrat, 
which is a little lonely on my side of the aisle. I have always 
voted for fast track when I was here. I think one of the 
problems right now is the voters want us to have to be a little 
more aggressive in making sure agreements are honored by both 
sides.
    I think China came into WTO, and it is great to have them 
in the tent. China thinks, because they are so big, they can do 
what they want. We will bend the rules our way rather than the 
way the universal group has interpreted them.
    So I think some hesitation you would find on this side, 
that we would like to be in there, but under WTO accession, for 
example, they were supposed to allow book publishers to be able 
to be in the market. We have never been allowed in the market, 
and it is now over 5 years later. So, those are the things that 
make us hesitate a bit to advocate extending TPA.
    Mr. BRADY. So, being out of the trade field while other 
countries developed trade agreements that favored books from 
other countries or products from other countries, that doesn't 
harm your members at all?
    Ms. SCHROEDER. It harms our members and we want to be in 
there, but when we had a WTO accession that would have been 
helpful to us and it still hasn't been implemented, then you 
get a little worried. Basically our group has been very much 
for free trade and for fast track. That is why they are working 
so hard with USTR to try and consolidate gains we were supposed 
to have gotten under the original WTO accession.
    Mr. GLICKMAN. It is like--I think generically, I think that 
the President needs fast track authority. I think the problem 
is that the old--Reagan used to use this line, trust but 
verify. The fact of the matter is, there is this feeling that 
the Congress is not getting its position felt in areas like the 
environment and labor issues where the executive branch may be 
moving the thing along without any restrictions whatsoever.
    I think, generally speaking, an executive needs that kind 
of authority, but it is up to you to figure out a way to 
protect your constituents on some of these changes where folks 
are getting hurt as part of the process toward globalization.
    Mr. BRADY. Well, I think right now we are looking at trying 
to find common ground on workers rights, environmental rights, 
trade adjustment, because there are jobs lost and you have got 
to address issues like--and enforcement, which is the panel 
here.
    Any other thoughts before the Chairman--he is less likely 
to gavel you down than me.
    Chairman LEVIN. I think I will because we want to try to 
stick to our time limits. Let's have some further discussions 
about China PNTR and the involvement of a number of us who are 
still in the Congress. We should do that.
    All right. Let me go over the list, and I think my pal from 
New York is next. Mr. Crowley?
    Mr. CROWLEY. Thank you, Mr. Chairman. Thank you for your 
presence today and your discussion.
    I have a number of constituents who have come to my office 
complaining about their copyright, their IP issues within China 
itself, dual nationals or individuals who are American citizens 
today, but born in China.
    Mr. Baranay, I am not in the position today to discuss 
those particular issues, as tempted as I am to want to talk 
about them more openly, because I have--I believe in the carrot 
and the stick approach. I am still using this carrot approach 
with the Chinese government. I want to continue to do that, and 
work with them to try to see if we can work through some of 
these issues.
    I also have been involved in the inter-parliamentary 
exchange between the United States and China. I vice Chaired 
that exchange in the last few Congresses and hope to in as the 
Chair or co-Chair within this Congress, and look forward to 
traveling once again to China.
    I can tell you all that amongst the issues that we have 
talked about, human rights has certainly been up there at the 
top of the agenda, but then IP, IPR, has become a top two or 
three issue or category of issues that we have been talking 
about when we do go. So, I can tell you that in terms of 
Members of Congress and our interaction with parliamentarians, 
with government officials, I can tell you that whenever I have 
been in a meeting with Chinese government officials here in the 
States, the issue of IPR has been raised continuously.
    I would, though, like to get a sense from you--and then, 
Mr. Glickman, you may be able to, and Ms. Schroeder as well, 
and Ms. Ritter, in terms of your umbrella groups, more or less. 
You can speak a little bit more broadly because you are not in 
any respects speaking for one company's point of view, but 
talking in a broader sense--of what your relationship is.
    Is there a counterpart? Do you have a counterpart in China? 
What is your relationship with that counterpart, if it exists, 
or is it developing? What are they doing in terms of, from 
their side of the world, addressing the issue within the 
Chinese government?
    Then I would also like to know what you believe in terms of 
what is happening with USTR. I know that USTR and the 
ambassador has a tremendous amount on her plate, but what more 
can they be doing to help open up some of the markets that you 
are talking about?
    I know, Mr. Glickman, you have talked specifically about 
the limitation on films and distribution and access to markets 
in China; and Ms. Schroeder, I know the same thing for you, and 
maybe historically, a more difficult subject is text; and 
pharmaceutical, obviously, as well.
    Maybe if you can just give me the sense of what is your 
counterpart, does it exist, and what is the relationship? Two, 
what are the expectations that we should be asking for from our 
own trade reps?
    Ms. SCHROEDER. We do work very closely with the Chinese 
Publishers Association, which is amazing. They are very strong. 
Piracy hurts them equally. They love to stand with us. They are 
a little hesitant to be too vigorous alone against their 
government.
    So we have worked with them, and I think that has been very 
helpful. We still need more leverage. I think publishing is 
unique because the Chinese want to control what people read. 
That may be why they don't let our people publish internally or 
import internally, but it has been very interesting. Even 
though they don't let us come compete with them directly, the 
local people are still very much for us because their stuff is 
getting pirated, too.
    Ms. RITTER. There is an association of research-based 
pharmaceutical industries in China. A lot of the members there 
are subsidiaries of global companies, so we are very well 
aligned and do coordinate, and they try to work day in and day 
out with the Chinese government on some of the issues that we 
have discussed today.
    We also work closely with USTR and also the Commerce 
Department through initiatives like the Joint Commission on 
Commerce and Trade on some of the issues I have discussed 
today. We would like to see some of those issues elevated even 
further--through that process, through the Strategic Economic 
Dialog process that Treasury has led--to really make sure that 
all of the various organs of the Chinese government that relate 
to our problem are engaged and working toward finding a 
solution.
    Mr. CROWLEY. Mr. Chairman, can Mr. Glickman----
    Chairman LEVIN. Yes, please.
    Mr. GLICKMAN. I would just say a lot of the management of 
the Chinese film industry is government, but a lot of the 
creative side we work with quite closely because they are 
becoming more outspoken in their concerns about this issue.
    Second, in the Chinese system you have Beijing and you have 
the regions. So, one of the more difficult things is figuring 
out who is in charge, who is making decisions here, and where 
is it coming from. That is something that we are doing in terms 
of helping USTR as they look at the possibility of filing a WTO 
action.
    I do think that the biggest thing that can be done right 
now is for the Chinese industry and government to see our 
Government committed to taking legal action if it thinks that 
it has got a case that can be brought legitimately.
    Chairman LEVIN. Thank you.
    There are two, maybe three of us left. So, let's see if we 
can work ourselves in. That means we will start the second 
panel a bit late. Mr. Meek? I think you are next. Then Mr. 
Kind, and then Mr. Reynolds if he is able to return.
    Mr. Kind. We are glad you could join us.
    Mr. KIND. Well, thank you, Mr. Chairman. I want to thank 
you for holding this very important hearing. I want to thank 
the witnesses for testifying and giving us your perspective on 
an immensely huge and important issue.
    I think, Mr. Glickman, you are exactly right, that whenever 
any of us in Government have the opportunity to go and travel 
to China, whether it is Executive Branch officials or Members 
of Congress, that we continuously raise this issue with the 
Chinese officials and authorities so that they understand where 
we are coming from in regards to the IPR issue.
    I had the opportunity about a year and a half ago to do 
just that with a delegation, meetings in Beijing and Shanghai. 
It is complicated, and one of the things I am hoping you could 
give us a little insight on here today is the scope of the real 
challenges that we are facing because obviously, our 
relationship with China is incredibly important. Outside the 
Muslim world, it is probably going to be the most important 
strategic relationship that we have with another country or 
another region in this century.
    Yet you wonder how much leverage we ultimately have over 
them because I think they sense that we are so desperate to 
gain market access that they are holding a lot of cards. Let's 
face it, we have become incredibly dependent upon them to 
finance our deficits. They are buying up a lot of our bonds 
today, basically freeing up a lot of capital, keeping rates low 
for us here. We have been very dependent on them in dealing 
with the North Korean situation, too.
    Yet what I am wondering is, looking at their laws, it seems 
the laws are good on the books and the penalties are 
sufficient. So, the question is, is this really a matter of 
will on their part, not willing to do it? Or is it a matter of 
capacity-building, that they need more help in order to develop 
the infrastructure of enforcement? They have a lot of other 
economic crimes, too, that they are worried about.
    In talking to one official--I think it was the Mayor of 
Shanghai--he said, you are going to see an improved effort for 
enforcement once the Chinese start having more skin in the 
game, and that is, starting to develop their own products that 
they want IPR protection over. We are seeing that now with 
their Olympic label and how tough and stringent they have 
gotten enforcing the protection of their Olympic label.
    Yet talking to another governmental official in Beijing, he 
says, the problem is even bigger than any of that. It is really 
cultural, based on Confucius' philosophy where if you adopt 
someone else's ideas, whether it is a movie or music or written 
material or some product, it is a form of a compliment and not 
viewed as economic or intellectual theft in their culture.
    So, I guess from your perspective, what is the scope here, 
and where can we be most effective in encouraging them to do 
the right thing as far as IPR protection? Do we need to be 
thinking as far as more assistance with capacity-building and 
helping them do a better job of enforcement?
    I guess I will leave it open to anyone who has any thoughts 
on this subject.
    Ms. SCHROEDER. Let me just say with education you are 
absolutely right. It is a very difficult thing to get any 
government to try and deal with educational materials. They 
want to take everything we have created in higher ed, and they 
want to take it and get it into the brains of their people, and 
then they come to compete against us.
    You can understand. They say, well, it is out there, and I 
guess it is a Confucian thing. You ought to be willing to give 
this to us.
    Mr. KIND. Right.
    Ms. SCHROEDER. The problem is, those are very expensive 
materials to create, very, very. When they pirate it all, what 
can you do? Stopping campus piracy is a much less complex issue 
than many of the other IP issues because the universities 
really are under the control of the Chinese government.
    Danny Glickman is absolutely correct that one of the 
Confucian things about trying to deal with all of these issues, 
the trade book issues and probably the pharmaceuticals and 
everything, is the regions are different, and who is in charge? 
It gets to be very, very confusing.
    Universities aren't confusing, it is a very clear-cut area. 
We really need more work, too, on what is going on with the 
websites and the digitization of everything.
    Mr. KIND. Right.
    Ms. SCHROEDER. Allowing the world to download everything 
free would kill all of us. You are seeing movies digitized, 
too, aren't you? The Chinese are saying now they are going to 
focus on it, but the question is, what does that mean, and are 
they going to do anything about it? That is our frustration.
    Mr. GLICKMAN. I think it was John Maynard Keynes who once 
said, ``For every complicated problem, there is a simple and a 
wrong solution.'' This is the classic example. This is a very 
complicated problem. So, you have mentioned capacity-building. 
It has got to be a big part of it. We have got to train these 
people to understand the significance of a legal system in a 
modern world with instant communication.
    You also have to have an enforcement component of this as 
well. We have got to make sure that we get the Internet and 
powers of communication so that the restrictions and the 
censorship there don't keep these people insulated from what is 
happening in the rest of the world.
    Going back to I think it was Mr. Weller's question--I am 
not sure--about the WTO, the fact that they are in the 
organization gives us some leverage, not a lot, but some, that 
we didn't have before, but we have to remember that it is a 
massive, complicated problem.
    Mr. KIND. Thank you, Mr. Chairman.
    Chairman LEVIN. Mr. Meek.
    Mr. MEEK. Thank you, Mr. Chairman. I am excited by the fact 
that we are having this hearing here today because this is so 
very, very important.
    As some of you know on the panel, I represent the State of 
Florida, and I am the only Member on the Committee on Ways and 
Means from Florida. We have a lot of companies in South Florida 
and in Central Florida very excited about trade, very excited 
about being the closest port to Africa and also to Latin 
America. We have a number of headquarters there. Sony has a big 
presence, I think, and their Latin music department. Also Perry 
Ellis. A number of these companies.
    They are talking to me more about China. They are talking 
to me about the fact that we haven't leadered up enough to be 
able to deal with China. I believe that we are running into a 
situation, Mr. Chairman, where we are concerned about the guns 
and the missiles and the people that we are at war with at this 
particular time, and we are not concerned about the economic 
issues that are happening right under our noses. U.S. companies 
are being cut at the knees because of the lack of IPR in China.
    Now, I have never been to China, but I can tell you from 
what I have read and what I know at this point from U.S. 
companies that are having problems as it relates to protecting 
the hard work and the research, since we have our 
pharmaceutical representative here, we are going to find 
ourselves in deep water.
    I am very interested in hearing from the panel if you have 
the opportunity to enforce, need it be through our 
international organizations or even as a Member of Congress. 
What are some of the things that we should lean forward on and 
letting our voice be heard? What are some of the things that we 
can do to try to get China to do the right thing?
    I believe it is the good cop/bad cop scenario. Of course 
they are going to protect their own interests, but when it 
comes down to--if you even look at the issue of steel, what 
they have been doing with steel and hurting the market here, 
hurting our suppliers here, because they have been able to use 
it as a national security issue and manufacture steel.
    Even in some of the areas of--I have Bacardi in my 
district. I have Perry Ellis in my district. They are feeling 
the effects of this. It is like no one--where is the police? No 
one can enforce this. It is hurting their business.
    So, I would love to hear, in the time that is left, from 
any of you on the panel: What are some of the things, if you 
had the opportunity to be in Congress at this time--I know some 
of you have--but what kind of forward lean would you have to 
make this hearing fruitful as we start to step off in this new 
endeavor of not only enforcement but education with China?
    Mr. GLICKMAN. One, Congressman, I would make sure that 
there are resources for USTR, for Customs, for the enforcement 
at the borders. It strikes me that we have not probably 
dollared up the necessary resources to help find the problem 
where it is taking place. I think those folks need that very, 
very desperately. So, that would be one specific suggestion.
    Ms. SCHROEDER. I would also say that when you meet with the 
Chinese, ask them to do enforcement that passes the straight 
face test. We got all excited when they raided universities, 
but if you raid universities when they are out of session, you 
are not going to find a lot, and so they also didn't find very 
much.
    So, the thing is, look. You have got the resources to do 
it. Let's do it right and let's not play games with each other. 
The straight face test, when it comes to enforcement, I think 
is going to be very important.
    Ms. RITTER. Excuse me. I would echo some of these themes, 
and particularly the one of enforcement. Fake Chinese medicines 
are a threat not only to Chinese patients, they are a threat to 
patients around the world, and including in the United States
    There have been some very high-profile cases of drugs, 
often ordered over the Internet, coming in from China to the 
United States and threatening our country. So, I think that is 
a particularly important aspect of this problem we haven't 
discussed as much today, but shouldn't be overlooked.
    I think, again going back to the theme of capacity-building 
and collaboration with China, particularly in the drug area, 
the problems really are so complex and there are so many actors 
involved in this that we have got to develop a broader 
comprehensive framework there for addressing them. That is 
going to take very high level attention.
    Ms. BARANAY. If I could echo what Chairman Levin said, I 
think the timing with the Olympics in 2008 is extremely 
auspicious. I think that the world will be looking to China. 
There is an opportunity here to put pressure on China that they 
wouldn't necessarily--the timing is actually very good. They 
understand IPR. It is just whether or not they are going to let 
us make them play by the rules.
    Mr. MEEK. Thank you, Mr. Chairman.
    Chairman LEVIN. Well, thank you. An excellent question, and 
an excellent panel. You represent four vital sectors--motion 
picture, publishing, pharmaceuticals, and MEMA. So, we really 
appreciate your participation. So we bid you farewell. Come 
back and see us. The next panel will come forth.
    [Pause.]
    Chairman LEVIN. Let's go. We are bit behind schedule, but I 
think this is going to work out.
    Thank you all for joining us on this truly vital subject. 
Mr. John Goodish--I will introduce you, if I might, all 
together, and then you will take over--is the Executive Vice 
President and Chief Operating Officer of U.S. Steel.
    Frank Vargo is the Vice President of International Economic 
Affairs for the National Association of Manufacturers.
    John Bassett, III, is Chairman and CEO of Vaughan-Bassett 
Furniture Company in Virginia.
    James Tyrone. Mr. Tyrone is Senior Vice President of Sales 
and Marketing for the NewPage Corporation.
    Professor Navarro is at the University of California, 
Irvine. If you came all the way, tell us how you managed. We 
especially welcome you.
    So, each of you, your testimony will be placed in the 
record. If each of you could try to take just the 5 minutes, 
that will leave us ample time. We will start in the order 
mentioned. Mr. Goodish.

  STATEMENT OF JOHN H. GOODISH, EXECUTIVE VICE PRESIDENT AND 
   CHIEF OPERATING OFFICER, UNITED STATES STEEL, PITTSBURGH, 
                          PENNSYLVANIA

    Mr. GOODISH. I am happy to testify today about a topic that 
is crucial not only to the U.S. steel industry but to all 
American manufacturers. That is the growing concern about the 
subsidies and State support of industrial capacity in China, 
and the extreme impact we are seeing on global markets as a 
result of these policies.
    I would like to show you some slides that illustrate the 
seriousness of the problem that we face. As you can see from 
this first slide, there is a great deal of evidence that China 
has the most heavily subsidized steel industry in the world. 
Let me give you a few examples.
    Press reports indicate that in 2000, 37 Chinese steel 
enterprises took advantage of $7.5 billion in government-
directed financing through the debt to equity swaps. Also in 
2000, China's government announced that $6 billion would be 
spent to upgrade and transform the steel industry.
    In July of 2005, China issued a new steel policy to guide 
the industry for the next 15 years. This policy calls for 
continuing subsidization of key steel projects, exports, and 
technologies. Available evidence suggests that consistent with 
this policy, significant government resources continue to flow 
to the Chinese industry. Chinese subsidies take many forms, 
including preferential tax treatment, subsidized materials and 
energy, and discount loans.
    On this second slide, you can see the result of these 
massive subsidies. Over the last 10 years, China's steel 
production has quadrupled, surging from an estimated 100 
million metric tons in 1996 to approximately 420 million metric 
tons in 2006. That is roughly the equivalent of building three 
entire American steel industries in just one decade. No other 
country has come close to adding so much new capacity, as shown 
by China's production as a percentage of global production.
    Slide 3 demonstrates that Chinese steel expansion has 
accelerated in recent years. To understand the enormity of what 
is taking place, consider that from 2003 to 2006, China's 
increase in production was about twice the total yearly 
production of either the United States or Japan.
    My fourth slide shows that China's domestic market cannot 
support all of that new capacity. China's steel trade balance 
shifted by roughly 50 million metric tons from 2003 to 2006, as 
China went from a major net importer to a large net exporter.
    How are these developments affecting U.S. producers? As you 
can see from slide 5, Chinese imports are flooding this market. 
In fact, steel imports from China reached 5 million net tons 
last year, more than double the 2005 level. Chinese steel 
increasingly competes with our highest value products, 
including corrosion-resistant steel, cold-rolled product, and 
our oil country tubular goods. Now is the time to address this 
import surge. We do not want a repeat of what happened in the 
late nineties, when a flood of unfairly traded imports 
precipitated a major crisis.
    The USTR's recent decision to bring a WTO challenge with 
respect to nine prohibited Chinese subsidies is a good first 
step, but the USTR'S actions involve only a limited subset of 
subsidies and does not in any way address the vast evidence of 
enormous domestic subsidies that buildup many of China's 
largest steel enterprises and continue to unfairly benefit 
Chinese producers today.
    There are a number of critical policy actions we can and 
should take. First, we must strictly enforce our trade laws, 
which often represent our only practical line of defense 
against foreign producers whose market-distorting practices 
would otherwise cause imports to overwhelm this market.
    Secondly, we urgently need real China legislation. We 
should apply our anti-subsidy law to the world's largest 
subsidizer. We also urgently need real action on currency 
manipulation, rather than allowing China to continue stringing 
us along with talk and tiny adjustments.
    Finally, we must preserve our anti-dumping and anti-subsidy 
laws in the face of efforts to weaken them in the context of 
international negotiations, such as the ongoing go-around and 
the U.S.-Korean FTA talks.
    We hope that you will send the clearest message possible 
that you will reject any agreement that weakens our anti-
dumping or countervailing duty laws. If we act now together, we 
can stop further unfair Chinese trade, make steel markets more 
efficient, and prevent another steel crisis. Thank you.
    [The prepared statement of Mr. Goodish follows:]
   Statement of John H. Goodish, Executive Vice President and Chief 
   Operations Officer, United States Steel, Pittsburgh, Pennsylvania
    I am pleased to be here today and to have the opportunity to 
testify about a topic that is crucial not only to the U.S. steel 
industry, but to all American manufacturers--that is, the growing 
concern about subsidies and state support of industrial capacity in 
China, and the extreme impact we are seeing on global markets as a 
result of these policies.
Introduction
    At the outset and to put this issue in context, it is worth keeping 
in mind the massive and growing U.S. trade imbalance with China. The 
U.S. trade deficit with China soared from around $84 billion in 2000 to 
over $225 billion in 2006 (Figure 1). This exploding deficit is having 
a devastating impact on U.S. manufacturing. Industries like ours are 
losing core customers in this market, seeing basic industrial 
capabilities evaporate, and witnessing the loss of whole industries. 
The China problem with regard to the steel industry is especially 
grave, but is really just one of the most vivid examples of a crisis 
impacting American manufacturing generally.
[GRAPHIC] [TIFF OMITTED] T0304A.001

    The trade imbalance with China and the rest of the world is having 
especially grave effects on employment here in the United States, as 
foreign exports--often unfairly traded--are costing American industries 
both customers and capacity. Since 2000, the year we granted China 
permanent normal trade relations (``PNTR''), the jobs of over 3 million 
American workers have disappeared (Figure 2). What's especially 
troubling is that these jobs have still not returned, despite 
consecutive years of apparent economic recovery. This impact is due in 
no small measure to the export-inducing industrial policies of 
countries like China, which refuse to play by the rules.
[GRAPHIC] [TIFF OMITTED] T0304A.002

    The steel industry, and indeed U.S. manufacturers generally, should 
not and do not object to new manufacturing capacity overseas that 
results from real-world investors putting their hard-earned money into 
new facilities that are driven by market demand. But that is not what 
is happening, particularly with regard to China. The invisible hand of 
the market is not driving China's exploding exports. Rather, the Sino-
U.S. trade imbalance reflects the hand of Chinese government, and the 
massive resources it has devoted to assisting its national industries.
    As this committee well knows, China uses a wide variety of policy 
tools to support industry and exports. Among these, deliberate 
suppression of the Chinese currency's value is one of the most 
significant. Indeed, in the view of many, currency manipulation 
represents the biggest single subsidy provided to Chinese producers. 
From 1994 until July 21, 2005, China pegged its currency (``yuan'' or 
``RMB'') to the U.S. dollar at an exchange rate of roughly 8.28 yuan to 
the dollar.\1\ The Chinese central bank maintained this peg by buying 
as many dollar-denominated assets in exchange for newly-printed yuan as 
needed to eliminate excess demand for the yuan.\2\ On July 21, 2005, 
China made a slight modification to this peg, raising the value of its 
currency by 2.1 percent, tying the value of the yuan to a basket of 
currencies, and allowing the yuan to fluctuate by 0.3 percent on a 
daily basis against the basket.\3\ The effects of this change have been 
minor; as of this week the dollar was still worth 7.75 yuan.\4\ Given 
that some experts believe that yuan was undervalued by as much as 40 
percent,\5\ it is clear that the yuan is still not trading in line with 
its true market value. This manipulation is at once a substantial 
export subsidy and import barrier, making Chinese exports cheaper 
abroad and increasing the price of U.S. goods in China.
---------------------------------------------------------------------------
    \1\ Wayne M. Morrison and Marc Labonte, ``China's Currency: A 
Summary of the Economic Issues'' (Congressional Research Service Report 
for Congress) at 1 (March 17, 2006) (``Morrison and Labonte'').
    \2\ Id. To obtain an idea of the magnitude of China's currency 
manipulation, consider that one expert estimated the value of these 
asset purchases to be $15 to $20 billion every month. See U.S.-China 
Economic and Security Review Commission (hearing transcript) at 103 
(Apr. 4, 2006) (testimony of Dr. C. Fred Bergsten, Director, Institute 
for International Economics) (``USCC Hearing'').
    \3\ Morrison and Labonte at 2.
    \4\ See Universal Currency Converter, available at http://
www.xe.com/ucc/ (last visited Feb. 12, 2007).
    \5\ Congressional Research Service Report for Congress, ``China's 
Currency: Brief Overview of U.S. Options'' at 2 (Nov. 29, 2005) 
(available at http://fpc.state.gov/documents/organization/57797.pdf).
---------------------------------------------------------------------------
    Other examples of Chinese industrial policy and market-distorting 
behavior could easily be provided. These range from failure to enforce 
intellectual property rights, to manipulation of raw material markets, 
to limitations on trading rights, to requirements for technology 
transfer, to a whole range of other unfair practices, many of which 
explicitly violate WTO commitments. These market-distorting mechanisms 
have been well-documented in government filings by the steel industry, 
and many other industrial sectors.\6\
---------------------------------------------------------------------------
    \6\ See, e.g., Letter from Barry D. Solarz, Vice President of the 
American Iron and Steel Institute, to Gloria Blue, Executive Secretary 
of the Trade Policy Staff Committee (Sept. 18, 2006).
---------------------------------------------------------------------------
    Clearly, however, one of the most troubling and distortive aspects 
China's trade regime is the topic of this panel: namely, China's 
industrial subsidies. These are at once among the most blatantly unfair 
and illegal aspects of China's policy, and the impact on world markets 
is becoming more apparent every day. In short, the matter of Chinese 
subsidies is one of the most crucial issues facing the global steel 
industry, as well as many other industries, today.
Chinese Subsidies to the Steel Industry
    There can be little doubt that, without subsidies past and present, 
China's steel enterprises would look very different than they do today. 
In the early 1990s, Chinese steel companies were widely viewed as 
utilizing low technology equipment and suffering from low productivity. 
Nonetheless, the Chinese government decided to inject massive funds 
into these mostly state-owned companies in an attempt to create export-
oriented steel giants, with little or no regard for principles of 
global supply and demand. According to published reports and 
independent experts, very significant subsidies were granted during 
1999 and 2000. Just to give a few examples:

      In the late 1990s, the Chinese government reportedly 
allocated $7.25 billion (RMB 60 billion) to fund bargain-rate 
subsidized loans to state-owned steel enterprises for major technology 
upgrades.\7\ According to this policy, discount loans were targeted to 
certain ``key'' technology projects specified by the state's industrial 
policies. In particular, the government reportedly aimed to encourage 
production of high value-added steel products, including galvanized 
sheet, cold-rolled sheet, and oil country tubular goods.\8\
---------------------------------------------------------------------------
    \7\ OECD, ``The Reform of the Chinese Steel Industry'' CCNM/NIS/
DSTI(99)52 (Oct. 1999).
    \8\ Id. at 7.
---------------------------------------------------------------------------
      Estimates suggest that at the end of the 1990s, over 50% 
of China's steel firms were losing money.\9\ According to an OECD 
report, the Chinese government bailed out several unprofitable state-
owned steel enterprises by transferring extensive debts the firms 
couldn't repay. To accomplish these debt-to-equity swaps, the 
government established and capitalized four ``Bank Asset Management 
Companies.''\10\ These companies took on the enterprises' non-
performing loans, exchanging them for stakes in the failing producers 
of dubious real value.\11\ Indeed, in 2000, the OECD expressed concern 
that the swaps were nothing more than a ``free lunch'' for China's 
largest state-owned enterprises.\12\ Estimates suggest that this ``free 
lunch'' was enormous. In 2000 alone, 37 Chinese steel enterprises 
reportedly took advantage of $7.53 billion in government-directed 
financing through debt-to-equity swaps.\13\
---------------------------------------------------------------------------
    \9\ ``Output controls boosting China's steel industry profit,'' 
Asia Pulse (Aug. 18, 2000).
    \10\ OECD, ``Reforming China's Enterprises'' at 78 (2000).
    \11\ Id.
    \12\ Id.
    \13\ ``China: Debt-to-equity swaps help steel makers,'' China Daily 
(Mar. 26, 2000).
---------------------------------------------------------------------------
      Press reports from this period also describe the Chinese 
government's effort to essentially force many steel enterprises to 
merge, after which debts of the resulting merged entities held by 
China's state banks were cancelled. In 2000, for example, reports 
suggest that the write-off of debts following forced mergers saved 
China's 100 largest steelmakers an estimated RMB 1.5 to 2 billion ($181 
to $242 million) in interest payments.\14\
---------------------------------------------------------------------------
    \14\ ``China's Metallurgical Industry Profits Soar in Year to 
November,'' Asia Pulse (Jan. 23, 2001).
---------------------------------------------------------------------------
      Also in 2000, China's government announced that $6 
billion would be spent over the following few years to upgrade and 
transform the steel industry.\15\

    \15\ U.S. Department of Commerce, Report to the President: Global 
Steel Trade at 146 (July 2000).

    Moreover, these historical subsidies correspond to what is 
apparently a longstanding official policy of the Chinese government to 
artificially support the steel industry. China's five-year plans, which 
address virtually every aspect of the country's economy, have 
reportedly ordered governments at all levels to support the expansion 
and technological renovation of the steel industry. China's ninth five-
year plan, covering the years 1996 to 2000, openly called for the 
development of certain key production technologies, including 
automobile, oil, and other advanced types of steel.\16\ The tenth five-
year plan, for 2001 to 2005, laid out a very detailed outline to 
upgrade the entire steel industry.\17\ The plan designated ``core'' 
regional steel enterprises to be targeted with government support, and 
even set export goals for each such enterprise.\18\ For example, the 
plan designated Baosteel Corporation, now China's largest steel 
producer, as the ``core'' enterprise for China's Eastern region, and 
set an export goal of 3 million MT per year by 2005 for the 
producer.\19\
---------------------------------------------------------------------------
    \16\ National People's Congress, ``Outline of the Ninth Five-Year 
Plan for Economic and Social Development'' at Art. 4.2.4.2 (Mar. 17, 
1996) (available at http://www.npc.gov.cn/zgrdw/common/zw.jsp?label 
=WXZLK&id=3506&pdmc=rdgb) (Chinese language document).
    \17\ State Economic and Trade Commission of China, ``Tenth Five-
Year Plan for the Metallurgical Industry'' (Sept. 5, 2002) (available 
at http://www.cas.cn/html/dir/2002/05/09/6332.htm) (Chinese language 
document).
    \18\ Id. at Art. 3.3.1.
    \19\ Id. at Art. 3.3.1.3.
---------------------------------------------------------------------------
    This explicit state planning, along with an apparent policy to 
engage in widespread subsidization of the Chinese steel industry, 
continues in China's most recent steel plan. In fact, in July 2005, 
China's National Development and Reform Commission adopted a new 
National Steel Policy to guide the industry's development over the next 
15 years.\20\ Several of the policy's provisions indicate that China 
continues--and will continue--to artificially support its steel 
enterprises, placing particular emphasis on producing and exporting 
high-technology steel products:

    \20\ China National Development and Reform Commission, ``Steel 
Industry Development Policy'' (July 20, 2005).

      The policy states, ``there shall be supported and 
organized the implementation of localization of steel industry 
installations so as to improve China's research and development, design 
and manufacturing ability of key steel industry technological 
installations. The state will provide tax support, interest 
subsidization support, scientific research funding support and other 
policy support to support key steel projects constructed in reliance of 
new domestically-developed installations.''\21\
---------------------------------------------------------------------------
    \21\ Id. at Art. 16 (emphasis added).
---------------------------------------------------------------------------
      Further, ``(t)he state provides export credit support to 
encourage steel manufacturing and equipment manufacturing enterprises 
to export domestic superior technologies and complete sets of 
metallurgy equipments by means of combining industry and trade or 
combining technology and trade.''\22\
---------------------------------------------------------------------------
    \22\ Id. at Art. 27 (emphasis added).
---------------------------------------------------------------------------
      The policy contains detailed plans for the shape and 
composition of the Chinese industry, calling, for example, for a 
reorganization of the steel industry by 2010 into a structure comprised 
of two 30 million MT steel groups and several 10 million MT groups.\23\
---------------------------------------------------------------------------
    \23\ Id. at Art. 20.
---------------------------------------------------------------------------
      The policy micromanages many aspects of the Chinese steel 
industry, including the size of new steel plants, the location of such 
plants, and even the minimum size of blast furnaces to be 
installed.\24\ The policy also bans all foreign companies from 
controlling Chinese steel companies.\25\
---------------------------------------------------------------------------
    \24\ Id. at Art. 12 (providing that the blast furnaces shall be 
over 3,000 cubic meters, and that steel plants should have a capacity 
in excess of 8 million MT).
    \25\ Id. at Art. 23.
---------------------------------------------------------------------------
      The policy declares that ``(m)ineral resources belong to 
the state,''\26\ and that ``(t)he export of primarily processed 
products of coke, iron alloy, cast iron, scrap steel, steel billet 
(ingot) with high level of energy consumption and heavy pollution shall 
be restricted.''\27\ Such restrictions suppress the price of steel 
inputs for Chinese producers.

    \26\ Id. at Art. 28.
    \27\ Id. at Art. 30.

    Available evidence suggests that significant government resources 
are indeed continuing to flow to Chinese industry through the very 
kinds of subsidies identified in the steel policy. For example, the 
central government reportedly allows substantial income tax credits for 
companies that purchase domestically made equipment for technology 
upgrades.\28\ Moreover, the central and provincial governments provide 
tax incentives for producers located in development zones. The U.S. 
State Department reports that five special economic zones, 14 coastal 
cities, hundreds of development zones and designated inland cities all 
promote investment with ``unique packages of investment and tax 
incentives.''\29\ Steel producers also reportedly receive subsidized 
raw materials and energy. In this regard, China's government controls 
the price of gasoline and electricity, allowing manufacturers to obtain 
these vital items at subsidized prices.\30\ And, government control of 
state-owned enterprises in a number of different sectors means these 
enterprises can make below-cost sales to one another.\31\ Provincial 
governments also reportedly subsidize steel inputs. In fact, just last 
year, the government of Shanxi province agreed to provide state-owned 
producer Shougang with coke and iron ore at a fraction of market 
value.\32\
---------------------------------------------------------------------------
    \28\ State Tax Administration, Technological Renovation of Domestic 
Equipment Corporate Income Tax Exemption Notice (Jan. 17, 2000) 
(available at http://www.jsgs.gov.cn/Page/
statutedetail.aspx?statuteid=2965) (Chinese language document).
    \29\ U.S. & Foreign Commercial Service and U.S. Department of 
State, Doing Business in China: A Country Commercial Guide for U.S. 
Companies at 148 (2006).
    \30\ USCC Hearing at 52 (Statement of Dr. Usha C.V. Haley, 
Director, Global Business Center, University of New Haven).
    \31\ Id.
    \32\ ``Shougang to Set Up Steel JV in Shanxi Province,'' Steel Bus. 
Briefing (March 2, 2006).
---------------------------------------------------------------------------
    China's widespread intervention in raw material markets is another 
area that has given rise to substantial concerns regarding ongoing 
benefits to, and effective subsidization of, Chinese steel producers. 
For example, China's steel policy provides that China's government may 
block ``cut-throat competition'' for resources.\33\ In early 2006, 
there were numerous press reports regarding efforts by the Chinese 
government to influence negotiations between Chinese producers and 
global suppliers of iron ore--making clear that the government would 
``take necessary measures if prices were unacceptable and 
unreasonable.'' \34\ China's imposition of export restrictions on 
coking coal in 2005 also caused extensive disruptions on world markets, 
and led the EU to threaten potential action under the WTO to deal with 
the problem \35\--which clearly served to artificially lower input 
costs for Chinese producers.\36\
---------------------------------------------------------------------------
    \33\ See Steel Industry Development Policy at Art. 30 (``When 
several domestic enterprises engage in cut-throat competition for 
overseas resources, the state may exercise executive power to 
coordinate, organizing (an) industrial alliance or deciding one 
enterprise to invest so as to avoid cut-throat competition. The 
enterprises shall obey national executive coordination.'')
    \34\ See., e.g., ``China Stance Helped Limit Iron Ore Price 
Increase,'' Dow Jones International News (June 21, 2006).
    \35\ See ``China Continues Restriction Measure on Coke Export,'' 
Asia Pulse (June 24, 2005).
    \36\ World Trade Organization, ``China's Transitional Review 
Mechanism: Communication of the United States, G/MA/W/71 at 3, para. 9 
(Sept. 6, 2005).
---------------------------------------------------------------------------
    China's continuing policy to subsidize its steel industry is 
further reflected in the recent decision of the United States Trade 
Representative to commence WTO consultations with China with regard to 
nine WTO-prohibited export performance and import substitution 
subsidies. It is noteworthy that the Chinese steel industry was 
specifically identified as one of the key industries receiving support 
under these programs. These programs involve, among other things, 
preferential income tax and VAT treatment, below-market loans, and 
policies to encourage the use of domestic, rather than imported, 
materials.\37\ While the specific WTO-prohibited subsidies identified 
by USTR represent only a small portion of the enormous level of state 
support that has been provided by the Chinese government, they are 
indicative both of the ongoing nature of the problem and the very clear 
evidence of WTO violations.\38\
---------------------------------------------------------------------------
    \37\ See United States Trade Representative, ``United States Files 
WTO Case Against China Over Prohibited Subsidies,'' Press Release (Feb. 
2, 2007).
    \38\ China's failure to adequately enforce basic labor and 
environmental standards has also, in the view of many, served to 
provide Chinese companies with an unfair advantage in international 
trade--and arguably served as a means of effective state support and 
subsidization.
---------------------------------------------------------------------------
    In sum, the evidence suggests that China's steel industry is the 
most heavily subsidized in the world (Figure 3).
[GRAPHIC] [TIFF OMITTED] T0304A.003

Impact of Subsidies on World and U.S. Steel Markets
    With all of this past and ongoing government support, it is not 
surprising that China's steel production expansion is unprecedented in 
the history of the global industry. In the time remaining today, I 
would like to focus my remarks on the impact of government support for 
Chinese steel industry--both on global and U.S. markets--and the steps 
needed to combat further distortion of global steel markets. The fact 
is that subsidies make a huge difference in the capacity and production 
decisions of companies, and can and do act to badly distort market 
outcomes. That is why it is imperative that policy makers take the 
problem seriously and act aggressively to combat it.
    Chinese steel production has exploded over the course of the last 
decade--i.e., at the same time that many of the subsidies described 
above were reportedly granted (Figure 4). In fact, Chinese crude steel 
production more than quadrupled in the last ten years, growing from an 
estimated 100 million MT in 1996 to approximately 420 million MT in 
2006. This is the rough equivalent of building three entire American 
steel industries in just one decade. Moreover, China's production 
growth has far outpaced growth in the rest of the world. China's share 
of world steel production skyrocketed from an estimated one-eighth in 
1996 to over one-third in 2006, underscoring the unprecedented nature 
and enormous magnitude of what China is doing.
[GRAPHIC] [TIFF OMITTED] T0304A.004

    And the situation is quickly deteriorating. In fact, the most 
colossal portion of China's steel production growth has occurred in 
just the last few years. Between 2003 and 2006, it is estimated that 
the increase in China's crude steel production alone was roughly equal 
to the total production of Japan or the United States in 2006 (Figure 
5). It is likely no coincidence that these are the years immediately 
following some of the largest reported Chinese government payouts to 
the steel industry. Though we are still working to understand the full 
implications of this absolutely unprecedented industrial expansion, one 
fact is clear: the Chinese market is not able to support the hundreds 
of millions of tons of production capacity added in the last few years.
[GRAPHIC] [TIFF OMITTED] T0304A.005

    This is evidenced by the fact that Chinese imports are bottoming 
out while exports are skyrocketing, as Chinese producers seek markets 
for their surplus production (Figure 6). In 2003, China was a net 
importer of steel. Three years later, the situation flipped completely, 
and China became a net exporter. Indeed, China's steel trade balance 
shifted by nearly 50 million MT between 2003 and 2006 (Figure 7).
[GRAPHIC] [TIFF OMITTED] T0304A.006

    I cannot emphasize enough how extraordinary, unprecedented, and 
threatening these developments are. Let me walk you through the 
serious, real-world consequences for our industry. We are being 
inundated with surging volumes of Chinese imports. China shipped over 5 
million NT of steel products to the United States in 2006, more than 
double the level of Chinese imports in 2005 (Figure 8). By the end of 
last year, we were importing more steel from China than from any other 
country--including Canada. In fact, we were importing more steel from 
China than from all 25 members of the EU combined.
    It is also very important to note that Chinese imports are no 
longer limited to low-end items. China is moving up the value chain, 
increasingly competing with some of our most advanced products, 
including corrosion-resistant sheet, oil country tubular goods, and 
cold-rolled sheet. These products are among the most valuable to the 
U.S. industry. And, as I discussed a few moments ago, Chinese state 
policy explicitly targets these high-value products for subsidization.
    The U.S. industry is very competitive, especially with regard to 
these critical, high-value products. To give one example, U.S. 
corrosion-resistant steel producers increased their productivity by 78 
percent from 2000 to the first half of 2006. We can compete with any 
steel producer in the world on market terms. But we simply cannot 
compete with China's government resources. And we should not have to. 
If China wants access to the markets of the world, it must play by the 
rules--and put a stop to market-distorting subsidies.
[GRAPHIC] [TIFF OMITTED] T0304A.007

Need for Policy Action
    In short, the China trade problem is grave, and the current trade 
imbalance--fueled by unfair practices--is unsustainable. The last thing 
we want is a repeat of the Asian crisis of the late 1990s, when 
overproduction abroad resulted in a flood of cut-rate imports that put 
the entire American steel industry at risk. The time for strong policy 
action to prevent another crisis is now.
    USTR's recent initiation of WTO consultations with regard to 
certain Chinese subsidy programs is a step in the right direction. But 
I would like to again underscore that the nine subsidy programs 
identified by USTR are a very limited subset of the problem. In 
particular, the USTR's action involves only WTO-prohibited subsidies 
(i.e., so-called ``export'' or ``import substitution'' subsidies), the 
majority of which relate solely to foreign-invested enterprises. The 
USTR action does not in any way address the vast evidence of enormous 
``domestic'' subsidies that built up many of China's largest steel 
enterprises over the past several years and continue to unfairly 
benefit Chinese producers today.
    Again, the time to act is now, before the situation deteriorates 
beyond our ability to meaningfully address it. There are a number of 
crucial policy actions we believe Congress and the Administration must 
take to address this problem:

      First, it is absolutely critical that we strictly enforce 
our trade laws. With regard to China and all of the other trade threats 
America faces, this must be our highest priority. Our anti-dumping and 
anti-subsidy laws constitute in most instances our only practical line 
of defense against severe market-distorting practices that would 
otherwise allow foreign producers to overrun this market. In this 
regard, we need to ensure that China continues to be treated as a non-
market economy for purposes of our anti-dumping law--particularly given 
the extensive evidence that China continues to control many fundamental 
aspects of its economy. The first step of any China policy--and indeed 
any manufacturing policy--should be a ``zero tolerance'' policy for 
unfair trade.
      Second, we also urgently need real China legislation. 
There are some very obvious, easy steps that can be taken, such as 
applying our anti-subsidy laws to China. It simply makes no sense to 
exempt Chinese producers, particularly given the evidence that they are 
among the most heavily subsidized producers in the world. We also 
urgently need do something real on currency manipulation. Letting China 
string us along with endless talk and tiny adjustments to the value of 
the yuan is no solution at all, especially in light of the enormous 
consequences of this flagrant manipulation. There are a lot of good 
ideas out there to address market-distorting behavior in China, and we 
sincerely hope that Congress will pursue them.
      Finally, it is imperative that we keep our AD/CVD laws 
strong in the face of relentless efforts to weaken them as part of 
international negotiations. We have seen such efforts to weaken our 
trade laws in the Doha round, and we are also seeing them in free-trade 
agreement (``FTA'') talks, such as the ongoing U.S.-Korea FTA 
negotiations. Weakening our trade laws as part of these talks could 
very well make them unworkable to combat unfair trade from China and 
other countries that disregard global rules. It is imperative that 
Congress send the clearest possible message that it will reject any 
agreement that weakens our AD/CVD laws.
Conclusion
    We find ourselves at a critical moment. If we act now, we can guard 
our nation against further unfair Chinese trade and prevent another 
crisis impacting core American industrial sectors. Thank you for 
supporting American manufacturing and the American steel industry, and 
thank you for the opportunity to testify today.

                                 

    Chairman LEVIN. Thank you.
    Frank Vargo, welcome.

STATEMENT OF FRANKLIN J. VARGO, VICE PRESIDENT OF INTERNATIONAL 
    ECONOMIC AFFAIRS, NATIONAL ASSOCIATION OF MANUFACTURERS

    Mr. VARGO. Thank you, Mr. Chairman, Mr. Herger, Members of 
the Subcommittee. I am very pleased to be here on behalf of the 
National Association of Manufacturers (NAM) to talk about 
China's trade-distorting subsidies.
    No other trade subject comes anywhere near China as far as 
commanding the attention of NAM companies. It is simultaneously 
the greatest concern of many of our import competing companies 
and one of the fastest growing markets for our exporters.
    We want a positive and mutually beneficial and very 
productive trade relationship with China, but to do so, we have 
to see that the rules that China agreed to abide by are 
actually followed. We have a range of concerns, including 
currency, intellectual property theft, and subsidies.
    Now, direct and indirect export subsidies have been a major 
concern for NAM members for some time. We have heard quite a 
few stories about Chinese products, for example, being imported 
into the United States for less than the cost of the raw 
materials.
    One of our member companies, for example, makes hardware, 
and gave us an example of a pair of pliers that can be imported 
from China for a wholesale price of 49 cents, but the only 
problem here is there is 61 cents of raw materials in them. So, 
how does a Chinese company take those raw materials, machine 
them, assemble them, package them, ship them across the Pacific 
Ocean, and sell them for 49 cents? One answer would be they 
were getting subsidies.
    Now, as part of China's accession, China agreed to identify 
its prohibited export subsidies and to eliminate them. Now, 5 
years later, they have finally identified a range of subsidies. 
USTR has been having discussions with them. Those discussions 
have not been productive. So, now we have the beginning of a 
trade case on those subsidies, and the NAM very strongly 
supports this.
    As we look at some of these subsidies, we believe they can 
be very significant. I understand one subsidy, for example, is 
that if you export 70 percent or more of your output, that your 
income taxes are cut in half. That is pretty potent incentive.
    They are not all export subsidies. On the other side, my 
understanding is that one of the Chinese laws is that if you 
buy Chinese-made equipment for your factory or your service 
facility that you get--you can write 40 percent of that off 
against your taxes. You get a 40 percent tax rebate. Well, that 
again is a pretty powerful subsidy, and it particularly affects 
American companies because we are a capital goods exporter. So, 
we would be able to sell more equipment to China if we didn't 
have to face these subsidies.
    Then there are specific subsidies in industries--in machine 
tools, tool and die, casting and forging. These are industries 
from which we hear a lot of pain from our NAM members. There 
could be more subsidies coming.
    We noted in the questions that the U.S. Government put to 
the Chinese at the WTO, among them was a statement that China's 
Ministry of Commerce is in the process of selecting a hundred 
Chinese auto or parts manufacturers to be designated as State-
level auto and parts exporters who will be targeted for special 
financial and export credit support.
    Now, we have no estimate of the overall effect that these 
subsidies are having, but we can see from the magnitude that 
they are very significant. Now, I know that a lot of people say 
Chinese wages are so low that nothing else matters; you just 
can't compete against them, but that is not so.
    American manufacturers are very productive. As a matter of 
fact, we estimate that the average labor cost in a U.S. 
manufactured good is only 11 percent. Eighty-nine percent is 
the cost of materials, energy, taxes, distribution, marketing, 
and so forth, so that the concept that Chinese labor wages 
trump all is just not true. We need to press for the 
elimination of these subsidies. They are prohibited. They are 
illegal. They shouldn't be there. We shouldn't have to deal 
with them.
    We want this just to be the beginning. These are the very 
visible prohibited subsidies. We want the USTR and the Commerce 
Department to investigate and press for more. We want to make 
sure that they have the resources to do so. Appropriations are 
not the jurisdiction of this Subcommittee or Committee, but we 
hope that you will work to ensure that all the resources they 
need are indeed provided.
    Now, in addition, we believe that U.S. companies should be 
able to bring countervailing duty cases against Chinese 
subsidies. We have urged the Commerce Department to reverse its 
20-year policy of not applying countervailing duty provisions 
to non-market economies.
    Now, the huge U.S. trade deficit with China continues to 
grow. Last year it was 232 billion, up from 205 billion in the 
year 2005. We have deficits with countries other than China, 
and we have an overall manufactured goods deficit of 530 
billion. That is huge.
    When we address these deficits and look at how we get them 
down, it is important that we deal with the facts. For example, 
it is not uncommon to hear that the three million manufacturing 
jobs lost in the United States were all due to increased 
imports. That is just not true. There are many factors 
involved.
    Some were certainly lost to imports. Some were lost to the 
export collapse that we had a couple of years ago. It is also 
very true that we have been very, very productive in recent 
years. As a matter of fact, if you look at the two graphs 
attached to the last page of my prepared statement, you will 
see that both in terms of the Federal Reserve Board's 
production index and in terms of the manufacturers' factory 
shipments from the Census Bureau, that we are at an all-time 
high, and our 14 million workers today are product more than 17 
million workers produced five years ago.
    That is not to say we don't have a problem at all. We do. 
We have too large a trade deficit. We have too large a trade 
deficit with China. We should not put up with WTO-inconsistent 
practices like these subsidies.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Vargo follows:]
    Statement of Franklin J. Vargo, Vice President of International 
        Economic Affairs, National Association of Manufacturers
    Mr. Chairman and Members of the Committee:
    I am pleased to testify today on behalf of the National Association 
of Manufacturers (NAM), the nation's largest industrial trade 
association, representing small and large manufacturers in every 
industrial sector and in all 50 states. We seek a vibrant, globally 
competitive manufacturing industry in the United States.
    No other trade subject comes close to commanding the attention that 
China is getting from NAM companies. China is simultaneously the 
greatest concern of many of our import-competing members and the 
fastest-growing global market for large and small exporters and for 
many companies that operate internationally. China has emerged within a 
short span of two decades as a strong international competitor in a 
wide range of manufactured products and a key market for U.S 
manufactured exports.
    The NAM seeks a positive and mutually-productive trading 
relationship with China that reflects market forces as closely as 
possible. China's emergence as a leading world economy has meant 
significant new opportunities for many NAM members, including increased 
exports and investment. At the same time, many import-competing U.S. 
manufacturers see prices of Chinese products so low--sometimes even 
lower than the cost of the raw materials--that it is difficult for them 
to see how they can compete. Others see their customers moving to China 
and cannot find new ones to replace them.
    The NAM's concerns with China cover a range of issues, including 
protecting intellectual property rights, maintaining a currency value 
that reflects the strength of the Chinese economy and ending prohibited 
government subsidization of industry.
    We are also concerned that we are seeing a growing Chinese 
industrial policy that favors domestic producers, making it more 
difficult for foreign firms to participate in the Chinese economy. 
While currency and intellectual property theft are huge problems for 
NAM members and for our trade balance with China, I will confine my 
remarks in this testimony to China's subsidies.
    The NAM worked hard to support China's membership in the World 
Trade Organization (WTO), and we remain fully supportive of that 
membership. Bringing China into the WTO required it to begin following 
the same trade rules as the rest of the world and to open its markets 
more fully. It has now been over five years since China joined the WTO 
and it is important that China implement its obligations fully.
    There have been many positive benefits. Joining the WTO has 
encouraged China to open its internal market to international trade and 
foreign investment and adopt more market-oriented policies for 
developing its economy after decades of state control and management. 
At the same time, WTO agreements and principles have provided 
internationally accepted standards for guiding and evaluating China's 
policies affecting trade.
    China has now been in the WTO five years, and the NAM concurs with 
the Administration's 2006 Top to Bottom Review of China Trade Policy 
that as a mature trading partner, China should be held fully to its 
commitments. Unlike most other WTO members, China presents a unique 
challenge for evaluating its WTO compliance. While the Chinese economy 
has evolved significantly from a state-controlled model, it is still 
not a market economy. Both the national government and local 
governments play a significant role, directly and indirectly, in 
determining business decisions and limiting competition in the 
marketplace. Some of these policies appear to be driven by economic 
policy goals aimed at artificially accelerating China's industrial 
growth and export of manufactured goods.
    The rule of law is essential to the free flow of trade in goods and 
services and governments have a responsibility to adhere to their 
commitments under the WTO and other international agreements. When 
governments interfere in trade in violation of the rules, enforcement 
is important to prevent the growth of distortion in global markets. The 
NAM believes that the area of subsidies is no exception and, in 2004 
and subsequently, the NAM Board of Directors has supported legislation 
in Congress that would state clearly that U.S. countervailing duty law 
should apply to both market and non-market economies.
    Often U.S. companies can only surmise that inappropriate policies 
are in place because they know that manufacturers operating on market 
principles would not engage in similar practices (e.g., selling a 
product at below the international price for the raw material input or 
continuing to build new capacity when there is already oversupply on 
the market.)
    To ensure effective WTO compliance, U.S. agencies must be prepared 
to investigate trade problems even when there is limited documentation 
and other hard evidence that a violation of trade rules has occurred. 
The NAM believes strongly in the rules-based trade system. As with any 
country, when there are violations of trade rules, U.S. companies 
should have recourse to WTO-consistent remedies under U.S. trade law.
    The use of and access to legitimate trade law in cases where it is 
warranted is necessary for mutually beneficial trade and is the best 
defense against the growth of protectionism. If affected companies have 
recourse when faced with unfair trade practices, there is a basic sense 
that trade works to their benefit.
Direct and Indirect Industry and Export Subsidies
    Direct and indirect industry and export subsidies are a major 
concern of U.S. manufacturers, particularly those that compete against 
Chinese-made products. Member companies and organizations have long 
complained to us that Chinese enterprises must be receiving subsidies 
because they appear to be selling their products in the United States 
at below the cost of raw materials and shipping.
    One of our member companies that makes hardware provides a typical 
example. Their large retail customers in the United States are able to 
purchase a particular pair of Chinese-made pliers for 49 cents. The 
U.S. company makes virtually identical pliers, but the problem is that 
the raw materials' cost in these pliers is 61 cents. This is not the 
sales price of the U.S. pliers--just the cost of the raw materials. How 
is it possible for a Chinese company to take 61 cents of raw materials, 
process them into pliers, package them, ship them across the ocean, and 
sell them for 49 cents? One way would be if the Chinese company were 
receiving subsidies.
    In 2001, China acceded to the WTO and agreed to be bound by its 
provisions, expressly including the Subsidies and Countervailing 
Measures (SCM) agreement. As part of China's accession, the Chinese 
government acknowledged the existence of subsidies and agreed to notify 
its subsidies to the WTO, and to terminate its prohibited subsidies 
upon accession. Last April, several years after it was due, China 
finally notified WTO members of government subsidy programs. China 
listed 78 subsidy programs for the period 2001-04 covering a wide range 
of programs.
    China's list, appears incomplete, however, and did not include a 
variety of policies and programs that NAM members believe are giving 
substantial subsidies to Chinese industrial enterprises--such as those 
provided by China's state-owned banks or by provincial or local 
governments. Chinese enterprises, for example, appear to have access to 
the automatic roll-over of unpaid principal and interest; loan 
forgiveness; continued borrowing despite having non-performing loans; 
and below-market interest rates.
    The SCM agreement defines two categories of subsidies: prohibited 
and actionable. The WTO defines prohibited subsidies as those that 
require recipients to meet certain export targets, or to use domestic 
goods instead of imported goods. They are prohibited because they are 
specifically designed to distort international trade. They can be 
challenged in the WTO dispute settlement procedure where they are 
handled under an accelerated timetable. If the dispute settlement 
procedure confirms that the subsidies are prohibited, they must be 
withdrawn.
    At the beginning of this month, after bilateral consultations with 
China made little progress, the U.S. Trade Representative (USTR) 
initiated dispute settlement proceedings against China, for what appear 
to be prohibited export subsidies that China should have terminated, 
but did not. The NAM strongly supports this action and urges that the 
proceedings be moved forward as rapidly as possible.
    For this initial case, USTR has chosen to focus on ``prohibited 
subsidies.'' No evidence of an adverse effect is necessary in the case 
of prohibited subsidies, unlike the situation in actionable subsidies. 
A prohibited subsidy is prohibited. Period. All that need be 
established in the case that is now being brought is that the Chinese 
subsidies in the complaint fit the definition of a prohibited subsidy.
    As we have looked at some of the subsidies in the complaint, there 
does not seem to be much question that these subsidies are prohibited. 
For example, I understand that in the case of one measure, enterprises 
that export at least 70 percent of their production may be able to 
enjoy a corporate income tax rate of 15 percent or lower rate instead 
of the normal 30 percent rate. That is a very significant subsidy and 
certainly can distort trade patterns in a way that would affect U.S. 
imports.
    I would like to comment in more detail about a number of subsidies 
being granted to manufacturers that are illustrative of Chinese 
subsidization.
    Equipment Generally: Not all of the subsidies being challenged in 
this WTO are export-oriented. Import-distorting subsidies are also 
included. For example, both foreign firms and domestic firms in China 
apparently get a tax write-off if they buy Chinese equipment for their 
factories or business installations instead of purchasing imported 
equipment. My understanding is that this takes the form of an income 
tax refund equal to 40 percent of the value of the equipment purchased. 
That is a huge incentive to buy domestically-made equipment rather than 
imports--and definitely would be a prohibited subsidy.
    Machine Tools: Additional subsidies appear to target particular 
industries that the Chinese government wants to develop by giving them 
preferred access to China's domestic market. One NAM member, for 
example, told us that 70 Chinese machine tool companies making computer 
numerically controlled (CNC) machine tools and related products can 
have 50% of the value-added tax (VAT) rebated to them.
    As the VAT tax is 17%, this is quite an incentive for them to lower 
their prices and distort competition by tilting the playing field 
against U.S. and other exporters. The machine tool subsidy is of 
particular concern as China is proving an increasingly difficult market 
to sell in to and Chinese exports of machine tools to the United States 
are growing rapidly.
    Tool and Die: The U.S. tool and die industry has a huge competitive 
problem with Chinese companies, and China's notification to the WTO 
shows that if Chinese producers buy die products produced by one of 160 
specified Chinese die manufacturers, they will get 70 percent of their 
VAT tax refunded.
    Casting and Forging: Another U.S. industry that is having a very 
difficult time competing against China is the casting and forging 
industry. China's notification to the WTO stated that if Chinese 
purchasers bought casting or forging products from one of 284 
specialized Chinese casting and forging companies rather than 
purchasing foreign imports, they could get a refund equal to 35 percent 
of the VAT paid on those products.
    Autos and Auto Parts: And yet even newer subsidies may be under 
development. In questioning China's subsidy submission to the WTO, the 
U.S. noted that ``China's Ministry of Commerce (MOFCOM) is in the 
process of selecting 100 Chinese auto or parts manufacturers to be 
designated as ?state-level auto and parts exporters' who will be 
targeted for ?financial and export credit support.'
    While we have no estimate of the overall effect these and other 
subsidies are having, we believe the effect is likely to be very 
substantial. The United States tends to be an exporter of capital 
equipment, rather than consumer goods, so subsidies that put imports of 
capital equipment into China at a disadvantage have a potentially 
strong effect on U.S. exports. This includes many small U.S. companies. 
In 2005, the latest year for which data are available, 22,000 small and 
medium-size U.S. firms exported to China, up 50 percent in the time 
since China joined the WTO. This number has likely continued to grow 
rapidly since 2005. As these smaller companies attempt to establish a 
marketing position in China, they already face ample obstacles without 
having to compete against subsidized Chinese firms.
    Some commentators have stated that Chinese wages are so low that 
little else counts in competing with China. They overlook the fact, 
however, that labor costs are only one factor in the production 
process. U.S. manufacturers are highly efficient, with strong labor 
productivity. In fact, Census Bureau data show that production worker 
wages and benefits on average are only 11 percent of the cost of U.S. 
manufactured goods--with 89 percent of the production cost being 
materials, energy, overhead, marketing, distribution, profits, taxes, 
and the like. We recognize that U.S. manufacturers need to work with 
our own government to make the U.S. manufacturing environment a 
competitive one. However, the idea that low Chinese labor rates trump 
all is not true.
    The U.S. government needs to press for the quick elimination of the 
subsidies identified in the case just filed with the WTO. In addition, 
the NAM wants USTR and the Commerce Department to continue seeking 
information on other possible subsidies, in the form of loan 
forgiveness and other forms of subsidy. Many of these subsidies may not 
be ``prohibited'' and may fall in the ``actionable'' category requiring 
considerable evidence of damage. The NAM hopes this subcommittee will 
inquire as to whether those two agencies are adequately staffed and 
funded for this exercise, and if not, we hope the subcommittee will 
encourage the relevant appropriations committees to ensure an adequate 
funding level.
    In addition, the NAM believes that U.S. companies should be able to 
bring countervailing duty cases against Chinese subsidies, and we have 
urged the Commerce Department to reverse the 20-year policy of not 
applying countervailing duty law in the case of non-market economies. 
There are two reasons for a change in policy: first, when the Subsidies 
and Countervailing Measures agreement was modified in 1994, the 
definition of a subsidy was changed from one that looked at effects to 
one that defined subsidies by what they are. Second, when China joined 
the WTO, it expressly agreed to be bound by the terms of the Subsidies 
and Countervailing Measures agreement, even agreeing to special 
methodologies for use in assessing subsidies its non-transparent 
economy.
    The NAM supported HR 3283 in the 109th Congress, a bill that sought 
to clarify the intent of Congress as being that countervailing duties 
should be applicable to subsidies from non-market economies as well as 
market economies. The NAM continues to support that concept, though we 
seek some technical changes to last year's bill.
    Finally, subsidized foreign investment is an issue that should be 
explored. WTO agreements have long recognized that subsidies unfairly 
distort trade in goods. The Agreement on Subsidies and Countervailing 
Measures (ASCM) subjects those subsidies to disciplines and provides 
remedies. Similarly, governments recognize that subsidies related to 
trade in services distort markets and should also be addressed. Article 
XV of the General Agreement on Trade in Services (GATS) acknowledges 
that subsidies may distort trade in services. The GATS obliges WTO 
member countries to enter into future negotiations on the subject and 
to give ``sympathetic consideration'' to complaints.
    Subsidies for the acquisition of assets distort the market for 
those assets in much the same manner as trade subsidies. The United 
States has long been an advocate for increased disciplines on 
subsidies, including market-distorting practices that may escape the 
current rules (such as government-directed credit) and stricter 
disciplines to address certain types of adverse effects that are not 
adequately dealt with under the current rules (e.g., overcapacity 
caused by subsidies in the steel and fisheries sectors). New 
consideration needs to be given to how we handle subsidized investment 
in the future.
Putting China_and Trade_In Perspective
    The huge U.S. trade deficit with China is continuing to grow. Data 
just released by the Commerce Department show the 2006 merchandise 
trade deficit with China was $232 billion up from $202 billion in 2005. 
China now accounts for over 40 percent of our global non-petroleum 
trade deficit.
    Export growth to China is rapid, but starts from a small base. Last 
year's 32 percent increase in exports to China resulted in a dollar 
growth of $13 billion. The 18 percent import growth, though, resulted 
in a $44 billion increase. As imports from China are five times as 
large as exports to China, a significantly higher export growth rate 
relative to the import growth rate is needed to stabilize and then 
bring down the deficit.
    It is noteworthy, though, that the increase in the deficit last 
year was 15 percent, significantly below the 25 percent growth that has 
been seen for some time. Now I am not implying that this is ``break out 
the champagne'' news, but it is the first time we have seen a slowing 
in the growth rate of our deficit with China. Nevertheless, the size of 
the deficit and its continued growth underscore the need to utilize our 
trade rights to eliminate subsidies and other distortions of trade with 
China.
    We have deficits with countries other than China, of course, and 
our global manufactured goods trade deficit in 2006 was nearly $530 
billion.But as we address these deficits, we must be realistic about 
the effect they are having on our economy. It is important that we all 
move forward with as good a grounding in the facts as possible.
    For example, it is not uncommon to hear that U.S. manufacturing is 
on its last legs, that we have been hollowed out and that our 
production base has moved overseas. A look at the factory shipments and 
industrial production data I have included as the last page of my 
testimony shows this is not true. Measured by historical standards and 
recent trends, U.S. manufacturing output is strong. This is not, of 
course, the case for all sectors. While some are doing very well, 
others are not. And within sectors some companies are doing well, while 
others are struggling to stay afloat.
    American manufacturing faces many problems and challenges. Global 
competition is one, both in terms of import competition and in terms of 
having to face trade barriers around the world and too many unfair 
trade practices. But we have home-grown problems as well, in terms of 
higher costs from taxes, regulation, energy costs, etc. In fact, when 
we ask our member companies to name their biggest problem, they tell us 
that health care costs and a shortage of skilled workers is at the top 
of their list.
    Some believe all our problems stem from trade, and that trade is 
the reason that manufacturing has lost 3 million jobs in recent years. 
Some commentators are fond of pointing out that the United States lost 
3 million jobs in the ``NAFTA-WTO decade.'' The clear implication is 
that NAFTA and trade generally are the cause of the 3 million job loss. 
But that is untrue.
    It is certainly true that between 2001 and 2003 nearly three 
million manufacturing jobs were lost--a huge number, close to one in 
every six jobs. The jobs have not come back since that time, with 
manufacturing employment trending down gradually since 2003. But since 
the U.S. manufactured goods deficit with NAFTA in 2001 was $38 billion 
and the 2006 manufactured goods deficit with NAFTA was also about $38 
billion, how could the job loss have been caused by NAFTA? Since there 
was no increase in the manufactured goods deficit with NAFTA, it is 
hard to see what kind of analysis would indicate NAFTA as the cause of 
our job loss.
    Many people are startled to learn that the manufactured goods 
deficit with NAFTA is no larger than it was in 2001, for they look at 
the overall trade figures with NAFTA and see a $55 billion increase 
since 2001. However, this increase was entirely due to oil imports. 
Mexico and Canada supply one in every three barrels of oil we import 
from the world, and with the price of oil being what it is, the 
petroleum deficit with them has soared--growing $55 billion.
    Looking at the trade deficit more broadly, Dr. Lawrence Michel, 
President of the Economic Policy Institute, testified before the full 
Ways and Means Committee at the end of January that, ``In just the five 
years from 2000 to 2005, more than three million manufacturing jobs 
disappeared. We estimate that at least one-third of that decline was 
caused by the rise in the manufactured goods trade deficit.''
    That is possible, as in the period when those 3 million jobs were 
lost, there was a big jump in our global manufactured goods deficit--a 
$90 billion increase, in fact. But the inference most people seem to 
draw from this is that it was imports that caused that job loss--
particularly U.S. multinational imports from low-wage countries. But 
that is not what the figures show. The data show that the $90 billion 
increase in the manufactured goods deficit in that period was due to a 
$20 billion increase in imports, and a $70 billion drop in exports. 
Thus, to the effect that trade was a factor in the job loss, about 80 
percent of the trade impact came from falling exports, not rising 
imports.
    None of this is to say that U.S. manufacturing doesn't face serious 
problems--including from import competition from China. We do, but as 
we approach these problems we must do so armed with the facts and with 
an understanding of how we got where we are and how best to solve our 
problems so we can have the vibrant and growing manufacturing sector 
this country cannot survive without. Manufacturing is how we will pay 
our way in the world and manufacturing is the principal source of the 
innovations and productivity that we need for continued increases in 
our standard of living.
    Thank you, Mr. Chairman, for holding this important hearing, and 
the NAM looks forward to continuing to work closely with you, other 
members of the committee, and the committee's excellent staff.
[GRAPHIC] [TIFF OMITTED] T0304A.008

                                 

    Chairman LEVIN. Thank you very much.
    [GRAPHIC] [TIFF OMITTED] T0304A.009
    
    Mr. Bassett.

STATEMENT OF JOHN D. BASSETT, III, CHAIRMAN AND CHIEF EXECUTIVE 
  OFFICER, VAUGHAN-BASSETT FURNITURE COMPANY, GALAX, VIRGINIA

    Mr. BASSETT. Thank you, Mr. Chairman and Members of the 
Subcommittee. Good morning. My name is John Bassett. I am the 
Chairman of Vaughan-Bassett Furniture Company headquartered in 
Galax, Virginia. Vaughan-Bassett was founded by my family in 
1919. We employ over a thousand workers at our furniture plants 
in Galax, Virginia and Elkin, North Carolina.
    I am also the Chairman of the American Furniture 
Manufacturers Committee for Legal Trade. The Committee for 
Legal Trade has 22 member companies that produce bedroom 
furniture in the United States. I am testifying today on behalf 
of Vaughan-Bassett and the Committee for Legal Trade.
    Beginning in about 2001, U.S. imports of wood bedroom 
furniture from China began to flood the U.S. market. In most 
cases, the Chinese producers did not offer anything new; they 
simply copied furniture styles that we were already 
successfully making for the U.S. market and offered them at 
much lower prices. Furniture became China's number one export 
to the United States, measured by the number of containers 
shipped. As a result, our industry lost enormous sales and a 
large share of our market to cheap imports from China.
    In 2003, we learned for the first time that a trade remedy 
law, the anti-dumping law, was available to combat unfair 
priced imports. We formed the Committee for Legal Trade and 
filed an anti-dumping petition against imports of wood bedroom 
furniture from China in October 2003.
    Given the Commerce Department's longstanding practice not 
to apply the countervailing duty laws to non-market economies 
or countries, we did not file a countervailing duty petition 
against the Chinese government subsidies.
    In our anti-dumping case, the U.S. International Trade 
Commission investigated the impact of dumped imports from China 
during January 2001 through June 2004. During that period, 
imports from China, having a landed value of about 3.8 billion, 
contributed to the closing of over 65 U.S. furniture factories 
that made bedroom furniture--today that figure is much higher--
and that employed over 18,000 workers. The Commission made a 
unanimous decision in late 2004 that our industry was 
materially injured as a result of dumped imports from China, 
and an anti-dumping order was imposed.
    Now let me come to the heart of the matter. I speak for all 
of our members by saying, first, we would like to stay in 
domestic manufacturing in this country. Two, as an 
organization, we have supported NAFTA and we have supported the 
General Agreement on Tariffs and Trade. We were prepared, and 
are still prepared, to compete in a global marketplace. We have 
modernized our factories. We have increased our efficiencies. 
We have improved our quality. We have done all those things.
    It was our understanding that our Government would provide 
a level playing field for us. Our job was to compete; our 
government's job was to create a playingfield that was level. 
Now, with dumping, subsidies, and pegged currencies, we 
question today if that playingfield is level.
    Here is a problem I have. How am I going to look my workers 
in the eye and tell them they no longer have a job, and it is a 
result of illegal trade? That is a hard thing to do. I have got 
to be able to look them in the eye as a corporate citizen and 
tell them truth. The truth is, I have done everything in my 
power to legally protect your job.
    So, if the Administration will not do this, ladies and 
gentlemen, as a corporate citizen I only have one other place 
to come, and that is to my elected representatives, the U.S. 
Congress.
    Now, in final, I am not asking for a bailout. I am not 
asking for a handout. I am not asking for a gift. We are asking 
for one thing: Let us do our job, and would you please do 
yours. Thank you very much.
    [The prepared statement of Mr. Bassett follows:]
Statement of John D. Bassett, III Chairman and Chief Executive Officer, 
           Vaughan-Bassett Furniture Company, Galax, Virginia
    Mr. Chairman, Mr. Herger, and Members of the Subcommittee:
    Good morning. My name is John D. Bassett. I am the Chairman of 
Vaughan-Bassett Furniture Company, headquartered in Galax, Virginia. 
Vaughan-Bassett was founded by my family in 1919. We employ over 1,000 
workers at our furniture plants in Galax, Virginia and Elkin, North 
Carolina. I am also the Chairman of the American Furniture 
Manufacturers Committee For Legal Trade. The Committee For Legal Trade 
has 22 member companies that produce bedroom furniture in the United 
States. I am testifying today on behalf of Vaughan-Bassett and the 
Committee For Legal Trade.
    Beginning in about 2001, U.S. imports of wooden bedroom furniture 
from China began to flood the U.S. market. In most cases, the Chinese 
producers did not offer anything new; they simply copied furniture 
styles that were already successful in the U.S. market and offered them 
at much lower prices. Furniture became China's number one export to the 
United States, measured by the number of containers shipped. As a 
result, our industry lost enormous sales and a large share of our 
market to cheap imports from China.
    In 2003, we learned for the first time that a trade remedy law--the 
antidumping law--was available to combat unfairly priced imports. We 
formed the Committee for Legal Trade and filed an antidumping petition 
against imports of wooden bedroom furniture from China in October 2003. 
Because of the Commerce Department's long-standing practice not to 
apply the countervailing duty law to non-market economy countries, we 
did not file a countervailing duty petition against Chinese government 
subsidies.
    In our antidumping case, the U.S. International Trade Commission 
investigated the impact of dumped imports from China during January 
2001-June 2004. During that period, imports from China, having a landed 
value of about $3.8 billion, contributed to the closing of over 65 U.S. 
furniture factories that made bedroom furniture and that employed over 
18,000 workers. The Commission made a unanimous determination in late 
2004 that our industry was materially injured as a result of dumped 
imports from China, and an antidumping order was imposed in January 
2005.
    Although the Commerce Department determined in its investigation 
that imports from China were being dumped, the dumping margins it 
calculated were disappointing. The average dumping margin, and 
resulting antidumping duty, was only about 7 percent. That duty has 
certainly helped, but it has not come close to offsetting the amount by 
which the Chinese prices undercut our prices. Also, the antidumping 
duty has done nothing to offset the subsidies granted by the Chinese 
government to its furniture industry.
    Since filing our antidumping petition, we have learned that Chinese 
subsidies for furniture makers include numerous tax breaks for 
exporters, for companies located in specially designated economic 
development zones, and for the purchase of machinery. Other subsidies 
include free-land use to attract investment, reduced duties on material 
inputs, and monetary incentives provided as part of an export promotion 
program. Input suppliers such as lumber companies also receive 
substantial subsidies, including more than $3 billion in grants in 
2001-2004, low-cost and even interest free loans, debt forgiveness, and 
numerous tax breaks. These subsidies to upstream suppliers are 
particularly important because China does not enjoy any natural 
competitive advantage in timber, but the Chinese government has decided 
to create advantages by funding the development of fast-growth forests 
and processing facilities.
    Mr. Chairman, wooden furniture is made from lumber, which comes 
from trees. The Chinese government owns the land where the trees grow, 
owns many of the mills which produce the lumber, and owns many of the 
factories that produce the furniture. It subsidizes the operations that 
it does not own. In addition, the Chinese government manipulates and 
undervalues its currency, giving its furniture exporters a 30-40 
percent price advantage on top of all of the other subsidies.
    These government preferences allow Chinese furniture producers to 
sell their products at extremely low prices, resulting in injury to 
U.S. furniture makers and U.S. workers. As a businessman, it makes no 
sense to me that the U.S. government would not apply all available 
trade remedies to imports from China. Giving China a free pass when it 
comes to subsidizing their export-oriented industries is neither good 
trade policy nor good economics, especially when the U.S. trade deficit 
with China is at record levels.
    The American Furniture Manufacturers Committee for Legal Trade and 
Vaughan-Bassett Furniture urge this Committee to make sure that 
Commerce applies the countervailing duty law to China and to do all 
that it can to make our trade laws stronger to address dumped and 
subsidized imports from China.

                                 

    Chairman LEVIN. Thank you.
    Mr. Tyrone.

 STATEMENT OF JAMES C. TYRONE, SENIOR VICE PRESIDENT OF SALES 
        AND MARKETING, NEWPAGE CORPORATION, DAYTON, OHIO

    Mr. TYRONE. Mr. Chairman, Mr. Herger, Members of the 
Subcommittee, I would like to thank you for the opportunity to 
appear before you today on the issue of trade with China. My 
name is Jim Tyrone and I am Senior Vice President of Sales and 
Marketing at NewPage Corporation.
    NewPage was founded in 2005 when the company purchased 
certain of the paper assets of MeadWestvaco. NewPage produces 
several types of paper, including coated free sheet, a high-end 
paper used in annual reports, promotional brochures, and other 
types of publications. NewPage is headquartered in Dayton, Ohio 
and we have production facilities in Rumford, Maine; Wickliffe, 
Kentucky; Luke, Maryland; and Escanaba, Michigan; and a 
converting and distribution facility in Chillicothe, Ohio.
    Coated free sheet paper is a multi-billion dollar U.S. 
industry. NewPage itself employs over 4,000 workers in the 
United States. I would like to speak specifically today about 
subsidies to coated paper manufacturers in China, and the 
critical need for the United States Government to address and 
offset these subsidies by using all tools at its disposal, 
including U.S. countervailing duty law.
    Unfair foreign competition has made it increasingly 
difficult for us to maintain the optimism we had at the 
founding of our company. In fact, NewPage recently had to 
permanently shut down an entire paper line at its Luke, 
Maryland facility as a result of unfair foreign competition.
    The government of China provides very significant subsidies 
to its domestic paper producers, and these subsidies are 
injuring competing U.S. paper producers. Starting in the late 
nineties, the government of China targeted its domestic coated 
paper industry for rapid development. As part of this 
development plan, the Chinese government provides low-cost 
policy loans through government-owned banks. It also provides 
grants for the development of new paper capacity, and tax 
breaks based on export performance and domestic equipment 
purchases.
    Moreover, government banks in China forgave at least $660 
million in loans they had provided to China's largest paper 
producer, Asia Pulp & Paper, when that company declared 
bankruptcy in 2003. These subsidies have had the effect of 
vastly expanding China's capacity to produce coated free sheet 
paper. As a result, in the United States, Chinese coated free 
sheet market share has increased by an average of 75 percent 
annually over the past 4 years based on publicly available data 
despite having to ship their products thousands of miles to 
reach the U.S. market.
    In the face of increased unfair foreign competition, 
NewPage filed anti-dumping and countervailing duty cases on 
coated free sheet paper against China and two other countries, 
South Korea and Indonesia, in October of last year. In 
December, the International Trade Commission reached a 
preliminary determination that the United States industry is 
being injured as a result of the dumped and subsidized imports 
from these countries. The Department of Commerce is now in the 
midst of its own investigation of the cases.
    The Department of Commerce investigation into subsidies to 
Chinese paper producers is a historic one. In the mid-eighties, 
Commerce found that it could not apply the countervailing duty 
law to address subsidies in Czechoslovakia and Poland based on 
its conclusion that subsidies in these non-market economies did 
not make sense at that time.
    However, much has changed in the global trade regime over 
the last 20 years. China has become the world's third largest 
exporting economy, and the current economic system in China is 
vastly different than the command economies of the former 
Soviet bloc countries.
    Also, as noted earlier, China joined the WTO in 2001, at 
which time it agreed to abide by global trading rules, 
including the rules on subsidies, in exchange for increased 
access to foreign markets. Moreover, while China retains many 
of the elements of a non-market system, it has also instituted 
policies to effect the development of particular industries 
through a host of subsidy programs. Basically, China is a 
highly subsidized non-market economy.
    Commerce has the authority to apply countervailing duty law 
to China right now, and should do so. Recently the People's 
Republic of China (PRC) argued in the context of our case on 
coated free sheet paper that the Commerce Department is legally 
prohibited from applying the countervailing duty law to imports 
from China.
    It is inconceivable to me that China would expect to garner 
all the benefits from WTO membership and yet argue that it is 
not bound by the responsibilities that WTO participation 
carries with respect to subsidies, responsibilities it 
specifically agreed to in 2001.
    I would urge the Members of this Committee to help ensure a 
level playingfield by making clear to the Department of 
Commerce and to the People's Republic of China that the 
countervailing duty does in fact apply to China. I thank you 
for your attention and would be pleased to answer any 
questions.
    [The prepared statement of Mr. Tyrone follows:]
   Statement of James C. Tyrone, Senior Vice President of Sales and 
              Marketing, NewPage Corporation, Dayton, Ohio
    Mr. Chairman, Mr. Herger, and Members of the Subcommittee:
    I would like to thank you for the opportunity to appear before you 
here today on the issue of trade with China. My name is Jim Tyrone and 
I am the Senior Vice President for Sales and Marketing at NewPage 
Corporation. NewPage was founded in 2005, when the company purchased 
certain of the paper operations of MeadWestvaco. NewPage produces 
several types of paper including coated free sheet, a high end paper 
used in annual reports, magazines, promotional brochures, coffee table 
books and other types of publications. NewPage is headquartered in 
Dayton, Ohio, and has production facilities in Rumford, Maine; 
Wickliffe, Kentucky; Luke, Maryland; and Escanaba, Michigan; and a 
converting and distribution facility in Chillicothe, Ohio. Coated free 
sheet paper is a multibillion dollar United States industry. NewPage 
itself has more than 4000 employees in the United States. I would like 
to speak specifically today about subsidies to paper producers in 
China, and the critical need for the United States government to 
address and offset these subsidies by using all the tools at its 
disposal including the U.S. countervailing duty law.
    NewPage was founded with a great deal of optimism about the future. 
In addition to being the largest coated paper manufacturer in the 
United States, we have efficient, state-of-the-art mills, skilled and 
dedicated employees, strong relationships with our customers, 
strategically located mills and distribution facilities and growing 
markets for our products. However, unfair foreign competition has made 
it increasingly difficult for us to feel optimistic. In fact, NewPage 
recently had to permanently shut down an entire paper line at its Luke, 
Maryland facility as a result of unfair foreign competition.
    The government of China provides very significant subsidies to its 
domestic paper producers, and these subsidies are injuring competing 
U.S. paper producers. Starting in the late 1990's the government of 
China targeted its domestic coated paper industry for rapid 
development. As part of this development plan, the Chinese government 
provides low-cost policy loans through government-owned banks. It also 
provides grants for the development of new paper capacity, and tax 
breaks based on export performance and domestic equipment purchases. 
Moreover, government banks in China forgave at least $660 million in 
loans they had provided to China's largest paper producer, Asia Pulp & 
Paper, when that company declared bankruptcy in 2003. The PRC has also 
fostered the development of timber and pulp production in China--the 
key inputs into paper production--with similar subsidized incentives. 
These subsidies have had the effect of vastly expanding China's 
capacity to produce coated free sheet paper. Much of this subsidized 
production finds its way into export markets, particularly the U.S. 
market, the most open in the world. Government subsidies allow Chinese 
producers to sell at very low prices, permitting them to undercut 
prevailing prices in the United States, and in third country markets. 
This, in turn, has allowed Chinese producers to dramatically increase 
their global market share. In the United States, Chinese coated free 
sheet market share has increased by an average 75 percent annually over 
the past four years based on publicly available data, despite having to 
ship their products thousands of miles to reach the U.S. market 
Ironically, and in contrast to U.S. paper producers, China has no 
natural advantage in the production of paper. It does not have an 
abundant supply of the requisite inputs, and must import much of the 
pulp that it uses to make paper. As a result, the government of China 
is now essentially underwriting the development and expansion of fast-
growth forests in China, to provide the timber and pulp that their huge 
paper companies now need to produce paper.
    In the face of increased unfair foreign competition, NewPage filed 
antidumping and countervailing duty cases on coated free sheet paper 
against China, and two other countries, South Korea and Indonesia, in 
October of last year. In December, the International Trade Commission 
reached a preliminary determination that the United States industry 
producing coated free sheet paper is injured as a result of dumped and 
subsidized imports from these countries. The Department of Commerce, 
which has the responsibility to investigate allegations of dumping and 
subsidization, is now in the midst of its own investigation.
    The Department of Commerce investigation into subsidies to Chinese 
paper producers is an historic one. In the mid-1980's, Commerce found 
that it could not apply the countervailing duty law to address 
subsidies in Czechoslovakia and Poland, based on its conclusion that 
subsidies in those ``nonmarket'' economies did not make sense at that 
time. Commerce has not since applied its countervailing duty law to 
nonmarket economies. However, much has changed in the global trade 
regime over the last twenty years. China has become the world's third 
largest exporting economy, and the current economic system in China is 
vastly different than the command economies of the former Soviet bloc 
countries. Moreover, China joined the WTO in 2001, at which time it 
agreed to abide by global trading rules--including the rules on 
subsidies--in exchange for increased access to foreign markets. 
Moreover, while China retains many of the elements of a nonmarket 
system, such as a pegged exchange rate, control over labor and lending 
rates, and the prices of certain inputs, it has also instituted 
policies to effect the development of particular industries through a 
host of subsidy programs implemented at the central and local 
government levels. Basically China is a highly subsidized non-market 
economy. It is imperative that the United States utilize the 
countervailing duty law to address these subsidies.
    Despite its WTO accession, and specific WTO commitments with 
respect to government subsidies, it is truly incredible that the PRC is 
arguing in the context of our case on coated free sheet paper, that the 
Commerce Department is legally prohibited from applying the 
countervailing duty law to imports from China. It is inconceivable to 
me that China would expect to garner all the benefits from WTO 
membership and yet argue that it is not bound by the responsibilities 
that WTO participation carries with respect to subsidies--
responsibilities it specifically agreed in 2001 to uphold.
    As I noted, Commerce has the legal authority to apply the CVD law 
to China. But we welcome all efforts to offset subsidies, including 
legislative efforts by this Committee and the WTO case brought by the 
U.S. Trade Representative. The USTR has requested consultations 
regarding nine subsidy programs in China that are prohibited under WTO 
rules. NewPage believes that Chinese paper exporters benefit from 
several of these subsidies, which we alleged in our countervailing duty 
petition.
    I would urge the members of this Committee to help ensure a level 
playing field by making clear to the Department of Commerce, and to the 
People's Republic of China, that the countervailing duty law does, in 
fact, apply to China. I thank you for your attention and would be 
pleased to answer any questions.

                                 

    Chairman LEVIN. Thank you so much.
    Dr. Navarro.

  STATEMENT OF PETER NAVARRO, PH.D., PROFESSOR, UNIVERSITY OF 
CALIFORNIA, IRVINE, THE PAUL MERAGE SCHOOL OF BUSINESS, IRVINE, 
                           CALIFORNIA

    Mr. NAVARRO. Thank you for the invitation. My message to 
you today is a simple one. The Administration has 
underestimated the scope of the China problem and overestimated 
its ability to solve it. The ball is in Congress's court.
    What I would like to do for you today is answer the 
question: What do you do? I think the policy framework I have 
offered in my table in the written testimony which is projected 
on your screen gives you an idea of the scope of this problem 
and a policy framework. Let me walk through this real quickly.
    The first category is subsidies and tax preferences, which 
the gentlemen have been talking about. These include things 
like subsidized energy, water, telecommunications, free land, 
free capital, value-added tax rebates. The important point to 
grasp here is that even if the Trade Representative was wildly 
successful in their recent complaints, it is only 17 percent of 
the problem.
    The same problem is with currency manipulation. This was a 
subject, for example, of the Schumer-Gramm legislation that was 
put before you. Unfortunately, the media perception was that 
somehow was a magic bullet to the problem. When you net out the 
import content, it is only 11 percent. It needs to be done, 
currency reform, but it is not the magic solution.
    The third problem was the subject of the first panel. Let 
me say this: The first panel did not mention, I think, the most 
important point regarding piracy and counterfeiting. It is not 
just about the fact that American movie companies can't sell 
their movies in China because they are copyrighted. It is the 
fact that counterfeiters and pirates get real cost advantages 
relative to us here in America.
    They don't have to pay R&D that hurts the auto 
manufacturers and the pharmaceutical companies. They don't have 
to pay marketing expenses for branding. Look, wouldn't we all 
in America love not to have to pay Microsoft and Oracle and SAP 
for our software needs? That is a critical point that needs to 
be grasped.
    Lax health and safety regulations, as well as lax 
environmental regulations: China is the most dangerous place to 
work in the world. It is the dirtiest country in the world. The 
problem here is that these lax standards provide real cost 
advantages to Chinese manufacturers. They don't have to worry 
about dumping toxic chemicals in rivers. They don't have to put 
scrubbers on their power plants. They don't have to train their 
people. They don't put filters in their factories. The result 
is a real cost advantage.
    The sixth and seventh what I call the drivers of the 
``China price'' are in the category of what I refer to as mixed 
mercantilism rather than pure mercantilism. We have got both 
labor costs and foreign direct investments here.
    Labor, look, China has a comparative advantage in labor. 
There is no question about it, but to the extent that they 
don't have adequate health and safety regulations, that is an 
issue. To the extent that they use slave labor, that is an 
issue. They have contracts which are effectively indentured 
servitude. They do not enforce the minimum wage which they have 
on the books. These all factor into their labor advantage and 
it hurts American workers.
    The last thing here is foreign direct investment. Foreign 
direct investment is running at over $60 billion a year right 
now in China, and going up to 100 billion. When you have FDI, 
you have got tremendous technology transfer, and you have got 
tremendous acceleration of best management practices. You wed 
that to a cheap labor force, and that is a powerful driver. 
That is a comparative advantage they have.
    Yet there still are mercantilist elements associated with 
that. For example, 20 to 30 percent of the so-called foreign 
direct investment in China is really attributable to what they 
call the ``round tripping'' of capital. It comes from China, 
out through Hong Kong, and it comes right back. It is attracted 
by a variety of subsidies and tax preferences, which violate 
the WTO, which are unfair trading practices, and which 
partially account for their advantage there.
    The point I am trying to make here is simply that if you 
are going to do a good job of addressing the China problem, you 
are going to need to take an omnibus approach. You can't do 
this in a piecemeal fashion. You can't let the trade rep to 
subsidies. You can't do just a bill on piracy. You can't pass 
just a bill on currency manipulation because it is all these 
things. These folks here who are trying to run companies are 
dying by a thousand cuts.
    So I would hope that the Congress would approach this in a 
fashion. I do not believe that the Administration is capable of 
handling this. They are distressed by other events, and plus 
watching particularly the Treasury Secretary in his fruitless 
efforts to bring China to the bargaining table has been very 
discouraging.
    So, I salute you, gentlemen and ladies, for having this 
here today. I would be happy to answer any of your questions, 
but please, this is a problem that we need to confront head-on.
    [The prepared statement of Mr. Navarro follows:]
Statement of Peter Navarro, Ph.D., Professor, University of California, 
     Irvine, The Paul Merage School of Business, Irvine, California
    Mr. Chairman and members of the Subcommittee. My name is Peter 
Navarro, and I want to thank the members and staff of this subcommittee 
for the opportunity to testify today on the crucial issue of U.S.-China 
trade relations--specifically the role of a complex web of mercantilist 
export subsidies in providing China with an unfair competitive 
advantage over U.S. manufacturers.
    As a biographical note, I am a business professor at the University 
of California-Irvine and hold a PhD in economics from Harvard 
University. My research has appeared in academic journals ranging from 
the Journal of Economic Perspectives, the Journal of Business, and the 
Rand Journal to the Harvard Business Review and China Perspectives. I 
am also the author of a number of books on economics and public policy, 
including The Coming China Wars: Where They Will Be Fought, How They 
Can Be Won (Financial Times, 2006).
    My value-added in this proceeding will be to provide members with a 
conceptual framework with which to understand the broad scope of 
Chinese mercantilist practices as well as to provide a more expansive 
definition of what constitutes an unfair ``mercantilist export 
subsidy.''
    In this testimony, I will identify the eight major drivers of the 
so-called ``China Price,'' which is a short hand term for Chinese 
competitive advantage in world markets. Most importantly, I will 
illustrate how fully 7 of these 8 China Price drivers are, in turn, 
driven by a complex web of direct, indirect, and hidden mercantilist 
export subsidies.
    I shall conclude this testimony by urging Congressional 
policymakers not to compartmentalize the various factors contributing 
to China's unfair trade practices nor deal with them in piecemeal 
policy fashion. Instead, I urge Congressional leaders to address 
Chinese mercantilism in a comprehensive and integrated fashion that 
hits all mercantilist points of the China Price compass. The framework 
offered in this testimony may be helpful in the policy architecture and 
design.
China's Clear and Present Danger to America
    By practicing a highly evolved form of 18th century ``beggar thy 
neighbor'' mercantilism, China is emerging as a 21st century economic 
superpower. While consumers around the world have benefited from the 
flood of cheap goods, China's broad portfolio of unfair trade practices 
has resulted in the loss of millions of jobs in countries ranging from 
the United States and Mexico to Brazil and Lesotho. Chinese 
mercantilism is also depressing wage and income levels worldwide while 
China's exploitation of lax environmental and health and safety 
standards as competitive drivers is killing millions of Chinese workers 
and citizens and generating significant regional and global pollution.
    To understand both the breadth and depth of Chinese mercantilism 
and its far ranging effects, it is essential to first understand the 
mercantilist roots of the so-called ``China Price'' and the complex web 
of direct, indirect, and hidden export subsidies that have so sharply 
honed China's global competitive advantage. The China Price refers to 
the ability of Chinese manufacturers to undercut global competitors by 
as much as 50% or more over a wide range of manufactured goods. Today, 
as a result of this powerful ``weapon of mass production,'' China has 
emerged as the world's blue collar ``factory floor.''
    The rapidity with which China has captured a wide range of markets 
is breathtaking: Already, China controls over 70% of the world's market 
share for DVDs and toys, more than half of the share for bikes, 
cameras, shoes, and telephones; and more than a third for air 
conditioners, color TVs, computer monitors, luggage, and microwave 
ovens. It has established dominant market positions in everything from 
furniture, refrigerators and washing machines to jeans and underwear 
(yes, boxers and briefs). As it moves inexorably up the value chain, 
China is now even making rapid inroads into the global auto market.
    In wielding the China Price to capture these markets, China has all 
but gutted many segments of blue collar manufacturing in countries 
around the world. In this regard, it's one thing for America to lose 
much of its blue collar manufacturing base to China. If the U.S. loses 
its white collar science and technology base too, it will be Americans 
living the peasant life rather than the Chinese.
    Alarmingly, under the catalyst of Chinese mercantilism, the shift 
of America's white collar science base has already begun. For example, 
the American biotech and pharmaceutical industries are already well on 
their way to offshoring much of their research and development and 
production to China. Indeed, today, there are more than 300 biotech 
companies in China, and nearly every major pharmaceutical company has 
built, or is building, a research center in China.
An Expanded Definition of ``Export Subsidy''
    Given current trends, it is crucial that U.S. policy makers 
cultivate a much more sophisticated understanding of the phenomenon of 
the China Price--as well as its mercantilist foundation and roots. In 
cultivating this understanding, it is equally essential for U.S. 
policymakers to use a broad definition of what truly constitutes an 
unfair ``mercantilist export subsidy.'' The clear danger of using an 
overly narrow definition is that policymakers will compartmentalize 
various aspects of Chinese mercantilism, e.g., currency manipulation, 
IP protection, and then attempt to deal with these issues legislatively 
in a piecemeal fashion.
    In this regard, while there are various legal and technical 
definitions for what constitutes an illegal or prohibited export 
subsidy in forums like the GATT and the WTO, the most useful economic 
definition for policymaking purposes is an expansive definition of a 
mercantilist export subsidy that includes any direct or indirect 
government action or inaction that unfairly stimulates export activity 
at the expense of trading partners.
    For example, a direct government action would be the use of tax 
rebates for exporters while an indirect action would be currency 
manipulation, which is designed to undervalue a country's exchange rate 
and thereby gain competitive advantage. More subtly, a government 
inaction would be the sanctioning of counterfeiting and piracy despite 
laws established to prevent such practices. Each of these direct and 
indirect government actions and inactions may be thought of most 
broadly as ``mercantilist export subsidies'' because their intent is to 
encourage the country's export trade in ways which are clearly outside 
the bounds of free and fair trade.
    The table on the next page provides an overview of the eight major 
drivers of the China Price and the various direct, indirect, or hidden 
mercantilist export subsidies used by China to capture markets in world 
trade. This table is based on a research project I conducted with a 
large team of MBA students over a year long period at the University of 
California-Irvine (Download The Report of the China Price Project at 
www.peternavarro.com). The purpose of that project was to answer these 
two questions: What are the major sources of Chinese competitive 
advantage in world markets and to what extent is Chinese 
competitiveness driven by fair versus unfair trading practices.
    Column One of the table on the next page identifies the various 
``Pure Mercantilism'' and ``Mixed Mercantilism'' drivers of the China 
Price while Column Two indicates their relative importance in the China 
Price equation. The third column may be of most interest to this 
subcommittee. It identifies the array of mercantilist export subsidies 
associated with each China Price driver.
[GRAPHIC] [TIFF OMITTED] T0304A.010

    The first five China Price drivers represent a very pure form of 
Chinese mercantilism and account for over 40% of China's competitive 
advantage. These drivers include a pervasive system of subsidies and 
tax preferences designed to stimulate the export economy, currency 
manipulation which distorts the dollar-yuan exchange rate relative to 
market forces, government-sanctioned counterfeiting and piracy, and a 
set of lax, and laxly enforced, environmental and health and safety 
regulations that fall far short of international norms and standards.
    The sixth and seventh Chinese Price drivers are Foreign Direct 
Investment and Low Labor Costs. These drivers may be characterized as 
``Mixed Mercantilism'' because of various mercantilist elements which 
enhance what would otherwise be a fair comparative advantage. (The 
final driver, not pictured in the table, is a very sophisticated form 
of industrial network clustering. See Report of the China Price Project 
for details, www.peternavarro.com.)
    China Price Driver #1: Subsidies, Tax Preferences, and Other WTO 
Violations
    Under state control, many Chinese state-owned manufacturers are 
operating with the benefit of state-sponsored subsidies, including: 
rent, utilities, raw materials, transportation, and telecommunications 
services. That is not how we define a level playing field.
Former U.S. Department of Commerce Secretary Donald Evans
    The first China Price driver encompasses a wide, but often 
difficult to detect, array of mercantilist subsidies and tax 
preferences that provide Chinese exporters with reduced costs. This 
array includes subsidized energy and water as well as preferential 
access to free or cheap land or rent.
    Despite alleged reforms, China's state-owned banks also continue to 
hold a large portfolio of non-performing loans. These NPLs often have 
been issued in a preferential manner and without expectation of 
repayment, providing many Chinese enterprises with essentially free 
money. Despite numerous WTO-related complaints, China also continues to 
use an extensive tax rebate system for its export industries.
China Price Driver #2: Currency Manipulation
    To maintain its undervalued currency--and thereby sell it exports 
cheap and keep foreign imports dear--China maintains a fixed currency 
peg between the U.S. dollar and the yuan. To maintain that peg, China 
must recycle large sums of its surplus U.S. dollars gained in the 
export trade back into the U.S. bond market. Through such activity, 
China has become the de facto ``central banker'' of the U.S., with its 
net capital inflows roughly equal to that needed to finance the U.S. 
budget deficit.
    Chinese currency manipulation is an indirect export subsidy because 
it artificially depresses the price of Chinese exports while inflating 
the price of exports from the U.S. This is not the only effect of 
Chinese currency manipulation, however.
    More subtly, China's massive recycling of its surplus U.S. dollars 
back into the U.S. bond market has helped keep long term interest rates 
and mortgage rates artificially low. This, in turn, has helped 
transform the typical U.S. home into an ``ATM machine.'' Indeed, many 
Americans have become ``serial refinancers'' of their homes. By taking 
equity out of their homes, they have managed to boost their consumption 
in the short run, and much of what these serial refinancers spend is on 
cheap Chinese imports. The practical effect has been a short run boost 
to the economy. Longer term, this is a dangerous situation because it 
is saddling U.S. consumers with more and more debt and U.S. homeowners 
with more and more risk of defaulting on their mortgages.
China Price Driver #3: Counterfeiting and Piracy
    China is the piracy capital of the world. It accounts for \2/3\ of 
all the world's pirated and counterfeited goods and fully 80% of all 
counterfeit goods seized at U.S. borders.
    Chinese counterfeiting and piracy help lower production costs for 
Chinese manufacturers relative to competitors in a number of ways that 
vary in degree by industry. For example, Chinese counterfeiters don't 
have to pay for R&D costs. This has been a particular stimulant to 
sectors like autos and pharmaceuticals. Nor do Chinese pirates who 
steal software have to pay for IT costs while Chinese counterfeiters 
save on marketing costs because they don't have to build brand.
    Chinese counterfeiting and piracy is a classic example of how 
government inaction leads to a mercantilist export subsidy. Despite 
highly publicized periodic crackdowns on counterfeiting and piracy by 
the Chinese government, much of it remains state-sanctioned. Indeed, 
stripped of Chinese rhetoric, counterfeiting and piracy represent a 
cornerstone of the country's discretionary macroeconomic policies.
    In this regard, it has been estimated that anywhere from 20% to as 
much as a third of China's GDP is derived from counterfeit and pirate 
activity. This intellectual property theft generates tens of millions 
of jobs while keeping prices and inflation low. That's why, absent 
outside pressure from the U.S. and other members of the global 
community, China will continue to merely give lip service to IP 
protection.
China Price Driver #4: Lax Health and Safety Standards
    Lax health and safety standards represent an important hidden 
mercantilist export subsidy. Under China's lax regulatory regime, China 
has become one of the most dangerous places to work in the world.
    The highest risk industries in China include building materials, 
chemicals, coal production, machinery manufacture, metallurgy, 
plastics, and textiles. Diseases ranging from silicosis and brown lung 
to a variety of cancers caused by the ingestion, inhalation, or contact 
with toxic chemicals and waste are endemic. Workplace injuries are 
endemic.
    The cost advantages to Chinese exporters derived from this lax 
health and safety regime range from the use of cheaper equipment for 
workers and fewer safety-related expenses to savings on training and 
safety-related large capital expenditures. For example, Chinese textile 
companies are unlikely to invest in anti-noise or dust control 
equipment. Chinese coal mining companies tend to skimp on masks, 
goggles, and emergency rescue facilities while a wet drilling system 
costs as much as 60% more than a dry drilling system but significantly 
reduces hazardous dust emissions.
    In addition, the compensation of Chinese workers who are maimed or 
dismembered in the production process is often reduced or withheld by 
companies in China. This callous behavior results in a reduction in 
liability costs for Chinese exporters relative to global competitors.
China Price Driver #5: Lax Environmental Standards and Enforcement
    China's lax environmental regulations and weak enforcement likewise 
provide Chinese exporters with a hidden mercantilist export subsidy. 
There is, however, some irony in using the term ``hidden'' here. 
China's air and water pollution are highly visible within China--with 
Beijing, Shanghai, and China's industrial heartland often enveloped in 
a toxic shroud. Meanwhile, America's air basins are also being 
despoiled by Chinese ``chog,'' an equally toxic combination of smog, 
particulate and hazardous substances like mercury, while much of the 
acid rain falling in both Japan and South Korea is ``made in China.''
    China lax environmental regime provides a variety of cost 
advantages to its industrial sector. Enterprises save money on 
protective equipment for workers. Many don't have to invest in 
pollution control technologies while those that do invest save money by 
not operating the equipment. Waste disposal costs are also considerably 
reduced. The net result is a significant reduction in compliance costs 
relative to competitors.
China Price Driver #6: Foreign Direct Investment
    Among developing nations, China has become the leading destination 
of Foreign Direct Investment (FDI). Since 1983, FDI has grown from less 
than $1 billion a year to over $60 billion. 72% of China's FDI targets 
manufacturing.
    This China Price driver fits into the category of ``Mixed 
Mercantilism.'' This is because that while much of FDI is attracted to 
China because of China's comparative advantage in labor and the promise 
of a burgeoning new market, FDI is also arriving on China's shores 
because of various mercantilist aspects of the Chinese economy.
    For example, both the aforementioned lax health and safety 
standards and weak environmental laws and enforcement have helped 
attract FDI from countries like Japan, South Korea, Taiwan, and the 
U.S. where standards are much higher. This observation illustrates an 
undesirable synergy between China's mercantilist policies and the 
attraction of FDI.
    Equally troubling is the pervasive practice of the ``round 
tripping'' of Chinese capital. In particular, 20% to 30% of China's FDI 
is estimated to be of domestic origin. It is the result of the ``round 
tripping'' of mainland Chinese capital, primarily through Hong Kong 
(and also the Virgin Islands). This round tripping of capital is 
clearly mercantilist in nature and quite contrary to the spirit and 
tenets of the WTO. This is because it is driven by the special 
preferences awarded to FDI in the form of lower tax rates, land use 
rights and subsidies, administrative support, and other subsidies as 
well as by a desire to evade foreign exchange controls.
    China's catalytic FDI provides a variety of competitive benefits. 
It finances the transfer of the most technologically advanced 
production and process technologies. It has brought with it managerial 
best practices and skills as many FDI-financed enterprises are managed 
by foreign talent. FDI is also often tied to the improvement of both 
marketing and distribution skills. When all of these attributes are 
tied to one of the least expensive labor forces in the world, FDI 
becomes a powerful competitive driver. To the extent that a significant 
component of FDI is driven by mercantilist elements, it represents a 
hidden mercantilist export subsidy.
China Price Driver #7: Low Labor Costs
    The China Price driver of low labor costs likewise fits into the 
category of ``Mixed Mercantilism.'' While China has an undeniable 
comparative advantage in its well-disciplined and well-educated 
workforce, China's low wage costs are also driven by significant 
mercantilist elements.
    The aforementioned lax health and safety standards represent one 
such element. In addition, there are the well-known problems of the use 
of slave labor, the specification of labor contracts in a manner which 
constitutes indentured servitude, the failure to pay the minimum wages 
specified under law, and the lack of any right to freely associate or 
organize into bargaining units or unions. Together, Chinese 
mercantilism in the workplace provides Chinese exporters with an 
additional unfair advantage over competitors.
Summary and Conclusions
    The picture that emerges from this analysis of the China Price and 
its economic drivers is that of a picture of a country singularly 
intent on export-driven growth that uses a complex web of direct, 
indirect, and hidden mercantilist export subsidies to beggar its 
neighbors. The policy framework strongly suggested by this China Price-
Mercantilist Export Subsidy analysis is one that requires a 
comprehensive, rather than piecemeal, policy approach.
    In particular, rather than deal with each of the various aspects of 
Chinese mercantilism such as IP protection or currency manipulation or 
labor abuses with separate pieces of legislation, it may be far more 
useful to develop an comprehensive, omnibus bill that hits all points 
of the mercantilist China Price compass. It is to this goal that I urge 
this subcommittee to direct all possible energies.

                                 

    Chairman LEVIN. Thank you very much.
    Well, there are eight of us, and there may be one or more 
joining us. We are going to try to finish by 12:30. Why don't 
we each take 3 minutes. I just want to take one minute, and 
then maybe Mr. Herger, but then we will call on those who were 
not here or able to question the first panel, and then we will 
come back.
    You were chosen on a bipartisan basis. I think Mr. Bassett 
said it so well: The job of you in the private sector, your job 
is to compete, and our job in the Government is to create a 
level playing field; if not a level playing field, totally 
level, a playable playing field. I believe that the subsidy 
area is one of the most vivid examples of the failure of the 
Government and this Administration to do so.
    China went into the WTO December 2001. It has been more 
than 5 years. There were some distinct responsibilities on 
their part, including to file a subsidy document within the 
first year. There was a failure to do that and failure to press 
them to do that in any respect in the WTO, including the annual 
report that we wrote into the China PNTR bill specifically.
    So here we are today with massive subsidization on their 
part in violation of their two obligations, and a failure to be 
active. It has been an example of a passive approach, feeling 
that it will work out, that the market will work out its own 
problems, don't touch it. I think what you have said is that it 
is our responsibility to enforce the rules so that the market 
can work fairly. That hasn't happened.
    Mr. Herger.
    Mr. HERGER. Thank you very much, Mr. Chairman. I think the 
point that Chairman Levin made really is right on. We need to 
be enforcing these rules. I think the big question is, we see 
China coming from an economy that was maybe early 20th century, 
trying to move into the 21st Century here within a few years.
    So, I think the real question is: How do we get there? How 
do we get where we do have this access, where we are enforcing 
the rules? I think that is really what is very important, that 
in the process, we don't cut off our nose to spite our face, 
but we make sure we are getting real progress that we are able 
to--be able to note and be able to chart.
    Mr. Vargo, I have a two-part question. You mentioned that 
U.S. productivity and innovation can outweigh China's labor 
advantage. I would like you to elaborate, and also focus on 
China's labor laws. China has been accused of not providing 
worker rights, e.g. child labor or mandatory prison labor, 
which is something we can unanimously condemn.
    Is that the source of China's advantage? If China adopted 
and enforced every ILO standard and convention, would it 
immediately lose its cost and labor advantage?
    Mr. VARGO. Mr. Herger, I don't have the answer to that. 
Certainly, their labor laws are very, very different from ours. 
You read so many instances of terrible working conditions. The 
overall wage level is quite low in China.
    My point is that that is not the reason why they can sell 
products in the United States as inexpensively as they are 
being sold. Even if Chinese labor were free, if the average 
cost of labor is 10 percent of our product and the cost of 
transportation from China is 10 percent, that wipes it out.
    There are other things going on here, which is why we are 
concerned about currency and why we are particularly concerned 
about subsidies. We do not know what will happen with the 
elimination of these subsidies. We know they have to get rid of 
them. They are against our interest. They are against China's 
obligations.
    I think when they get rid of them, we are going to see 
quite a difference. As I look at these, they can be very, very 
potent. There are other things I said--intellectual property, 
currency, and others.
    Mr. HERGER. Yes. Anyone else have a comment, like to 
comment on this?
    Mr. NAVARRO. Well, I would just refer you to that table. 
Labor costs are about 40 percent of the China price advantage. 
If you were to tighten up everything and kind of have American 
rules over there, it would not solve the problem. There are 
always other things going on, and subsidies and currency 
manipulation are easily as or more important than the issue of 
labor.
    Mr. HERGER. Thank you very much.
    Chairman LEVIN. All right. Let's follow our procedure that 
we outlined. Mr. Reynolds, you will be next, if that is okay. 
He didn't have a chance the first crack around.
    Mr. Reynolds.
    Mr. REYNOLDS. Some firms are impatient with the U.S. trade 
remedies law in context with China because it is expensive to 
bring many of these cases, and China seems to be such a 
pervasive subsidizer of the economy. Naturally, the firms would 
prefer the government to bear the expense of bringing WTO cases 
to stop subsidization.
    What is the difficulty in providing USTR with evidence 
sufficient to bring WTO cases against a broad swath of 
subsidies, and not just the ones that are part of the recent 
China subsidy case? Any of the panel wish to comment on that?
    Mr. NAVARRO. Let me say two things about that. First of all 
is that the WTO rules really overly narrowly define just what a 
subsidy is. So, the kinds of things that are done, it is 
difficult to pin it down. It is like trying to nail water to a 
wall.
    The other thing is the issue of Chinese transparency. The 
fact that they haven't complied since 2001 with the 
transparency and report portion of that agreement has made it 
very, very difficult for us to respond. So, those two problems 
alone make it very difficult.
    Mr. VARGO. Could I add to that? What you say is certainly 
true. These trade cases are expensive. They are lengthy. For 
our members, particularly our smaller members, it is much more 
feasible to have WTO cases brought.
    It is very difficult for our members--again, especially our 
smaller members--to go do investigations and see what is going 
on. So, we, as I noted in my prepared statement, want to see 
USTR and Commerce investigate these more fully and take a 
broader range of cases.
    We are very pleased that this first case is being brought 
focusing on prohibited export subsidies, which are, I think, 
the easiest to prove, but we want more. We also want--even 
though the cases are expensive, we want companies to have the 
option of being able to bring the countervailing duty cases. We 
also want the Administration to use section 421.
    Chairman LEVIN. I think Mr. Bassett wanted to say 
something.
    Mr. REYNOLDS. I am sorry, I didn't hear the Chairman.
    Chairman LEVIN. What?
    Mr. REYNOLDS. I didn't hear you.
    Chairman LEVIN. I think Mr. Bassett wanted to comment on 
that. You shook your head. Mr. Bassett, did you want to comment 
on that issue?
    Mr. BASSETT. I only have one comment. I thoroughly enjoyed 
listening to the professor give us the percentages of what each 
of these advantages are. I have never had them before, but I am 
going to contact him and get this in writing.
    I would implore you people to do one thing. He wants you to 
do everything. If you can't do everything, do something.
    Chairman LEVIN. Amen.
    Mr. BASSETT. Exchange part of this puzzle is out there. I 
think so often, if we can't put the puzzle together, nothing 
happens.
    Chairman LEVIN. I thought you would have words of wisdom. 
No, seriously. I think you sum it up beautifully, if I might 
say so.
    Mr. Blumenauer, Mr. Larson isn't back. Mr. Blumenauer?
    Mr. BLUMENAUER. Thank you, Mr. Chairman. Again, I think 
this panel was extraordinarily helpful in terms of getting at 
the big picture from a variety of different perspectives. I 
agree with Mr. Bassett. I thought Dr. Navarro's distinctions of 
the various areas of advantage suggest why we do need to have a 
comprehensive approach. I hope that we don't just do something, 
but that we are able to look at it in a comprehensive fashion.
    Mr. Bassett, in response to what you are saying, I think we 
have an obligation to tell you in the business community, the 
American companies and their workers, and the Chinese, that we 
are serious about playing by these rules.
    I found compelling the testimony about the non-market 
exclusion no longer making any sense, if it ever did, and I am 
hoping we can deal with something in terms of a broader 
application of the countervailing duties.
    I have, I guess, one question. I am listening in terms of 
what happens with steel and with paper products, wondering if 
any of these find their way into business activities in the 
United States that in whole or in part involve investment of 
taxpayer dollars.
    Chairman LEVIN. Mr. Goodish, do you want to say a word 
about that?
    Mr. GOODISH. I guess I am not following the question 
exactly.
    Mr. BLUMENAUER. I am wondering if these products that you 
are talking about that have been lavishly subsidized, that have 
not been in full compliance of labor standards and the 
environment, even for the Chinese themselves, if these products 
ever find their way into government contracts where they are 
used for construction, for manufacture, that is in total or in 
part the result of taxpayer investment.
    Mr. GOODISH. I think it would be very difficult for us as 
the manufacturers to be able to assure you that they do not. 
When you go to stamping plants and you see coils laying ahead 
of the line that get stamped into automotive parts or truck 
parts, I am not sure anyone could guarantee you that none of 
that steel finds its way into a vehicle that the U.S. 
Government or the American taxpayers don't buy at some point in 
time.
    There is just such a massive import of goods coming into 
this country from China that are subsidized that I don't think 
anyone could guarantee you that.
    Mr. TYRONE. As it relates to paper products, I would 
actually be very surprised if they did not. The reason that 
would be the case is the countries that we filed the anti-
dumping and countervailing duty cases on represent 14 percent 
of imports. So, it is a very large proportion, and I would be 
very surprised if they weren't.
    Mr. BLUMENAUER. I realize my time is expired, Mr. Chairman, 
but I would like to explore--I am not interested in a lot of 
bureaucracy; I am not interested in doing something that is 
goofy, but it just seems to me that there may be some things 
that we can do to make it difficult for taxpayer dollars to be 
used for furniture purchases or paper purchases or metals or 
whatever that are a result of inappropriate activities from a 
country around the world.
    Chairman LEVIN. It is an interesting point. Interesting.
    Mr. BLUMENAUER. Thank you.
    Chairman LEVIN. We will try to follow up.
    Mr. Weller.
    Mr. WELLER. Thank you, Mr. Chairman. This is a helpful 
panel, and as we go through this process looking at what we 
consider illegal subsidies, discussion of the definition of 
what is a subsidy is helpful.
    Mr. Vargo, he gave an example of an imported pair of 
pliers, with raw materials costing more than the selling price 
of the finished product. He used that as an example of a clear 
and obvious subsidy by the Chinese.
    Before the Trade Representative's office acted on such 
cases, the WTO would likely ask about the evidence of subsidies 
for case development. I ask Mr. Vargo, and if there are others 
who would like to comment on this, would you go into further 
detail?
    Why isn't the uneconomically low price of a product 
sufficient evidence? What more do you need to have to challenge 
subsidies of Chinese makers of pliers and similar products?
    Mr. VARGO. Well, to begin with, many of our companies don't 
have the resources to have investigators go over and see just 
why the prices are so low. They have evidence sometimes of 
invoices offering the products, but that in itself is 
insufficient information to bring a WTO case. the Commerce 
Department has not applied the countervailing duty statutes to 
non-market economies, so that route has not been open to them.
    We hope that that door will open. I think at that point we 
may see additional companies step forward with the information 
they have and bring cases.
    Mr. WELLER. Others want to comment on that question?
    Mr. GOODISH. I think it is correct. It is extremely 
difficult for us to be able to gather the facts on exactly what 
the manufacturing cost is. You can go to endless research firms 
that we use, such as World Steel Dynamics or J.P. Morgan, and 
see from the production costs from a ton of steel, it costs as 
much if not more to produce that ton of steel in China as what 
it cost us to produce it in the United States. Yet we are now 
seeing oil country tubular goods, as an example, coming to the 
country for as much as $600 a ton under what our selling price 
is, which actually takes it under what our manufacturing cost 
is.
    It is hard for us to believe that. We know what the world 
market for iron ore is. We know what the world prices for coal 
and coke are. While they have cheap labor, where we might use a 
manhour and a half or two manhours in a ton of steel, they are 
using 10 or 15. So, they really don't have the economic 
advantage on labor because of the volume of labor that they 
have in their facilities.
    We also know with the limitation that they have on power 
generation that they are also paying probably 8 to as much as 
11 cents for power, which our power costs are raising but they 
are not in that marketplace. They are in the 5 to 6 cents.
    So, we know that it costs them as much to produce steel as 
it costs us to produce steel. Yet we see their products coming 
into the marketplace well under what our current market prices 
are.
    Mr. WELLER. Anyone else?
    Mr. TYRONE. If I may, it was certainly our observation of 
the prices being offered by Chinese producers relative to our 
costs that led us to believe that there was some chance that 
they were pricing below their costs.
    Upon further investigation, we did in fact conclude that 
based on our analysis, there was very good evidence of that, 
such that we were able to convince both the International Trade 
Commission and the Department of Commerce to take on both the 
anti-dumping cases and the countervailing duty cases.
    Commerce has done that preliminarily. They are doing the 
investigation, and they have said that they are using this case 
to reexamine their practice of not evaluating countervailing 
duty on non-market economies.
    Mr. WELLER. Thank you, Mr. Chairman.
    Chairman LEVIN. Mr. Pascrell.
    Mr. PASCRELL. Thank you, Mr. Chairman.
    In your testimony, Mr. Vargo, on page 8 of that testimony 
you talk about America's trade deficit. Two paragraphs in the 
middle of that page discuss the relationship between imports 
and exports and how exports have been reduced. So, it is not 
simply imports that are affecting this deficit. It is the fact 
that exports have been reduced significantly. I think this was 
your point. Let me go back and ask you a question about that.
    I am reading the testimony here of Mr. Bassett. Your Chair 
could have been many industries in the past 20 years who have 
gone through this particular experience, the fact that just in 
a short period of time, 3 years, 65 furniture manufacturers had 
to shut down, 18,000 jobs lost.
    Now, that doesn't seem like a lot of jobs, but when you 
begin to look at one industry after the other, when you 
particularly look at the manufacturing sector, Mr. Vargo in his 
testimony admitted to the fact that during that period of 
time--maybe one more year--we lost 3 million manufacturing jobs 
in the United States of America.
    This is a very serious problem, a very significant problem. 
Whether we are talking about looking at protecting a property 
or whether we are looking at subsidies, we need to all address 
this and be all on the same page. So, I can appreciate what you 
are going through.
    What happened, Mr. Bassett, to the infrastructure in each 
of those 65 factories? I am very concerned about the 
manufacturing infrastructure and apparatus. I am looking at the 
apparatus. When we lose that apparatus, when we lose the 
manufacturing mechanisms, when we need to go back and 
understand the significance of manufacturing in this country, 
we will not have the wherewithal or the material or the 
mechanisms or the apparatus to deal with it.
    Would you please quickly respond to that? Or am I making 
much out of nothing?
    Mr. BASSETT. You are right on. Well, not only are the jobs 
we are losing--one of the problems I am having right now is so 
many of my suppliers have disappeared. They are smaller, so you 
don't hear about them, but trying to find people to buy from 
because they have nobody to sell to is one of the main problems 
we are going to encounter. I hope I don't go out of business 
because I no longer-I have customers but I don't have 
suppliers.
    I am going to vary just a little bit and I want to tell you 
gentlemen that one of the things I think that you ought to be 
very cautious about, I read in the Washington Post yesterday 
about a hearing that you had yesterday. It included, I think, 
flowers for Valentine's.
    Chairman LEVIN. Chocolate.
    Mr. BASSETT. The proposition is that you can buy flowers 
for Valentine's less expensively today than you ever bought 
them.
    Mr. PASCRELL. That is correct.
    Mr. BASSETT. Which probably is true. I can't argue with 
those facts. If the only premise for trade, gentlemen, is is 
the price cheaper, then we are right on the right track.
    Mr. PASCRELL. Well, doesn't it get you nervous, though, 
when the representative of trade says that to this Committee in 
response to a particular question? If that is the standard, if 
that is the overall standard that we need to use and the 
priority standard, we are in bigger trouble than we thought we 
were.
    Mr. BASSETT. I agree with you. Let me tell you the example 
I use when people ask for it.
    Mr. PASCRELL. Sure.
    Mr. BASSETT. I come from a very small Southern town in 
Southern Virginia. Years ago, when I was a young man, there 
used to be a lot of bootlegging going on. Now, I want to tell 
you, it was good liquor. It really was. It was good liquor. It 
was cheap liquor.
    Mr. PASCRELL. I will take your word for it.
    Mr. BASSETT. But it was against the law to make it, to own 
it, or to drink it. It was illegal. The ox that was getting 
gored was the Federal and State governments. They did something 
about it because they were losing their business.
    The premise here is if price is the only thing that we look 
at and we don't care how we get there, then we ought to go back 
and let the bootleggers start up again.
    Mr. PASCRELL. Mr. Chairman, can I ask one more quick 
question?
    Chairman LEVIN. Yes. I don't think we wanted to finish on 
that point.
    [Laughter.]
    Chairman LEVIN. Though I think it is a very good one.
    Mr. PASCRELL. Very illustrative.
    Mr. NAVARRO. Can I just make one quick point on this?
    Mr. PASCRELL. Yes, sir.
    Mr. NAVARRO. There is a lot of focus in blue collar 
manufacturing and how all those jobs have gone. I come here 
today to tell you that the same thing is happening now in white 
collar science-oriented jobs.
    Mr. PASCRELL. Absolutely.
    Mr. NAVARRO. If we lose those jobs as well, it is going to 
be us living the peasant life.
    Mr. PASCRELL. I agree with you.
    Chairman LEVIN. Mr. Pascrell, one other thing. Don't lose 
the power of Mr. Bassett's last point, though.
    Mr. PASCRELL. I will not lose that. Thank you for bringing 
that up.
    Mr. Vargo, back to the question. What is your organization 
doing to protect the interests of small and medium-sized 
manufacturers in the threat that they face from China for 
various reasons? What is your organization doing specifically 
for the medium-sized, small-sized manufacturers?
    Mr. VARGO. Several things. First of all, we are pressing 
hard to ensure that the rules are followed, particularly in 
this case in subsidies. We are pressing for some specific 
changes in Chinese law to get better protection for 
intellectual property. Believe me, that hurts small companies 
as well as large companies.
    So many of our small companies are exporters, we are also 
pressing to get foreign trade barriers down. As you know, this 
is a very open market, and we want other markets to be as open 
to us in tariffs and in non-tariff barriers as we are to them. 
So, that is a range of things we are doing.
    All of the problems that our small companies face are not 
trade-related. When you go out and talk with our companies, in 
fact, the number one problem most of them say is, I can't find 
the skilled workforce I need. My workforce is retiring. I can't 
find the new ones.
    So, we have a range of problems, and we are working on that 
one, too. So, thank you for that.
    Mr. PASCRELL. Thank you.
    Chairman LEVIN. I wasn't going to mention this. We have a 
minute left before we are supposed to recess.
    Mr. Vargo, the Korea FTA is being negotiated. They have a 
complete wall against industrial products, essentially, an 
economic iron curtain. I am not sure the NAM has weighed in. We 
have said to USTR, it is essential in those negotiations that 
there be a tearing down of those walls over time. For example, 
in automotive, we can't support reduction in tariffs unless 
there is assured increase in access to the market, measurably.
    I hope you would think about joining in to impress upon 
USTR that, secondly, we had an interesting panel on currency a 
couple days ago. It was informal, Republicans, Democrats, 
sitting around with four experts. If I might ask, take another 
look in terms of China.
    Mr. VARGO. Mr. Levin, could I just quickly respond? We have 
been pressing hard for a free trade agreement with Korea, not 
because of tariffs but because of the non-tariff barriers. This 
will be the first trade agreement the importance of which is in 
getting non-tariff barriers down. That doesn't happen, then the 
agreement just does not provide what we want.
    Chairman LEVIN. It has to be measurable. We have to find a 
way to tie their benefit from reduced tariffs to our access in 
a measurable way. That is the outstanding issue on that part of 
it. There are other issues in Korea. Some of us have said 
firmly to USTR, find a way to do that or we won't support the 
Korea FTA.
    All right. We are going to stand in recess until 1:00. You 
have been an outstanding panel. Thank you very much.
    [Whereupon, at 12:29 p.m., the Subcommittee recessed, to 
reconvene at 1:00 p.m., the same day.]
    Chairman LEVIN. Well, maybe we'll begin. We had this break 
for lunch. It's always dangerous, but we welcome you as the 
Deputy USTR, Mr. Bhatia, and we did want to try to this time 
reverse what has been the traditional order and have panels 
come first so that USTR would have the panoply, the full range 
of, at least a substantial range of points of view that you 
could take into account.
    Again, Mr. Herger and I welcome you. You have some written 
testimony, and I'll, since it was provided in advance, I'll 
assume that all of the members have had a chance to read it.
    Not to limit your use of it, but to indicate that we'll put 
it into the record. Why don't you just set forth in any way 
that is most you think useful, informative and you can take not 
hours, but don't worry about the green light, and just give us 
the view of USTR, taking into account what you heard or were 
told about in the morning, which I think was very productive. I 
think Mr. Herger would agree.
    Now I had some opening remarks. I won't repeat them, and I 
think, Mr. Herger, is it all right? Should we just go into----
    Mr. HERGER. Why don't we go into it?
    Chairman LEVIN. Okay. So, we welcome formally, more 
officially, the USTR, Trade Representative Karan Bhatia. 
Welcome.

THE HONORABLE KARAN K. BHATIA, DEPUTY U.S. TRADE REPRESENTATIVE, OFFICE 
        OF THE U.S. TRADE REPRESENTATIVE

    Mr. BHATIA. Thank you very much, Chairman Levin, Ranking 
Member Herger. Let me start by noting that I'm really delighted 
to be able to be here today to participate in what I understand 
is the first of a series of hearings that you're going to be 
conducting on U.S.-China trade relations. I am the Deputy U.S. 
Trade Representative with principal responsibility for Asia and 
Africa at USTR. I can tell you that there are few subjects that 
I spend more time on or that are more complex, more challenging 
or more important, frankly, than our relationship with China. I 
truly am very pleased that the Subcommittee is devoting time to 
this subject today.
    I appreciate you taking cognizance of my written testimony, 
and I won't repeat it, certainly not in its entirety. I thought 
it might be helpful, though, given that this is the first of a 
series of hearings, to put in context the specific focus that I 
know is the focus of today's hearing, namely, subsidies and 
IPR, perhaps into a little broader context. So if I can, 
perhaps let me spend a few minutes providing a brief overview 
of the U.S.-China trade relationship generally, and 
developments in that relationship in the last 12 months.
    Any summary of our interaction with China, of our trade 
policy with China over the last 12 months I think has to start 
with our top-to-bottom review of U.S.-China trade relations, 
which we issued actually a year ago yesterday, so this is a 
very timely hearing.
    That review, which was a comprehensive, interagency 
overview of U.S.-China trade relations, observed that the 
policy of economic engagement that we have pursued with China 
over the past 25 years, I would note it has been a policy 
pursued largely on a bipartisan basis, across Administrations, 
has benefited both countries, both United States and China.
    The review noted that after a period in which U.S. trade 
policy was largely focused on bringing China into the 
international trading system, that relationship is now entering 
a new phase, one in which China will be held fully accountable 
for its WTO obligations as a mature trading partner, and will 
be expected to play a greater role in strengthening the global 
trading system commensurate with its economic heft and the 
economic benefit it receives.
    The review suggested that as we enter this new period, it 
is appropriate to revisit U.S. trade policy and in fact to 
readjust U.S. trade policy and priorities with respect to 
China, and to do so in favor of enhanced use of enforcement 
tools and more focused, coordinated and senior level dialog.
    Now the top-to-bottom review set forward a number of key 
objectives. I will tick off a few. First, strengthening the 
focus on China's WTO compliance and adherence to international 
norms. Secondly, ensuring that the bilateral trade relationship 
offers more balanced opportunities and is equitable and 
durable. Third, a focus on making U.S. trade policymaking with 
respect to China more proactive and informed by more 
comprehensive information and more coordination. Fourth, 
encouraging China to participate more fully in the global 
trading system, and fifth, ensuring that the United States 
remains an active and influential player and trading partner in 
the Asia Pacific region generally. The review set forward a 
pretty detailed list of steps to achieve those objectives.
    Looking back over the past year, I am pleased to report 
that after we've had the opportunity to consult with Congress, 
we moved forward full steam to implement the recommendations 
laid out in the top-to-bottom review, and my written testimony 
details those steps. Let me just touch on a couple orally here.
    First, we demonstrated I think very clearly our willingness 
to use WTO dispute settlement to hold China to its commitments 
where necessary. We filed WTO cases on China's treatment of 
imported parts. We filed another case recently on its use of 
prohibited subsidies, and we were on the verge of filing a 
third case last year challenging China's anti-dumping order 
against U.S. exports of Kraft Linerboard when China rescinded 
that order just hours before our filing.
    In April, we held a meeting of our Joint Commission on 
Commerce and Trade, our principal trade dialog with China, at 
which we obtained Chinese commitments to address a number of 
concerns about access to China's market, transparency and 
enforcement of IPR.
    We have launched a new and unprecedented provincial level 
review of China's IPR enforcement efforts and look forward to 
publishing the results later this spring.
    We have held 61 meetings or briefings with Congress over 
the past year on the subject of our China trade relationship, 
and consult regularly on such topics as our WTO litigation 
strategy, the Joint Commission on Commerce and Trade (JCCT) 
dialog and the newly launched strategic economic dialog, 
thereby I think strengthening the coordination among different 
branches of Government that is important in dealing with China.
    We have established new channels of communication with our 
third country trading partners to coordinate trade policy with 
respect to China. At USTR itself over the past year, we have 
substantially bulked up our China-focused resources with the 
creation of the position of the Chief Counsel for China Trade 
Enforcement, the creation of a China Enforcement Task Force, 
the addition of new staff in our China office, and the hiring 
of a new USTR attache in Beijing.
    These and many other actions I think that we have taken to 
implement the top-to-bottom strategy over the past year 
demonstrate to U.S. stakeholders, to China and to our other 
trading partners that we do have a carefully crafted strategy 
for how to engage China on trade matters, and that we have been 
following it.
    Now, Chairman Levin, Ranking Member Herger, I would be the 
first to say that both the top-to-bottom review and the actions 
taken to implement it are a means to an end. They are not an 
end in itself. The end is a trade relationship with China that 
is more balanced and the opportunities it offers more equitable 
and more durable. Such a relationship is not going to be 
achieved within the span of 12 months, but I am pleased to say 
that there are some encouraging signs, and let me point to 
three if I may.
    First, based on the results just reported by the Commerce 
Department, U.S. exports to China last year climbed by 32 
percent. This suggests that the Chinese market is become more 
accessible to U.S. companies and that Chinese consumers are 
developing an appetite for America's highly competitive goods 
and services.
    China today has become our fourth largest export market and 
the fastest growing major export market for the United States 
in the world. China is helping to support thousands of American 
jobs today and will support even more in the future.
    Secondly, in its 2006 annual survey of members, the U.S.-
China Business Council reported that 81 percent of its members 
surveyed report that their Chinese operations are profitable, 
and 97 percent of respondents say they are optimistic about 
prospects for their China business over the next 5 years.
    Third, I would point to the fact that there have been a 
number of important specific transactions opening the Chinese 
market to U.S. companies in the past year, including the 
acquisition of a stake in Guangdong Development Bank by 
Citibank, the selection of Westinghouse for a five to eight 
billion dollar nuclear power contract, and the signing of over 
100 purchase agreements and contracts worth over $16 billion 
last year in advance of President Hu Jintao's visit to the 
United States
    Now importantly, in citing these developments, I do not 
mean to suggest that all is well in the U.S.-China economic 
relationship. Significant challenges do remain. In particular, 
as we detailed in a 2006 report to Congress on China's WTO 
compliance that we issued last December, we are concerned by 
signs that China could seek to slow down or pull back from the 
market-oriented and WTO-consistent changes that they have been 
making in their economy and instead pursue more State 
interventionist or mercantilistic policies.
    A retreat from continued reform I believe would slow 
China's own economic development, dampen U.S. export growth, 
preclude the leveling of imbalances and breed frustrations. So, 
working to ensure that China does not slow down or retreat from 
reform is a key objective.
    Mr. Chairman, if I may just in conclusion have a brief note 
on the two subjects that I know have been occupying your 
thoughts and attention this morning, subsidies and IPR.
    Chairman LEVIN. Take your time. Take your time.
    Mr. BHATIA. Thank you. On subsidies and IPR, these are two 
clearly critical topics. They are two topics that perhaps pose 
some of the greatest challenges to U.S. trade policy and to our 
engagement with China.
    I would point out I think that both are being addressed 
consistent with--that we are seeking to address both consistent 
with the template we laid out in the top-to-bottom review. On 
subsidies, and on IPR, we have pursued both enforcement and 
dialog. Both are serious concerns for the United States. Both 
are serious concerns for our other trading partners, and both 
should be serious concerns for China.
    On both IPR and the use of government subsidies that 
distort trade and the global economy, China has at the most 
senior level said the right things, but that is not enough. We 
need to see changes in results on the ground, and we have made 
that clear to China.
    On subsidies, we have, as you know, filed a WTO case. On 
IPR, we have made very clear that we are prepared to do so. At 
the same time, we are pursuing focused and forceful dialog I 
think in both areas to try to make progress consistent with our 
goals outside of litigation, and we will continue to do both.
    I have more detailed remarks on both subject, Mr. Chairman, 
in the written testimony. I'm happy to elaborate on those areas 
further, but I think perhaps let me stop here and I'd be happy 
to respond to any questions that you or others would have.
    [The prepared statement of Mr. Bhatia follows:]
     Statement of The Honorable Karan K. Bhatia, Deputy U.S. Trade 
        Representative, Office of the U.S. Trade Representative
Introduction
    Chairman Levin, Ranking Member Herger and distinguished members of 
the Ways and Means Subcommittee on Trade, I am delighted to be able to 
participate in the first of what I understand is to be a series of 
hearings on U.S.-China trade relations. As the Deputy U.S. Trade 
Representative with principal responsibility for our Asian and African 
trade relationships, I can tell you that there are few subjects that I 
deal with that are more important or more complex than our relationship 
with China, and I'm very pleased that this subcommittee is devoting 
time to this subject.
    I understand that today's hearing is focused principally on two 
topics: (i) subsidies and (ii) the enforcement of intellectual property 
rights. I will touch on both subjects. But, especially because this is 
the first of a number of hearings that the Subcommittee intends to 
conduct, I thought it might be helpful to provide a brief overview of 
the U.S.-China trade relationship generally and developments in that 
relationship over the past 12 months.
Top-to-Bottom Review
    One year ago yesterday, USTR issued a comprehensive, interagency 
``Top-to-Bottom Review'' (``T2B'' or ``Review'') of U.S.-China trade 
relations. That Review observed the policy of economic engagement the 
U.S. has pursued with China for the past 25 years--on a largely 
bipartisan basis across administrations--has benefited both countries. 
The Review also noted that, after a period in which U.S. trade policy 
was largely focused on bringing China into the international trading 
system and urging China to implement its new WTO commitments during a 
transition period, the relationship is now entering an important new 
phase--one in which China will be held fully accountable for its WTO 
obligations as a mature trading partner and will be expected to play a 
greater role in strengthening the global trading system commensurate 
with its economic heft and the economic benefits it receives. The 
Review urged, as we enter this new period, the readjustment of U.S. 
trade resources and priorities with respect to China--in favor of 
enhanced use of enforcement tools and more focused, coordinated and 
senior-level dialogue.
    The T2B set forth a number of key objectives: (i) strengthening the 
focus on China's WTO compliance and adherence to international norms, 
(ii) ensuring that the bilateral trade relationship offers more 
balanced opportunities and is equitable and durable, (iii) making U.S. 
trade policymaking more proactive and informed by more comprehensive 
information and more coordination, (iv) encouraging China to 
participate more fully in the global trading system, and (v) ensuring 
that the United States remains an active and influential economic and 
trading power in the Asia Pacific region. The T2B also set forth a 
detailed list of steps to achieve those objectives.
Top-to-Bottom Review_Implementation
    Looking back over the past year, I am pleased to report that, after 
the opportunity to consult with Congress, we have moved full-steam 
ahead to implement the recommendations laid out in the T2B. Let me run 
through a few:

      We demonstrated our willingness to use WTO dispute 
settlement to hold China to its commitments. Under Ambassadors Portman 
and Schwab, we filed WTO cases on China's discriminatory treatment of 
imported auto parts and use of prohibited subsidies. And we were on the 
verge of filing a third case last year, challenging China's antidumping 
order against U.S. exports of Kraft Linerboard, when China rescinded 
that order just hours before our filing.
      In April 2006, we held a meeting of the Joint Commission 
on Commerce and Trade (JCCT). At that meeting, we obtained Chinese 
commitments to address a number of concerns about access to China's 
market, transparency, and enforcement of intellectual property rights. 
President Bush also had an opportunity to discuss important economic 
issues with President Hu Jintao during his visit to the United States.
      In September, President Bush launched a new high-level 
dialogue to address critical economic issues--the Strategic Economic 
Dialogue (SED). The first SED meeting was held in Beijing in December, 
and we have been pushing forward with a number of specific follow-up 
discussions in anticipation of the next SED meeting here in May. To 
further bolster the initiative, Secretary Paulson recently announced 
that Treasury has appointed Ambassador Alan Holmer as Special Envoy to 
China overseeing the SED process.
      We have launched a new and unprecedented provincial level 
review of China's IPR enforcement efforts, and look forward to 
publishing the results later this Spring.
      We have held dozens of sector--or issue-specific 
negotiations with the Chinese in areas ranging from beef to 
telecommunications, as we seek to ensure that China continues to open 
its markets and honor its commitments.
      We have held 61 meetings or briefings with Congress over 
the past year regarding our China trade relationship and have regularly 
consulted on such topics as our WTO litigation strategy, the JCCT 
dialogue, and the SED.
      We have created a senior-level China Task Force within 
our Advisory Committee on Trade Policy and Negotiations.
      We have established new channels of communication with 
our third country trading partners to coordinate trade policy with 
respect to China.
      And at USTR, over the past year, we have substantially 
strengthened our China-focused resources, with the creation of the 
position of Chief Counsel for China Trade Enforcement, the creation of 
a China Enforcement Task Force, the addition of new staff in our China 
Office, and the hiring of a new USTR attache in Beijing.

    These and the many other actions we have taken to implement the T2B 
strategy over the past year have been important, both individually and 
collectively. They demonstrate to U.S. stakeholders, to China, and to 
our other trading partners that we have a carefully crafted strategy 
for engaging China on trade matters, and that we have been following 
it.
    Of course, both the T2B and the actions taken to implement it are 
means to an end, not an end in itself. The end is a trade relationship 
with China that is more balanced in the opportunities it offers, more 
equitable and more durable. Such a relationship will not be achieved 
within the span of a mere 12 months. But I am pleased to say that there 
are some encouraging signs. Let me point to three:

      Based on the results just reported by the Commerce 
Department, U.S. exports to China last year climbed by 32 percent. (By 
contrast, I would note that China's exports to the U.S. increased by 18 
percent.) This suggests that the Chinese market is becoming more 
accessible for American companies, and that Chinese consumers are 
developing an appetite for America's highly competitive goods and 
services. China today has become our fourth largest export market, and 
the fastest growing major export market for the United States in the 
world. It is helping to support thousands of American jobs today and 
will support even more in the future.
      In its 2006 annual survey of members, the U.S.-China 
Business Council reported that 81 percent of members surveyed reported 
that their Chinese operations are profitable (with more than half 
saying that profitability rates for their China operations meet or 
exceed global profit margins) and 97 percent of respondents saying that 
they are optimistic about prospects for their China business over the 
next five years.
      There have been a number of important transactions that 
have helped to further open the Chinese market to U.S. companies--
including the acquisition of a stake in Guangdong Development Bank by 
Citibank, the selection of Westinghouse for a $5-8 billion nuclear 
power contract, and the signing of over 100 purchase agreements and 
contracts worth over $16 billion in advance of President Hu Jintao's 
visit to the United States last April.

    In citing these positive developments, I do not mean to suggest 
that all is well in the U.S.-China economic relationship. Significant 
challenges remain. In particular, as detailed in the 2006 Report to 
Congress on China's WTO compliance that USTR issued last December, we 
are concerned by signs that China could seek to slow down or pull back 
from the market-oriented and WTO-consistent changes they have been 
making in their economy and pursue more state interventionist or 
mercantilist policies. A retreat from continued reform would slow 
China's own economic development, dampen U.S export growth, preclude 
the leveling of imbalances, and breed frustrations. So, working to 
ensure that China does not slow down or retreat from reform is a key 
objective.
    Let me now turn to the two specific topics at issue here today--
subsidies and IPR--and briefly discuss the most recent developments in 
our dealings with the China on these two topics.
Subsidies
    In testimony last year before the Senate Finance Committee, I 
observed that the Chinese Government's role in directing the Chinese 
economy, including through the use of subsidies, was one of the 
principal concerns of USTR. The way we have approached this issue over 
the past twelve months is entirely consistent with the

strategy laid out in the T2B--we are confronting this serious challenge 
using both enforcement levers as well as dialogue.
    As you know, just two weeks ago we announced that the United States 
has requested consultations at the WTO over what we contend is China's 
persistent use of prohibited subsidies. Basically, the United States 
believes that China uses its tax laws and other tools to encourage 
exports and to discriminate against imports of a variety of 
manufactured goods. The subsidies at issue in this case are offered 
across a broad array of industry sectors in China--including steel, 
wood products, information technology, and others.
    It is an important case--important because it challenges policies 
that are tilting the playing field against our workers and companies, 
important because it makes clear that we will use WTO dispute 
settlement procedures to hold China to its commitments where dialogue 
does not resolve our concerns, and--perhaps most of all--important 
because it will help impel China to maintain a process of reform and to 
redirect its economy towards a model of consumption-led, rather than 
export-led, growth.
    While we have filed this WTO case, we continue to engage in 
dialogue with the Chinese on their use of subsidies. These discussions 
are happening both at the sector-specific level--for example, our 
recently created ``Steel Dialogue'' under the JCCT is enabling a 
conversation among governments and industries of both sides--as well as 
in connection with our broader economic dialogues, including the 
Strategic Economic Dialogue. Industrial policies that limit market 
access for non-Chinese origin goods and that provide substantial 
government resources to support Chinese industries also remain a 
concern.
    Finally, although it does not fall within USTR's statutory purview, 
I should note that the Department of Commerce continues to apply U.S. 
trade remedy laws to ensure that unfair trade practices, whether 
undertaken by the Chinese or others, do not distort the playing field 
against U.S. companies.
IPR Enforcement
    The Administration is similarly employing a dual-track approach in 
the area of intellectual property rights. The rampant infringement of 
intellectual property rights that persists in China, in spite of 
efforts by central government officials to move against illegal 
practices, not only robs U.S. businesses of billions of dollars a year 
in legitimate sales, it also weakens China's development of its own 
knowledge-based industries.
    Over the past year, we have been working to prepare a WTO case that 
challenges China's compliance with its WTO obligations in the area of 
intellectual property rights enforcement. Last October, we informed 
China that we would be filing such a case, but then agreed to hold off, 
with the support of U.S. industry, when China asked for further 
bilateral discussion. We have been holding those discussions, including 
late last month in Beijing. We have also been raising with China 
restrictions on market access. While these are not IPR issues per se, 
they have a negative impact on the industries depending on intellectual 
property, such as the copyright industry and, to a certain extent, they 
exacerbate some of the problems with IPR enforcement. Thus far, no 
settlement has been reached. We are consulting with Congress and with 
industry on next steps. If we believe that negotiations offer a 
reasonable chance of success, we will continue to pursue them--a 
successfully negotiated outcome can be more efficient and as successful 
as a litigated outcome. But if it becomes clear that negotiations will 
not be successful, then we will proceed with WTO dispute settlement.
    In the interim, of course, we continue to try to work with China 
through various other avenues to address this serious problem. For 
example, under Special 301, we are conducting a special review of 
enforcement at the provincial and municipal levels of government where 
much of the responsibility for day-to-day enforcement lies. We are also 
continuing to press China to make improvements in its IP system through 
the JCCT and SED.
    It bears noting that at the highest levels of the Chinese 
government there is a clearly stated commitment to tackle this problem. 
In his remarks from the South Lawn of the White House in April, 
President Hu affirmed that China is committed to ``strengthening the 
protection of intellectual property rights.'' China's leadership 
appears to recognize that the development of a more vigorous and 
effective IPR enforcement system is critical not only to trade 
relations with the United States, but also to China's own economic 
development. The challenge confronting China is turning those stated 
commitments into real results.
    Thank you for the opportunity to testify. I will be happy to take 
your questions.

                                 
    Chairman LEVIN. Thank you very, very much. So, let's have a 
good back-and-forth for a few minutes.
    Mr. BHATIA. Great.
    Chairman LEVIN. Others may join us, but with Mr. Herger and 
myself, this is an important gathering in our eyes. Let me just 
repeat what I said both on the record here and in talking to 
others in the media.
    I welcome the fact there's been this bottom-to-top or top-
to-bottom review, number one. It was long overdue. As I look 
back since we had the controversial discussion of PNTR, which I 
was very much involved in, the first years were really years of 
very passive reaction. It was very disappointing. This is 
before you came. I think it was harmful.
    China went in with the assumption that it was much better 
for it to be in than out, not only for them, but it would be 
better for us, that there would be rules that they would need 
to comply with. The problem is that while in some respects the 
structure opened up their markets, there were so many 
requirements that they failed to meet. We have this morning 
discussed two of the areas, subsidies and IPR.
    I don't think anybody can say that there was much more than 
rhetoric. Essentially, there was a passive attitude, and that 
was true of our position, this Administration's position within 
the WTO, whether it was the annual review program that we 
fought to get into the PNTR legislation, pursuing the 
requirement that they file their subsidy report. So, I do think 
it's good that we have shifted out of what might be called 
neutral in terms of a car, the car I used to drive when I was 
young, into first. It's now kind of different.
    We really need to accelerate our attention to this, and 
that's why we talked this morning about setting 2008 when the 
Olympics will be in Beijing, for China to take a kind of leap 
in terms of their compliance with their commitments.
    You mentioned, Mr. Bhatia, the exports. I said this to 
USTR, to your boss yesterday, our ambassador. Also talk about 
imports. You talk about the percentage of increase in our 
exports. It starts from such a low base. As you know, the 
amount of our imports far exceed the amount of our exports. So 
you have a continuing increase in our trade deficit. I just 
wanted to bring your attention to an example of I think the 
harmful failure of this Administration before your time.
    We put 421 in there. It was part, as we said, at this very 
place, it was part of what we worked out. We did so on a 
bipartisan basis with a lot of controversy. The Administration 
has failed to use it. I give you one example of the harm of 
this failure. It relates to pipes and tubes from China. A case 
was--it was filed. The ITC found harm. The Administration 
decided not to take action, and in terms of thousands of net 
tons, which happened since 2004 when it was 274, it's now 671 
thousands. That's more than doubling.
    You have to look at this in terms of the impact on 
businesses and workers here. I know it means that some people 
bought pipe more cheaply, but businesses and workers have been 
displaced. So, try to carry back the message. Talk about the 
whole glass.
    Secondly--and by the way, I have the figures here in terms 
of the exports and imports, and it's really clear, exports rose 
by 13.3 billion '05 to '06, imports rose by 44 billion. So, if 
you start with a low base, you'll get a higher percentage. 
That's about as much as I learned in math.
    All right, but now let's talk about subsidies, and then Mr. 
Herger will take over. A long last, China filed its subsidies 
report, right? Three or 4 years late.
    Mr. BHATIA. Yes, that's right.
    Chairman LEVIN. Okay. Now they identified 70, and that's 
only a partial report, 70 subsidy programs, and they're 
probably just the tip of the iceberg. Your notice, what you 
started with, touches how many of these?
    Mr. BHATIA. The case that we have--the consultations?
    Chairman LEVIN. Right. It's not a case. These are the 
consultations. So, they cover how many of the 70?
    Mr. BHATIA. It's not a simple area. There are 9 subsidies 
at issue. Some are in those 70 and some are things that we 
found on our own. So, they're not--it's not an easy answer, but 
there are 9 subsidies at issue.
    Chairman LEVIN. By the way, a lot of these subsidies, some 
of them were known years ago. I won't bother you with the list, 
but many of them were known as early as '90, '91, and in some 
cases, before.
    Okay. So, you say of the 70--well, the consultation covers 
9 of them?
    Mr. BHATIA. Yes, that's right.
    Chairman LEVIN. Okay. So, that leaves a lot of them out.
    Mr. BHATIA. That's correct.
    Chairman LEVIN. So, tell us as quickly as you can the 
strategy why those 9, what about all the others?
    Mr. BHATIA. Should I go ahead and respond now, Mr. 
Chairman? Okay. Would you like me to respond--you had a couple 
of other points that I'd be happy to touch on. Okay.
    Chairman LEVIN. Touch on everything.
    Mr. BHATIA. Okay. Why don't we start maybe with this last 
one.
    Chairman LEVIN. Okay.
    Mr. BHATIA. Then I can go back through some of the others. 
The Chinese subsidy notification was filed last spring after we 
pushed substantially--during China's accession process, they 
made a commitment, or indicated that they would seek to provide 
the information about subsidies over the course of time. We--
this did precede me joining USTR, but over the course of that 
period from 2001 onwards, there was a steady push to try and 
get them to supply that information. Ultimately last year, they 
did indeed supply it.
    At that point in time, we reviewed obviously that list of 
subsidies, looking for those that were actionable in the WTO, 
to figure out what the consequences--and figure out what they 
were. There are two types of subsidies that are effectively 
actionable in the WTO. There are those that are prohibited, and 
those that--the 9 that we have sought consultations right now 
are what's called prohibited subsidies.
    Two types of prohibited subsidies fall into that category. 
The first are export-linked subsidies, subsidies that are 
provided, say tax benefits or other things that are provided to 
companies contingent upon them exporting as opposed to 
producing for the domestic market; and import substitution 
subsidies, those that are awarded conditional upon companies in 
China using domestically made inputs rather than imported 
inputs.
    Those two types of subsidies are so clearly trade 
distorting that the WTO has deemed them prohibited subsidies. 
You don't need to prove injury. There are a variety of other 
provisions that apply, and it allows you to move on a very fast 
tract with respect to them. That is what we have done so with 
respect to these 9.
    The other subsidies, indeed, and you refer to the 61, and 
there are--we pretty confident there probably are others out 
there as well, but those are a more complex matter to litigate. 
They may be actionable, they may not be actionable. Briefly, 
without getting too deeply into the weeds here, for a subsidy 
to be actionable under the WTO, what one needs to prove is a 
couple of things. First of all, that there is a financial 
contribution by the government. Secondly, that it is specific, 
specific to an industry or industries. Thirdly, that there is a 
benefit accrued by that industry or industries. Finally, that 
it is having an adverse effect on the U.S. industry, that we 
would be able to show that.
    That is a much more complex endeavor, Mr. Chairman, than 
simply demonstrating a prohibited subsidy. A prohibited subsidy 
is basically a de jure case. An actionable, nonprohibited 
subsidy that still might be in contradiction with the WTO 
rules, requires the building up of a case, a very detailed, 
factually driven case.
    We have spoken with a number of industries about other 
subsidies, including some industry--well, a number of 
industries about subsidies that are of concern to them, and if 
we believe that there is a strong case there to be brought, and 
if that industry, frankly, provides us with the information 
demonstrating that there is a strong case here, believe me, 
we're not going to hesitate from using the WTO litigation route 
if that proves to be the optimal way to proceed.
    Mr. Chairman, maybe I could touch on a few of the other 
things that you raised----
    Chairman LEVIN. Please.
    Mr. BHATIA [continuing]. In response. Actually, perhaps I 
could just add one final point on subsidies. I think your 
focusing this hearing on subsidies is extremely valuable, and I 
think it is valuable because in my mind, and I think in our 
eyes, the role of the Chinese government influencing and 
directing its economy is perhaps the central challenge that we 
face in our trade policy going forward. There are many other 
challenges, IPR and other things are key, and don't mean to 
diminish them.
    Ensuring that China reforms--continues on the path of 
reform that it has been on to move toward a more market-based 
system of economic--a more market-based economy, I think is the 
greatest challenge that we face, and I think subsidies is a key 
window into that problem, and thus the importance of our case.
    I think, frankly, I think it is a very important case that 
we brought 2 weeks ago, because I think it will signal to the 
Chinese and indeed to the rest of the world that we are 
approaching this issue and we are going to be using the WTO 
mechanism to address what we see as being a systemic problem. 
This doesn't affect just one industry. This potentially affects 
all industries, and it potentially distorts the global economy 
as well as the Chinese economy. So, we are very cognizant of 
the importance of the subsidies issue, and we'll continue to 
pursue it.
    If I perhaps could just touch on these other issues. The 
421 case, the issue of 421 that you mentioned, Mr. Chairman, 
during my tenure at USTR, I have been involved with one of 
these cases, the steel pipe case that you reference, and 
perhaps I could touch on that. I think it in some sense it 
reflects the same analysis that applies to some of the other 
cases.
    We gave tremendously careful consideration to the 421 
petition that was filed and did so relying upon and looking 
closely at the ITC analysis that was done as well. As you know, 
Mr. Chairman you were--you clearly were involved in the PNTR 
decision. The 421 analysis ultimately involves and contemplates 
a balancing test. One has to consider the national economic 
interest as well as the injury to the affected industry.
    That is precisely what we did in this case. I think there 
were two reasons that drove the decisionmaking there. One is, 
would the remedy that the industry was seeking ultimately have 
been effective? Secondly, what was the national economic 
interest? What did the balancing test counsel in favor of?
    When you look at what the structure of this market was, we 
could have imposed--had we imposed--let me put it that way. Had 
we imposed the sought quotas on pipes coming out of China, 
there were somewhere between 40 and 50 other countries that 
were suppliers in this area.
    So, I think there was a strong case, there was a very 
strong case. There was, frankly, I think compelling evidence 
that even had we imposed quotas, the effect of those quotas 
would have been nullified through imports from other countries.
    The second point to made on that subject is the balancing 
test, the issue of the national economic interests. At the end 
of the day, the ITC analysis that we were provided with 
suggested that the damages to the general economy, the damage--
the cost to the general economy. Excuse me, not damage. The 
cost to the general economy would have been five times greater 
from imposing these than not imposing them, imposing the 
quotas, which is not to suggest, I don't in any way mean to 
suggest that we are not concerned about the fate of the workers 
and the manufacturing plants that you were talking about.
    Clearly, imports are important. They are important because 
they bring into focus the impact of globalization and trade 
with China, but we were administering, and I feel very 
confident of this, we have administered 421 consistent with the 
statutory language and the statutory intent.
    Last, with respect to 2008 and China taking a leap--excuse 
me, there are two other points. One is 2008. I am all for China 
pushing forward--indeed, let me say it this way. We believe 
China needs to be brought into compliance with its WTO 
commitments, and 2008 is a bit far off, frankly. We are pushing 
China on every WTO commitment that we are aware of where 
they're not in compliance to bring them into compliance, and 
yet China has emerged onto the global scene, and it will 
continue--it will play an even larger role with the Olympics. I 
agree with that.
    Right now, and this is what our top-to-bottom review says, 
China is certainly one of these major beneficiaries of 
participating in the global trading system. It needs to live up 
to that. It needs to demonstrate a responsibility there that is 
commensurate with the benefit that it's getting. That means 
being in compliance with its WTO commitments, that means being 
in compliance with its JCCT commitments, and the top-to-bottom 
review is the strategy to pursue to get them there.
    Last, you point out the exports rose by 13 billion whereas 
imports rose by 44. I'm not disputing those numbers at all. 
There is a trade deficit. There is a trade deficit that in our 
top-to-bottom review we have said is not sustainable 
politically or otherwise, but I do think it is important to 
note the growth, the trend in exports by U.S. exporters, 
manufactured, services and agriculture, is encouraging. It does 
show that China is a growing market for U.S. exports, and that 
is creating jobs.
    So, I appreciate the liberty to respond at length.
    Chairman LEVIN. Just briefly--by the way, Mr. Vargo's 
testimony about the drop in exports in manufacturing we want to 
look at. Let me just say on the pipe and tubes case, I think 
your looking at other suppliers is not consistent with the 
intent of the language. In terms of national economic impact, 
that always can be used as a reason, but this Administration 
has turned down four out of four of the 421s when there was an 
ITC recommendation. The message that sends is one of 
complacence to a very unbalanced relationship.
    As I leave and Mr. Herger takes over, we had testimony from 
those in furniture. I'd like you to give us some specific 
response, and also the testimony from the steel industry. There 
has been a very major increase in steel production, as you 
know, in China.
    Mr. BHATIA. Yes.
    Chairman LEVIN. Subsidization is clearly part of it. We had 
better get ready to handle the issue of their increased imports 
here from subsidized industries. We better get ready.
    Mr. Herger.
    Mr. HERGER. Thank you, Mr. Chairman. Welcome to our 
Committee.
    Mr. BHATIA. Thank you.
    Mr. HERGER. Thank you for the work that you're doing. 
Really listening to the testimony and the questions from both 
sides of the aisle, it really sounds like we're on the same 
page. I think the big concern is are we moving quickly enough? 
Are we attacking the problem aggressively enough?
    Yet putting this into perspective, just a decade and a half 
ago, where China, where the entire free world had virtually no 
contact at all with China, and to see how far we've come in 
such a relatively small period, short period of time. Those of 
us who have visited China, just to see this country taking off 
from the bicycle era which it was when I first visited there 
almost a decade and a half ago or so to just seeing what's 
going on there.
    Again, trying to put this in perspective, am I correct, of 
all the trading partners, all the U.S. trading partners that 
deal with China, is it correct that the United States is the 
only trading partner that's actually brought a case against 
China? I believe that was last year in the auto parts, and that 
now we've brought a second case, an additional case, and yet we 
have settled two or more without litigation?
    Mr. BHATIA. Congressman, there are three cases, three 
requests for consultation, basically, the commencement of cases 
in the WTO that we have pursued. The first, a case with respect 
to value-added taxes on semiconductors, that case settled. The 
second is the auto parts case that we filed earlier--well, 
filed last year. That case was brought by the United States, 
but we were joined as co-complainants in that case by the 
European Union and by Canada. So, effectively, the three of us 
brought that case altogether.
    The third is the subsidies case that we just brought, the 
United States just brought last--two weeks ago.
    Mr. HERGER. How many cases have other trading partners that 
you--in addition to what you've just mentioned, Japan, other 
trading partners, how many cases have they brought?
    Mr. BHATIA. Against China? None.
    Mr. HERGER. So, as few as we've brought, no one else has 
brought any. This leads into my question. My concern is the 
fact that other countries would seem to be free riding, at 
least at this point, on the work that we've been doing, it 
would seem the only country that's aggressively pursuing 
dispute settlements with China is the United States.
    Why would you say, why is it that other WTO members have 
not raised concerns similar to ours with China's 
implementation, and are we working with them in common areas of 
concern?
    Mr. BHATIA. I think, Congressman Herger, there's probably a 
couple part answer to that.
    Mr. HERGER. I might ask, these other countries are 
experiencing the same concerns we are, aren't they?
    Mr. BHATIA. Yes. Yes they are I think.
    Mr. HERGER. It's not just the United States that's----
    Mr. BHATIA. I think that is a fair point. To some extent, 
China's commitments, have, as we've described, been phased in 
over the course of time. So, the fact that China acceded in '01 
and that you're now seeing a greater amount of litigation 
recently I think is in part attributable to the fact that some 
of those commitments they had periods of time to come into 
compliance. I think that--I believe that you will see increased 
litigation against China not only by the United States but by 
others as we move further into that period effectively this 
point forward, in which China is obliged to be in compliance. I 
do think that's one case.
    I think the United States, and I'm afraid this has been 
true for a long time, has played the role of leader in the WTO 
and elsewhere and in promoting compliance with global trading 
standards and requirements, and we're doing it again here with 
China. While we don't shy away from that role, we do it, I 
would point out that we are working more cooperatively I 
believe with our trading partners in a joint approach to 
promoting responsible WTO-compliant behavior by China than in 
years past.
    I would point out the fact that with the auto parts case, 
we did work very closely with our colleagues in the European 
Union (EU) and Canada to bring that, that we have set up--last 
year we have set up some mechanisms, standing mechanisms by 
which we coordinate with our colleagues in the EU in Brussels, 
in Tokyo and elsewhere on China enforcement issues.
    They will probably tell you--some of the things we hear 
from our trading partners abroad is it's got to be a multi-
pronged approach to China, that sometimes litigation is the 
best way, sometimes dialog is the best way. We don't disagree 
with that. We ourselves pursue both dialog and litigation, but 
our view, as clearly expressed in the top-to-bottom, is that a 
strong enforcement prong has got to be a key part of that, and 
we look forward to our trading partners joining us in that 
going forward.
    Mr. HERGER. Sir, are we working with them? You mentioned 
that the EU did join us in two of these, Japan. Do we have 
others that are working with us? Are we working to involve 
other countries as well to bring greater pressure on China to 
do the, quote, ``right thing'' and to live up to their 
commitments?
    Mr. BHATIA. We are. We are, Congressman, and we do a fair 
amount--I think there is not a meeting that goes by where I 
don't meet with my EU counterpart, probably my Japanese 
counterpart, and my counterparts increasingly in other 
countries in the region where the subject of whether China is 
in compliance with WTO commitments and what we can do to help 
continue this process of reform does not come. So, we are 
regularly in contact with them.
    Mr. HERGER. Very good. Thank you.
    Mr. BHATIA. Thank you.
    Chairman LEVIN. Thank you very much. Mr. Crowley.
    Mr. CROWLEY. Thank you, Mr. Chairman. Mr. Bhatia, welcome 
to the Committee.
    Mr. BHATIA. Thank you.
    Mr. CROWLEY. Mr. Bhatia, my city, New York, has a strong 
competitive advantage in the financial services sector, 
something that myself and a number of Members of the delegation 
guard very closely. New York companies are world leaders in 
financial services, yet many of these firms continue to have 
trouble gaining full access to the Chinese market even as our 
markets remain open to both Chinese goods and to Chinese 
services.
    Can you describe some of the regulatory barriers to entry 
for U.S. firms into the Chinese financial services market and 
what is the Chinese government doing to reduce those barriers, 
and why do those barriers continue to exist even now, 5 years 
after China's entry into the WTO?
    Mr. BHATIA. Congressman Crowley, the financial services 
commitments that China made are a very high priority for us. We 
recognize fully the importance of compliance with those 
commitments, not only because financial services, as you 
described, is a key area of, frankly, competitive advantage for 
the United States, but in fact it is I think critically 
important for China's own economic development; the 
rationalization of the Chinese economy that it open itself up 
in this area and it allow the sort of business practices and 
the skill sets that American financial services companies can 
offer to be able to promote the kinds of reforms and changes 
that China needs.
    So, I think this is a critically important area for us and 
for China. China's commitments, as you may know, were to phase 
out geographical client, scope of business limitations for 
foreign entities that provide banking services within 5 years 
of joining the WTO.
    It also committed to remove market access limitations and 
provide national treatment for foreign suppliers of payment and 
money transmission services, including credit cards and charge 
cards and debit cards, and that commitment was supposed to 
become effective with respect to Ren Min Bi (RMB) denominated 
business, Chinese currency denominated business, with respect 
to the retail clients in China, no later than December 11th of 
last year. There are a variety of other commitments, including 
with respect to financial information, financial data 
processing.
    Now China has issued new regulations. At the end of last 
year in November, just before the phase-in of the commitments, 
they did issue new regulations that allow foreign banks that 
incorporate in China as subsidiaries to provide a range of 
services, including doing domestic currency business with 
Chinese individuals.
    We are working very closely with the financial community to 
figure out whether these new regulations are in fact and in 
practice bringing China into compliance with its WTO 
compliances. We do--I will be frank--we do have some 
preliminary concerns about the requirements and about 
restrictions.
    Let me also mention if I can with respect to electronic 
payment services, I am disappointed, frankly, with China's--
that China has not yet taken any action to implement its 
commitments to provide access to foreign providers by December 
11th of last year, although we understand China may soon 
release regulations in that area.
    We are watching that area closely. We are, as I say, in all 
of these areas in strong and steady contact with the business 
community, and we raise the issues frequently with the Chinese. 
Again, let me make clear, we will pursue ensuring that China is 
in compliance with its obligations in this and in other 
sectors, both through dialog and through use of WTO dispute 
settlement if necessary and if appropriate.
    Mr. CROWLEY. Figuratism is a form of subsidization as well, 
I believe. I think that's what's going on China when it comes 
to the financial services sector in particular.
    The WTO subsidy case that USTR recently filed I think was a 
good first step.
    Mr. BHATIA. Thank you.
    Mr. CROWLEY, but this case only covers 7 of the 70-plus 
subsidies China recently reported to the WTO four years after 
the required filing date, no less. Moreover, though, many 
analysts do not be that China has fully notified the WTO, that 
it's not fully complete in terms of the number of subsidies 
that are offered.
    Why didn't the USTR press the Chinese government to file 
its subsidies in a timely manner, and what steps is USTR taking 
to pressure China to eliminate those subsidies and to identify 
nondeclared subsidies like favoritism?
    Mr. BHATIA. Thank you, Congressman. Just in general, again, 
if I can make the point that we believe that subsidies and what 
they represent basically in terms of the Chinese government 
attempting to pick winners and losers, to pick favorite 
sectors, to direct their economy, is not only a problem with 
respect to global imbalances, but fundamentally is a problem 
for a China itself as it seeks to pursue a path of economic 
development that is sustainable in the long run.
    So, we are very much focused on the subsidies issue, as 
evidenced by the case that we brought. The case I think will 
have a--indeed, I already have reason to believe it is having a 
significant--it has been taken notice of by the Chinese as 
being an effort to correct policies that go beyond a single 
sector, but rather deal with the role that the Chinese 
government is playing in terms of influencing its broad 
economy.
    If I could respond to your specific questions about the 
filing of the Chinese notification and then the remaining 
subsidies. The filing of the notification--China was in its WTO 
accession commitment--accession package--indicated that it 
would seek to provide notifications over the course of time. 
We, starting in '01 and continuing I can tell you until last 
May when we received--April or May when we received the 
notification, pushed the Chinese assiduously on this.
    It was a major topic leading up to last year's JCCT, and 
indeed was notified almost contemporaneously with the JCCT, and 
it has given us some transparency into what is frankly a very 
opaque system. So, there was a real value to that.
    The 70 subsidies notified, some of those subsidies have 
given rise to--their notification has given rise to the case 
that we brought. Some of the subsidies that we are targeting in 
the case frankly are things we discovered on our own, or were 
aware of outside of the subsidies notification. So, that is how 
we've pursued this.
    The remaining subsidies are--the subsidies we have brought 
dispute settlement over are in our view clearly prohibited 
subsidies, by which we mean they are subsidies that are export-
related or import substitution subsidies. They are so trade 
distorting that the WTO has clearly marked them off for 
specific treatment regardless of whether there is injury and so 
forth. That's that tranche of subsidies.
    Beyond that, there are subsidies that may or may not be 
actionable under the WTO. It is important to recognize that 
just because it's a subsidy doesn't necessarily mean it's a WTO 
actionable subsidy, but there are subsidies that we are looking 
at and discussing with industry to see whether they meet the 
relevant definitions of being a WTO actionable subsidy; namely, 
that there is a financial contribution from the government, 
that it is specific to an industry or industries, that there is 
a benefit accrued by that industry, and that it causes harm.
    If we see that pattern, and this really does depend upon 
getting a lot of information from our own industry, to be 
honest with you, but if we see that, we have made very clear we 
will not hesitate to use WTO dispute settlement as well as 
whatever other tools we have to try and address it. We do 
believe that this, again, as I started out with, subsidies is 
critically important.
    Chairman LEVIN. Thank you. Let me just ask Mr. Crowley, Mr. 
Crowley, before you have to go, is it possible that a Chinese 
requirement that a financial services institution--institute or 
institution--be a subsidiary of a Chinese entity, it's 
conceivable that that's WTO consistent?
    Mr. BHATIA. Mr. Chairman----
    Chairman LEVIN. I think in answer to Mr. Crowley you said 
that there was a new regulation.
    Mr. BHATIA. Yes.
    Chairman LEVIN. That it, I thought you said required that 
the entity be a subsidiary?
    Mr. BHATIA. The issue is subsidy versus branching, is what 
we're talking about here. So, that these are regulations that 
the Chinese have put out to try and bring themselves into 
compliance with their WTO obligations that they have made, and 
we are trying to figure out whether as applied those 
requirements are going to be consistent with the WTO 
commitments they made.
    Chairman LEVIN. Their regulation says what regarding being 
a sub or a branch?
    Mr. BHATIA. The regulations allow foreign banks that have 
incorporated in China to provide the range of services that 
we're looking to allow our companies to be able to provide, 
including domestic currency transacted business.
    Chairman LEVIN. So, they would allow a completely foreign-
owned bank to have a full range of services?
    Mr. BHATIA. We are trying to figure out whether the 
regulations as applied are going to permit that or not.
    Chairman LEVIN. If they don't, it would be out of 
compliance?
    Mr. BHATIA. It would, I think, Mr. Levin--I don't want to 
misspeak to you on whether there would be a WTO case there or 
not. I do know that our industry appears to be--well, our 
industry is concerned about being able to get access to the 
market. I think the subsidies versus branching issue is one 
that may be less pressing than ensuring that they ultimately 
have that access.
    I'm happy to follow up with you on more detail on whether 
the regulations specifically on the subsidies versus branching 
issue are consistent with WTO requirements or not.
    Chairman LEVIN. Okay. Lastly, when you referred to the 
request for consultations, when you referred to that, it's 
interesting that the footnotes, in the footnotes, you have your 
references to specific Chinese regulations or whatever, and 
most of them date back a number of years. So, it would seem 
that the document you filed shows that these were regulations 
or otherwise published by China many years ago.
    Anyway, let's focus on the future now. By the way, I did 
ask the staff to look at the data of the Chinese surplus, and I 
guess you have to add the European Union countries together, 
but our deficit so overshadows that of any other country. I 
guess Canada is next. Japan, Mexico. So, we better be a leader. 
We've got the biggest deficit.
    All right, Mr. Herger. Do you have any further questions?
    Mr. HERGER. Maybe one last question, Mr. Chairman. Mr. 
Bhatia, the USTR brought the prohibited subsidy case against 
China because these prohibited subsidies are openly and 
publicly advertised.
    The whole point of these subsidies was to attract foreign 
investment with these subsidies, and that can only occur if 
they are known and documented. Could you tell us what about the 
hard cases of hidden subsidies and what is the USTR's plan to 
root these out?
    Mr. BHATIA. Congressman Herger, that is challenging. I 
don't deny the fact that the case we were able to bring, we 
were able to bring because it was a de jure claim, and it was--
they were subsidies that were well known, and indeed the 
Chinese, with respect to some of them, had notified them.
    There are hidden subsidies, subsidies that may occur in the 
form of concessionary financing or real estate for which there 
is not market prices charged or no price charged. There could 
be a bank funding or loans that are not--that don't need to be 
repaid or are forgiven. There are a variety of instruments that 
we are concerned about.
    The challenge we have, to be frank, is a lot of that is 
very opaque. There isn't clear--there is not a great deal of 
clarity in that. I think we are approaching it several ways. 
First of all, we're working to try and make China more 
transparent. We are through the various dialogs, both the 
strategic economic dialog as well as the JCCTs, there is almost 
always a transparency feature to those as we've tried to move 
China along.
    Indeed, I'd point to the last JCCT where one of the major 
successful outcomes was a commitment by China to enhance 
transparency with respect to at least regulations that it's 
putting forward. So, transparency is a key aim and goal.
    I think secondly, we are trying to gather as much 
information as we can, principally by working with U.S. 
industry, about the hidden subsidies. It is--I will readily 
confess, it is not easy, but we are endeavoring to do so. We 
are working using U.S. Government resources and we are working 
using in collaboration with the private sector, and that's what 
we'll continue to do.
    Mr. HERGER. Very good. Thank you.
    Chairman LEVIN. Well, thank you very much. It's been very 
useful.
    Mr. BHATIA. Thank you.
    Chairman LEVIN. We'll be seeing much of each other.
    Mr. BHATIA. I look forward to it.
    Chairman LEVIN. We stand in adjournment.
    [Whereupon, at 2:02 p.m., the hearing was adjourned.]
    [Submissions for the Record follow:]
          Statement of Advanced Medical Technology Association
    We thank the Committee for holding this important Hearing today on 
China's use of subsidies and abuse of intellectual property rights 
(IPR) As you know, AdvaMed represents over 1,300 of the world's leading 
medical technology innovators and manufacturers of medical devices, 
diagnostic products and medical information systems. Our members are 
devoted to the development of new technologies that allow patients to 
lead longer, healthier, and more productive lives. Together, our 
members manufacture nearly 90 percent of the $86 billion in life-
enhancing health care technology products purchased annually in the 
United States, and nearly 50 percent of the $220 billion in medical 
technology products purchased globally. Exports in medical devices and 
diagnostics totaled $25.5 billion in 2005, and imports were $23.7 
billion. The medical technology industry directly employs about 350,000 
workers in the U.S.
    The medical technology industry is fueled by intensive competition 
and the innovative energy of small companies--firms that drive very 
rapid innovation cycles among products, in many cases leading new 
product iterations every 18 months. Accordingly, our U.S. industry 
succeeds most in fair, transparent global markets where products can be 
adopted on their merits, and IPR are protected. We strongly support the 
Administration's effort to expand market access for U.S. products 
abroad through the World Trade Organization (WTO negotiations and new 
free trade agreements (FTAs), as well as oversight of market access 
barriers in countries with which we have strong trade relationships. In 
addition, we believe U.S. participation in trade agreements is most 
effective when provisions are enforced.
Global Challenges
    Innovative medical technologies offer an important solution for 
industrialized nations, including Japan and European Union members that 
face serious health care budget constraints and the demands of aging 
populations. Medical technologies also provide a way for emerging 
market countries, like China, to improve healthcare to their people, 
who are increasingly expecting substantially better healthcare to 
accompany rapid economic development. Advanced medical technology can 
not only save and enhance patients' lives, but also lower health care 
costs, improve the efficiency of the health care delivery system, and 
increase productivity by allowing people to return to work sooner.
    To deliver this value to patients, our industry invests heavily in 
research and development (R&D). Today, our industry leads global 
medical technology R&D, both in terms of innovation as well as 
investment. The level of R&D spending in the medical devices and 
diagnostic industry, as a percent of sales, more than doubled during 
the 1990s--increasing from 5.4% in 1990 to 8.4% in 1995 and over 11% 
last year. In absolute terms, R&D spending has increased 20% on a 
cumulative annual basis since 1990. Our industry's level of spending on 
R&D is more than three times the overall U.S. average.
    Despite the great advances the medical technology industry has made 
in improving patient quality of life and delivering considerable value 
for its innovations, patient access to critical medical technology 
advances can be hindered by onerous government policies. Patients and 
health care systems experience much less benefit from our industry's 
R&D investment when regulatory procedures are complex, non-transparent, 
or overly burdensome--all of which can significantly delay patient 
access and drive up costs. In the future, patients will be further 
disadvantaged if payment systems fail to provide appropriate payments 
for innovative products--which will subsequently affect the 
availability of R&D funds and the stream of new technologies.
    The medical technology industry is facing these challenges around 
the world as governments enact more regulations. While we support those 
regulations that ensure product safety and efficacy, many others are 
being imposed without scientific justification, and in non-transparent 
processes, which only adds to costs and delays without improving 
patient outcomes.
    As governments prioritize difficult budget decisions, they 
sometimes look to short-term decreases in health care expenditures 
without accurately assessing the long-term implications. In most cases, 
governments do not effectively measure the contributions medical 
technology makes in enhancing patient outcomes and productivity as well 
as expanding economic growth, which would more than offset the costs of 
providing these products. Instead, governments often inappropriately 
include reduced reimbursement rates as part of overall budget cuts.
    In some cases, governments seek to reduce prices of medical 
technologies in their country by fixing ceiling prices. In the longer-
term, patients in these countries and around the world will experience 
less access to innovative medical technologies, as research and 
development funds decrease. This is the situation we are facing in 
China.
Obstacles Impede Market Access in China
    AdvaMed looks to the U.S. government to pursue trade liberalization 
throughout the Asia-Pacific region and to protect IPR Because of its 
potential market size and government policies, China should remain a 
focus of U.S. Government attention.
    China has quickly become an important market for the U.S. medical 
technology sector. The American Chamber of Commerce in China estimates 
that the Chinese market for medical technology exceeds $8 billion and 
is growing rapidly. It is on pace to surpass some of the key European 
markets for medical technology in a few years. As global leaders, U.S. 
medical technology firms already account for a significant portion of 
sales in China and the position of these firms underscores the 
importance of ongoing efforts with the U.S. government to open the 
Chinese market further.
    AdvaMed looks forward to working with Congress and the 
Administration to address the following barriers:

      A Lengthy and Costly Product Registration Process
      Redundancy in the Registration Process
      Lack of Transparency in Decision-Making
      Inappropriate Price Controls
      Counterfeiting and piracy of Medical Technology

    For the medical technology industry, the Bush Administration's 
efforts with China under the U.S.-China Joint Commission on Commerce 
and Trade, as well as in less formal meetings, are critical for 
allowing U.S. medical technology firms broader access to the burgeoning 
Chinese health care market. The recently-launched U.S.-China Health 
Care Forum initiative, led by the U.S. Department of Commerce and 
supported by AdvaMed and other health care partners, holds great 
promise as another vehicle for addressing many of the trade-related and 
health policy-related barriers confronting U.S. medical technology 
firms in China. We also endorse including healthcare under the 
Strategic Economic Dialogue.
    However, our trade agreements offer little leverage over some of 
China's policies that adversely affect our industry's market access. In 
particular, agencies in the Chinese Government appear to be pursuing an 
industrial policy, implementing measures that support certain domestic 
industries to take markets from foreign suppliers. Medical technology 
is one such industry.
    The National Development and Reform Commission (NDRC) and the 
Shanghai Pricing Bureau (SPB)--which we believe are in close 
coordination--are demanding sensitive price, cost and marketing 
information from U.S. companies. We believe that this is part of 
China's industrial policy for its national medical technology industry. 
The State Council Opinions on Invigorating the Equipment Manufacturing 
Industry issued on June 28, 2006 clearly identifies the medical 
technology industry. In July 11, 2006, the NDRC issued a proposal to 
collect sensitive information from our companies. This proposal 
includes a policy rationale for controlling foreign manufacturers of 
medical technology, with an allegation that technology ``monopoly'' 
causes monopoly prices--which, of course, is not the situation in our 
highly competitive industry.
    In addition, our company representatives report the theft of their 
intellectual property by some domestic firms. The use of this 
intellectual property obviously provides a competitive advantage, 
because such domestic firms do not have to devote hundreds of millions 
of dollars for research and development of their products. This means 
that domestic firms can produce medical devices at lower cost than 
foreign firms, not because of greater efficiencies but because they are 
not investing in research.
    The detailed price information which the SPB is giving to local 
associations and which is likely to be shared more widely with domestic 
associations that are closely affiliated with the Chinese Government 
would increase the competitive advantage for domestic companies. Our 
competitors in China would very likely be able to obtain detailed 
product-specific price information, ranging from prices at origin, on 
foreign markets, at import, for wholesale, and for retail. Foreign 
companies would not have access to the same information about domestic 
firms. This result is both unfair and harmful to competition. In the 
United States, sharing price information among competitors would be 
contrary to anti-trust laws. If companies know what others are 
charging, there is a risk that prices will be coordinated and 
competition will be harmed.
    The regulations imposed on our industry to provide detailed cost 
information would be unique. We know of no other industry in China that 
would be subjected to these types of requirements and controls--with 
the exception of the pharmaceutical industry for which China's 
accession commitment to the World Trade Organization includes a 
specific provision.
    The net impact of these policies is an indirect subsidy for 
domestic Chinese medical technology companies. Price controls favor 
domestic Chinese companies. Such companies do not incur the R&D 
expenses, since they simply use U.S. technology. And, domestic 
companies have far lower overall production costs, for the many well-
known reasons that favor Chinese manufactures. In a free and open 
market, our companies can compete effectively on the basis of quality 
and service. In a price-regulated market, with our domestic competitors 
receiving sensitive IP and economic information due to Chinese 
Government policies, the U.S. medical technology industry's ability to 
compete and to provide patients our innovative products is seriously 
eroded.
    The medical technology industry has made a proposal to address 
China's legitimate concerns regarding rising healthcare costs and 
inappropriate distributor mark-ups. We hope continued U.S. Government 
support will provide us to opportunity to discuss this proposal with 
NDRC officials.
    We also endorse efforts to convince China to enforce IPR. The U.S. 
medical technology industry depends on our ability to innovate and to 
have our new products protected.
Conclusion
    AdvaMed appreciates the shared commitment by Congress and the 
President to expand international trade opportunities and encourage 
global trade liberalization. We look to the U.S. Government to 
aggressively combat barriers to trade throughout the globe, especially 
in China. AdvaMed is fully prepared to work with Congress to monitor, 
enforce and advance multilateral, regional and bilateral trade 
agreements, particularly with our key trading partners.

                                 

           Statement of American Forest and Paper Association
    The American Forest & Paper Association (AF&PA) appreciates this 
opportunity to present the forest and paper products industry's views 
regarding U.S. trade with China. AF&PA is the national trade 
association of the forest, pulp, paper, paperboard and wood products 
industry. The industry accounts for approximately 6 percent of the 
total U.S. manufacturing output, employs more than a million people, 
and ranks among the top 10 manufacturing employers in 42 states with an 
estimated payroll exceeding $50 billion. Sales of the paper and forest 
products industry top $230 billion annually in the U.S. and export 
markets. The more than 200 companies and related associations AF&PA 
represents have a strong interest in ensuring that commitments made by 
China are met so they can create a solid basis for the continued growth 
of business opportunities.
    As is the case with many U.S. manufacturing industries, we face 
increasing domestic and international challenges. Since early 1997, 128 
pulp and paper mills have closed in the U.S., contributing to a loss of 
85,000 jobs, or 39 percent of our workforce. An additional 60,000 jobs 
have been lost in the wood products industry since 1997.
    China's spectacular economic growth in the last decade is having a 
dramatic impact on the global economy. In the forest products sector, 
the speed in which China has become a major player has greatly 
influenced global supply and trade pattern. The increasing trade flows 
also have frequently been associated with unsustainable harvesting and 
illegal logging in other Asian countries and Russia that supply timber 
to the Chinese market.
    AF&PA worked hard with others in the American business community in 
support of China's membership in the World Trade Organization (WTO). 
Since its WTO accession in 2001, China has implemented many economic 
and regulatory reforms that have allowed it to achieve tremendous 
economic success. However, the government continues to use subsidies 
and other industrial policies to protect and nurture Chinese 
industries. In the paper and wood processing industries, the result has 
been a substantial expansion in China's production and exports over a 
very brief time period and a corresponding drop in market opportunities 
for U.S. manufacturers. This is incongruous since China doesn't have 
the fiber resources necessary for a competitive forest products 
industry, and is largely dependent on imported fiber in the form of 
logs and other wood products, wood pulp and recovered paper.
U.S. TRADE WITH CHINA
    China has the fastest growing forest products industry in the 
world. However, with limited forest resources, China has to import a 
significant amount of raw material in the form of logs, chips, pulp and 
recovered paper. The total value of Chinese forest products imports 
reached $17.8 billion in 2006, an increase of 72 percent since 2000. 
Imports include $6.5 billion in wood products and $7.1 billion in wood 
pulp and recovered paper. However, China's drive to meet rising demand 
by heavily investing in domestic production, has meant that imports of 
products such as paper and paperboard have stagnated over the last six 
years. In 2006, paper and paperboard imports amounted to $4.2 billion, 
a decrease from a year earlier, and just 7 percent higher than in 2000, 
at a time when China's paper and paperboard consumption in volume terms 
rose by more than 70 percent.
    China's imports from the U.S. increasingly consist of raw materials 
in the form of wood pulp and recovered paper as furnish for the Chinese 
paper industry; and of logs and lumber for manufacturing solid wood 
products, furniture and other wood products. In 2006, China's imports 
of these products from the U.S. amounted to $1.86 billion, or 66 
percent of total U.S. forest products shipments to China. In the past 
several years, raw materials have represented a very high, and growing 
share of China's forest products imports from the U.S. For example, 
imports of recovered paper from the U.S. rose by over 182 percent in 
the 2002-2006 period to $1.27 billion. In addition, China's hardwood 
logs imports from the U.S. almost quadrupled during this period to $109 
million.
    In contrast, Chinese exports of forest products to the U.S. 
increasingly consist of processed and finished products. For instance, 
Chinese exports of coated free sheet--a paper product suitable for 
high-end print projects, magazines, advertising, and brochures--reached 
$225 million last year, almost double the amount recorded in 2005, and 
up from practically zero in 2000. Just ten years ago, China had no 
capability to produce international grade coated paper. Furthermore, 
Chinese exports of converted paper and paperboard products, such as, 
packaging paper, boxes, cartons and school supply paper reached 
approximately $1 billion in 2006, which represented 72 percent of all 
Chinese paper product exports to the U.S. last year.
    In terms of wood products, China continues to be an important 
market for U.S. producers, particularly for hardwoods. China's imports 
of U.S. hardwood lumber, logs and veneer exceeded $477 million in 2006. 
Increasingly, many U.S. wood products are used in domestic application 
for furniture, interiors and outdoor construction, but also for the 
production of picture frames and other value-added wood articles 
principally manufactured for export to the U.S., Europe and other 
global markets.
    China also is becoming a significant supplier of primary wood 
products such as lumber and plywood. It is the second largest supplier 
of wood product imports to the U.S., and the largest supplier of 
plywood and veneer imports. According to U.S. trade statistics, the 
U.S. imported $3 billion of lumber and wood products from China in 
2006, almost treble the amount in 2002. Of the total, imports of 
plywood and veneer were $982 million last year, a 60 percent increase 
from 2005. We have received reports that some Chinese oak-faced plywood 
has been mislabeled as birch-faced plywood in order to avoid the 8 
percent duty on the former.
    AF&PA believes that as long as China fails to fully comply with its 
obligations as a member of the WTO the longer-term export prospects are 
not encouraging for U.S. manufacturers of forest products. This is the 
case as China's production capacity for paper and paperboard and for 
lumber and wood products is rising rapidly, and for some grades in 
excess of domestic demand, largely with the direction and support of 
the government and government owned or government controlled banks. 
Consequently, this is displacing imports in key grades and leading to 
growing Chinese exports, a trend that will likely accelerate if current 
non-market economic and trade policies remain in place.
ANTIDUMPING MEASURES
    China has been very aggressive in using antidumping investigations 
as a tool to protect and promote manufacturing sectors identified by 
the government as growth industries. Since the late 1990's, U.S. paper 
and paperboard producers have been subject to four antidumping 
investigations specifically in those segments of the industry where 
Chinese manufacturing capacity has been rapidly expanding, including 
newsprint, coated printing paper and kraft linerboard. This section 
will highlight several important issues from our industry's recent 
experience in the kraft linerboard case which was terminated earlier 
last year only after USTR informed the Chinese mission in Geneva that 
the U.S. was going to ask for consultation under WTO proceedings.

      Lack of Transparency and Failure to Make Timely 
Disclosure: When China's Ministry of Commerce (MOFCOM) initiated 
antidumping investigation against kraft linerboard imports it did not 
make the full text of the petition immediately available to all known 
affected exporters. This is inconsistent with the requirements of 
Article 6.1.3 of the WTO Antidumping Agreement. Furthermore, when 
MOFCOM issued the preliminary determination on May 31, 2005, it 
formally refused to disclose to AF&PA the aggregate data on which it 
based its injury determination. This is at odds with China's 
obligations as it interfered with the ability of U.S. exporters to 
defend their interests in this case. Full disclosure of all such 
information should be provided. In explaining the reason for 
terminating the final determination, MOFCOM acknowledged that the 
investigating authorities failed to provide some basic facts to 
interested parties before issuing the final determination.
      Inadequate Injury and Causation Analysis: The preliminary 
and final determinations in the kraft linerboard case didn't provide 
evidence of a causal link between the subject imports and the alleged 
injury to the Chinese domestic industry as is required by Article 3.5 
of the WTO Antidumping Agreement. Specifically, MOFCOM failed to 
adequately account for the alleged injury caused to the domestic 
industry by its rapid expansion in capacity and production in excess of 
the growth in demand. This is a fundamental failure to abide by WTO 
rules, which mandate that an investigating authority examine the injury 
caused by factors other than the subject imports to ensure that the 
injury from such factors is not improperly attributed to imports.
      Improper Cumulation: MOFCOM improperly cumulated the 
linerboard products exported to China by the three other countries 
subject to the AD investigation with the kraft linerboard exported by 
the U.S. even though these products differed in significant respect 
from the U.S. product, including quality, physical characteristics, and 
price. The cumulation of these products violated Article 3.3 of the WTO 
Agreement and contributed to the erroneous injury analysis.

    Even though MOFCOM eventually rescinded the AD duties, this was 
almost 2 years after the launch of the investigation. In the meantime, 
the uncertainty created by the case caused long-term disruption and 
loss of business for U.S. kraft linerboard suppliers.
SUBSIDIES
    The Chinese government has encouraged the development of a world-
class forest products industry through domestic investment and 
expansion of paper and forest products manufacturing operations. Many 
of the measures used to achieve the rapid and massive industry 
expansion that has taken place in China in recent years include direct 
and indirect subsidies that may not be WTO-legal. Since many of the 
Chinese forest products companies are engaged in international trade or 
compete against imports, they have an unfair competitive advantage 
versus U.S.-based companies that must rely on financing at market 
rates.
    In the past several years, AF&PA has examined and documented the 
various financial, trade and policy measures that the Chinese 
government is using to build its fiber resources and its pulp, paper 
and wood processing industries. Our research found that the Chinese 
government employs direct and indirect subsidies--for example grants, 
low interest loans and debt forgiveness--to prop up state-owned 
enterprises, introduce new technology, and build massive new production 
capacity.
    The Chinese government acknowledged just as much during the kraft 
linerboard antidumping investigation noted in the previous section. In 
the preliminary determination, MOFCOM explicitly acknowledged that the 
Chinese linerboard industry was targeted for government promotion. Such 
promotional policies explain the growth of domestic industry capacity 
and production in excess of demand. The result has been an erosion in 
market share for imports, both from the U.S. and others countries.
    AF&PA was pleased that the United States, in October 2004, 
submitted questions to China in the WTO on its subsidy practices, 
including a series of specific questions on subsidies in the forest 
products sector. China committed to respond to these questions by the 
end of 2005. So far, however, China has failed to provide information 
in response to the Article 25.8 request filed by the U.S. in 2004.
    We note that China's 11th Five Year Plan might signal an important 
change in emphasis from previous plans when it comes to government 
policy toward industry. Based on publicly available information, it 
seems that the new Five Year Plan has a more market oriented approach 
toward economic development and addresses some of the ``unhealthy'' 
outcomes of China's rapid industrial expansion, namely the potential 
for environmental pollution, excessive energy and water consumption, 
and China's raw material deficit. We hope that greater government 
concern about the negative impacts of excessive investment will lead to 
more balanced and sustainable growth in China's paper production and 
capacity. In the meantime, AF&PA supports the continued efforts by the 
U.S. at all levels to impress on China the need to reign in and 
ultimately eliminate industrial subsidies.
    U.S. industries have not been able to resort to the use of 
countervailing duty (CVD) law to counter subsidized imports from China. 
Since 1984, the U.S. Commerce Department has not applied CVD law to 
non-market economies (NMEs) such as China, even though the WTO does not 
prohibit the application of CVD law to NMEs. AF&PA, and a large group 
of U.S. industries, supports legislation to clarify the intent of 
Congress by expressly providing for the application of CVD provisions 
to China and other NMEs.
CURRENCY MANIPULATION
    The controlled undervaluation of China's currency has nullified 
that country's WTO market access commitments. While AF&PA welcomed the 
slight revaluation of the Yuan in July 2005, the meager appreciation of 
China's currency since that time in spite of the country's strong 
economic, financial and trade performance indicates that the Chinese 
government continues to tightly manage its currency to support its 
export led growth. As a result, U.S. manufacturers, including U.S. 
producers of forest and paper products, remain at a significant 
competitive disadvantage when exporting to China or when competing in 
the U.S. or third country markets against Chinese exports.
    The Chinese government's active intervention in foreign exchange 
markets to keep its currency undervalued offsets the market access 
benefits the U.S. negotiated under China's WTO accession agreement. The 
General Agreement on Tariffs and Trade (GATT) Article XV, now 
incorporated within the WTO, addresses Exchange Arrangements and 
stipulates that members should not take exchange rate actions which 
``frustrate the intent of the provisions of this Agreement'', namely, 
negotiated reduction of tariffs and other barriers to trade. For this 
reason, AF&PA believes that the U.S. Administration should continue to 
press the Chinese government to allow the value of its currency to 
reflect economic fundamentals.
ILLEGAL LOGGING
    The presence of illegally procured wood fiber in several 
international forest products markets affects the competitiveness of 
U.S. producers who operate legitimately within national and 
international environmental and trade rules. In the case of China, U.S. 
trade opportunities are directly affected by the abundance of illegally 
harvested timber from a number of regional sources. China, which is the 
world's second largest importer of wood products, is laundering much of 
this illegal product through its manufacturing sector. It is estimated 
that 40 percent of Russian logs entering China are suspicious 
(potentially illegal) because of excess cutting, harvesting without 
authorization or as undocumented/unreported exports. China's imports of 
hardwood logs also come from countries with significant problems with 
illegal logging (Indonesia is the largest supplier of hardwood to 
China).
    A study commissioned by AF&PA, Illegal Logging and Global Wood 
Markets: The Competitive Impact on the U.S. Wood Products Industry 
(November 2004), examined the flow of suspicious roundwood into the 
lumber and plywood sectors estimated that the value of U.S. wood 
exports could increase by over $460 million annually were there no 
illegally harvested wood in the global market. The elimination of 
illegally harvested wood in the global market would also have an effect 
on the pulp and paper sector. China plays a key role in the global 
equation.
    Illegal logging, associated illegal border trade, and the use of 
illegally obtained timber in manufacturing distort international trade 
and reduce market opportunities for U.S. suppliers. China needs to take 
immediate steps to improve its on-the-ground enforcement capabilities 
and improve monitoring systems that better regulate cross border trade. 
AF&PA supports comprehensive compliance efforts by the U.S. Government 
to ensure that the U.S. industry has a fair chance to compete in China 
and in third country markets where our industry competes against 
Chinese suppliers.
REFERENCE PRICING
    China applies reference prices when calculating duties for imports 
of certain wood products. As these reference prices seem to be set 
unreasonably high, the result is higher duties than would be the case 
if the invoice value of the shipment was taken into account. Sources 
also indicate that local customs officials develop their own reference 
prices independently, which means different customs posts use different 
reference prices.
    It is unclear why China is applying reference prices when 
calculating duties on wood products. The WTO rules on the calculation 
of duties state that the ``transaction value'' is the primary method 
from which to determine duties, and if the ``transaction value'' cannot 
be easily determined, the rules set out a series of alternatives, for 
instance, the value of an identical or similar imported good, which 
must be agreed to between the importer and customs authorities. 
Reference prices to determine duties are not permitted under WTO rules.
RESTRICTIVE CODES AND STANDARDS
    Even though the U.S. has been successful in having China adopt U.S. 
design values and grading rules for common species of U.S. softwood 
dimension lumber into its revised GB50005-2003 (design code) and 
GB50206 (inspection code), there is no requirement in either code 
regarding materials quality conformance, such as requirements for 
grade-stamps for dimension lumber, wood-based structural panels and 
preservative-treated wood. This could potentially create quality 
problems for these wood products and compromise safety for structures 
built with such non-conforming structural products.
    Currently, China is developing product standards for dimension 
lumber, wood-based structural panels and engineered wood products and 
fasteners. In some cases, local builders use non-structural plywood as 
sheathing or floor material. Even though progress has been made in the 
area of revising China's Timber Structure Design Code and Timber 
Construction Inspection Code to incorporate U.S. design values, grading 
rules and species, more work is needed regarding the development of 
product standards, product certification inspections and building site 
conformity inspections to ensure Chinese engineers, inspectors and 
consumers can determine the quality of structural material. The absence 
of a formal recognition of U.S. certification agencies and their 
grading rules/marks, for example, may lead to an increase in the 
counterfeiting of building materials, or misleading labels being placed 
on products, which has already been evidenced in the Chinese 
marketplace.
CONCLUSION
    The rapidly developing Chinese economy should represent a strong 
potential for increased exports of U.S. wood and paper products. 
However, that potential has not been fully realized as a result of 
economic and trade distorting practices outlined above. To ensure that 
our industry has a fair chance to compete in the Chinese market, AF&PA 
strongly supports comprehensive efforts by the U.S. Government to 
ensure that China complies with its WTO market access commitments.
    AF&PA believes that China has a long way to go in addressing its 
economic and trade distorting policies and practices before it can be 
considered to be a market economy. The Administration should address 
the critical issues of antidumping practices, subsidies, currency 
manipulation, restrictive codes and standards, and illegal logging in 
ongoing discussions with the Chinese government.
    AF&PA appreciates this opportunity to provide comments to the 
committee on our industry's views about trade with China. We look 
forward to working with the committee in the 110th Congress to address 
these critical issues.

                                 

       Statement of Americans For Fair Taxation, Conyers, Georgia
    Trade policies through the WTO as the arbitrator places 
restrictions on the U.S.'s negotiating powers. Rather than trying to 
promote exports through free trade agreements with other countries, 
Congress should enact needed tax reform legislation to make trading 
with the United States a desired goal of other countries.
    Free trade is never really free either. It is a convoluted set of 
tax treaties negotiated not for the benefit of the employer/exporter, 
but rather between the governments to produce a neutral equation of tax 
revenues paid to each countries government coffers.
    It would be in the United States best interest to push for an 
overhaul of our tax system by replacing the income tax with H.R. 25, 
The Fair Tax. A system that does not place any tax on exports to other 
countries automatically drives other countries to manufacture or source 
the manufacture of their goods here in the U.S., rather than their own 
country or elsewhere. This drives up the desirability of the United 
states for a trading partner with anyone since our goods will be 
produces more cheaply than our current system allows.

                                 

                          American Apparel and Footwear Association
                                                  February 26, 2007
The Honorable Sander M. Levin, Chair
Ways and Means Trade Subcommittee
U.S. House of Representatives
Washington, DC

Dear Chairman Levin:

    Thank you for providing us this opportunity to submit this 
statement in relation to the hearing cited above.
    The American Apparel & Footwear Association (AAFA) is the national 
trade association representing the apparel and footwear industries, and 
their suppliers. Our members produce and market apparel and footwear 
throughout the United States and the world, including China. In short, 
our members make everywhere and sell everywhere.
    I would like to take this opportunity to briefly describe the 
importance of China to the U.S. apparel and footwear industries and how 
our relationship with China benefits U.S. apparel and footwear firms, 
U.S. workers, U.S. consumers and, in turn, the U.S. economy. I will 
also discuss our concerns and hopes for this relationship in the 
future, particularly as it relates to the focus of this hearing--i.e. 
Intellectual Property Rights (IPR) and subsidies.
Our Industry--Then & Now
    But first, a little background on our industries. Our industries 
have historically been among the most protected industries in the 
United States--subject to decades of stiff protection in the form of 
high tariffs and restrictive quotas (for apparel). Even today, U.S. 
apparel and footwear imports from China are still subject to high 
tariffs and, in the case of apparel, quotas.
    Yet, this incredible protection failed to do the very thing it was 
supposed to do, protect the U.S. apparel and footwear manufacturing 
base. Today, more than 98 percent of all footwear and more than 90 
percent of all apparel sold in the United States is imported. For 
comparison, in 1980, only one-half of all footwear and less than one-
third of all apparel sold in the United States was imported.
    Today, less than 630,000 people work in the manufacturing of 
apparel, textiles and shoes in the United States--a loss of over 1.6 
million jobs, or almost three-quarters of the entire manufacturing 
workforce since 1974. Almost 1 million of those jobs have been lost in 
the last decade alone.
    Despite this seemingly bleak picture, the U.S. apparel and footwear 
market is booming. Americans like their clothes, and their shoes, and 
it shows. U.S. consumers spent a record $350 billion on apparel and 
footwear last year, or an average of $1,800 for every man, woman and 
child in the United States. Even as energy prices skyrocketed last 
year, retail sales at clothing and footwear stores were 6.1 percent 
higher than in 2005. The bottom line is that despite whatever economic 
pressures face us, Americans still buy new things to wear. Americans, 
however, are picky about their shoes and clothes, they continually want 
an ever-wider variety of higher-quality shoes and clothes at lower 
prices--and our industry has had to respond.
    U.S. footwear and apparel firms have responded to these challenges 
by transforming themselves from manufacturers into brands. Today's U.S. 
apparel and footwear ``brands'' are more lean and more competitive than 
ever--their goal is to provide the American consumer with what they 
want--the best brands at the best prices, while still making a profit.
    And the result of this is that U.S. apparel and footwear firms are 
thriving, with many achieving profits last year--profits that go 
directly back into the U.S. economy and ensure a competitive industry.
    Further, while the industry has lost over one million manufacturing 
jobs in the last decade, the industry has produced hundreds of 
thousands of good-paying new jobs for U.S. workers--not in 
manufacturing, but in such varied professions as design, research and 
development, marketing, distribution, sourcing, warehousing, 
management, administration and sales. Further, the industry directly 
supports another 1.5 million plus jobs at retail establishments 
throughout the United States.
    The industry's transformation has directly benefited U.S. 
consumers--particularly hardworking lower- and middle-income American 
families--by lowering prices on one of the most basic staples every 
man, woman and child needs. As a result of the industry's 
transformation, apparel and footwear retail prices have declined some 
10 percent since 1998, despite a 20 percent increase in overall retail 
prices during the same period--saving American families countless 
billions of dollars every year--money they pump back into the U.S. 
economy.
    Thanks to these lower prices, American families today spend a 
smaller percentage of their income on shoes and clothes, a necessity 
for every American, and instead spend more elsewhere. According to the 
U.S. Department of Commerce's Bureau of Economic Analysis, the 
percentage of the average American family's Personal Consumption 
Expenditures (PCE) spent on clothes and shoes has dropped by almost 
one-half since 1977--from 6.6 percent of total PCE in 1977 to less than 
3.9 percent today. With consumer spending driving over 2/3 of our Gross 
Domestic Product (GDP), the decline in U.S. apparel and footwear prices 
has helped fuel the overall economy.
China's Relationship with the U.S. Apparel & Footwear Industry
    The U.S. apparel and footwear industry could not have succeeded in 
transforming into the success that it has become today without the 
existence of China. Working for the most part with foreign-owned and 
privately-held factories in China, U.S. apparel and footwear firms have 
been able to give American consumers what they want--an ever-wider 
variety of higher-quality shoes and clothes at lower prices.
    Today, this relationship is stronger than ever. U.S. footwear and 
apparel firms imported over $30 billion worth of footwear and apparel 
from China. U.S. imports from China account for over 85 percent of all 
shoes and over 25 percent of clothes sold in the United States.
Opening the Chinese Market to U.S. Apparel and Footwear Brands
There Has Been Progress, but More Must be Done
    U.S. footwear and apparel firms, however, recognize that 95 percent 
of the world's population lives outside the United States. Some of 
their fastest growing markets are no longer in the United States or 
Europe, but in China, or India or Brazil. U.S. apparel and footwear 
firms are now truly global--they buy and sell clothes and shoes all 
over the world. That is why AAFA's motto is--``We Dress the World.''
    That is why our industry was one of the biggest supporters of China 
entering the World Trade Organization (WTO), not just because of our 
relationship with China as a supplier to the U.S. market, but because 
we wanted to use WTO rules to open China--with the world's largest 
middle class of 200 million people and growing--to U.S. brands. Since 
China's WTO accession, our industry has worked closely with the U.S. 
government and the rest of the U.S. business community to ensure that 
China lives up to its commitment in opening up its distribution and 
retail sectors. Thanks to our efforts, China has largely lived up to 
those commitments, opening the doors to U.S. brands to sell into the 
vast Chinese market. While U.S. brands have had some success in China 
because of these efforts, restrictions still exist in these sectors. We 
hope the Chinese fully live up to their commitments in these areas.
Intellectual Property Rights (IPR)
    Moreover, we have been deeply disappointed with the progress made 
to date on China's efforts to improve its Intellectual Property Rights 
(IPR) enforcement. U.S. footwear and apparel brands have been subject 
to rampant counterfeiting in China, stalling our efforts to break into 
this important market.
    This problem even affects us in our home market--the United States. 
Every year, clothes and shoes top the list of counterfeit items seized 
by U.S. Customs. We estimate that these seizures represent only a small 
fraction of the total amount of counterfeit shoes and clothes entering 
the U.S. market.
    China must do more on IPR enforcement. While we continue to support 
the dialogue between the U.S. and Chinese governments on this subject, 
the Chinese must move beyond talk and take action. Otherwise, the U.S. 
government must take action.
Subsidies
    We applaud the Bush administration in initiating a case against 
China in the World Trade Organization (WTO) again China's continued use 
of WTO-Prohibited Subsidies. Such subsidies can truly distort trade in 
certain products and industries. Further, the arbitrary nature of such 
subsidies, where China has provided and then removed such subsidies 
without notice, creates immense uncertainty for our industry.
Next Steps--the U.S. Apparel and Footwear Industry View
    As we noted, China still has a long way to go in meeting its 
international obligations--as both a major economic power and as a 
major market for U.S. brands and U.S. products. We fully support the 
current administration's efforts to address these many issues through 
dialogue. As we also noted, however, our industry would support further 
actions in specific instances where dialogue continues to produce less 
than desired results.
    I would, however, caution those who would propose certain 
``remedies'' for the purpose of resolving many of these issues. First, 
many of the proposed ``solutions'' clearly violate U.S. obligations 
under international trade rules. While many might not be concerned 
about this, this violation is of critical concern to our industry. As I 
mentioned previously, U.S. apparel and footwear firms make and sell 
everywhere around the world, including selling clothes and shoes made 
in China into major markets like Europe, Brazil and India. Any action 
taken by the United States against China that violates international 
trade rules would not only be closely watched by these countries but 
quickly replicated, closing these important markets to U.S. brands
    Second, many of these proposed ``remedies'' would impose 
significant penalties, in the form of punitive duties or other 
restrictions, on some or all U.S. imports from China. As I have already 
stated, virtually all clothes and shoes sold in the United States are 
imported, with a significant portion being imported from China. Similar 
situations exist for a multitude of other consumer products. If such 
``remedies'' are imposed, those remedies would amount to huge new tax 
on hardworking American families--at a time when many of these families 
could least afford it.
    Finally, such actions could actually hurt the very U.S. 
manufacturing base these measures are supposedly trying to protect. 
Regrettably, recent history has repeatedly demonstrated this fact--our 
members' products--U.S.-made apparel and footwear--figured prominently 
on foreign country retaliation lists in both the WTO dispute over 
Foreign Sales Corporations (FSC) and in the WTO dispute over the Byrd 
Amendment. These punitive measures severely crippled what remains of 
the U.S. apparel and footwear manufacturing industries as it 
essentially closed their primary export market for U.S.-made footwear 
and apparel--Europe.
    The U.S. apparel and footwear industry recognizes that many 
important issues exist in the U.S.-China relationship--issues that 
directly affect U.S. apparel and footwear firms. However, as in the 
case of our industry, the relationship between the United States and 
China is one that is critically important to and very intertwined with 
the U.S. economy. Therefore, I urge policymakers to carefully consider 
all aspects of this vital and complicated relationship before setting 
new policy.
    Thank you for your time and consideration in this matter.
            Sincerely,
                                                     Kevin M. Burke
                                                    President & CEO

                                 
              Statement of Coalition of Service Industries
China's Implementation of WTO Committments
    Thank you, Mr. Chairman and members of the Subcommittee, for the 
opportunity to express the views of the Coalition of Service Industries 
(CSI) on U.S.-China services trade and China's implementation of WTO 
services commitments. CSI is the leading business association dedicated 
to reducing barriers to U.S. services exports and mobilizing support 
for policies that enhance the global competitiveness of U.S. service 
providers. Our membership consists of U.S. corporations and 
associations engaged in many commercially important services sectors. 
Many of our member companies have significant presence in China and are 
deeply interested in China's full implementation of its WTO commitments 
and the continuation of its sectoral reforms.
    Since WTO accession, China has conducted comprehensive trade 
reforms that opened key services sectors to foreign participants, 
improved trade policy predictability, and expanded China's foreign 
markets. According to the World Bank, Chinese global cross-border 
services exports grew from $5.7 billion in 1990 to $62 billion in 2004. 
China's exports in travel, IT and communication services were 
especially strong. U.S. cross-border exports to China also increased by 
61% from $5.6 billion in 2001 to $9 billion in 2005. The U.S. services 
trade surplus with China now stands at $2.6 billion, and is based on 
strong U.S. exports in business, professional, educational, financial, 
and telecommunications services.
    Despite the robust growth of U.S.-China services trade, China's 
economy is unbalanced, because its policies continue to favor export-
oriented manufacturing sectors, as opposed to local consumption-
generated growth based on demand. As a result of these skewed policies, 
Chinese services sectors have experienced lower growth than the goods 
sector, and comprise only 41% of GDP. This is less than the average 
services GDP in low and middle income countries, and much lower than in 
the U.S., where private services are 78% of output, and 80% of private 
sector employment.
    The development of China's services sector is also hampered because 
U.S. companies are still unable to take full advantage of its WTO 
commitments due to erratic implementation. In our reviews of China's 
services trade record, we specifically stressed systemic, cross-cutting 
issues, such as market access and national treatment, poor services 
infrastructure, the lack of transparency, the lack of intellectual 
property rights (IPR) protection, and other challenges. We support the 
U.S. Government's decision to raise these overarching issues at the 
U.S.-China Strategic Economic Dialogue (SED), which we urgently hope 
will also create a solid foundation for solving many sector-specific 
trade impediments in other forums.
Structural and Systemic Issues for Strategic Economic Dialogue
    CSI members support the objective that the SED process should 
remove structural barriers that impede both China's growth and U.S. 
access to its markets through trade and investment. Services sectors 
have become increasingly important to China's further infrastructure 
growth and global competitiveness. Therefore, we suggest that the SED 
forum focus on the following systemic issues:
Increased Regulatory and Licensing Transparency
    It is in China's interest to fully embrace regulatory transparency. 
China made substantial WTO commitments to regulatory and licensing 
transparency, such as notice and comment requirements for new trade 
laws and regulations, improved licensing procedures, and judicial 
review. However, full implementation of these commitments simply has 
not taken hold in the Chinese bureaucracy. Chinese laws, regulations, 
and administrative practices frequently change without warning, and are 
frequently not applied uniformly. We are also concerned that China's 
rules often provide regulators with broad discretion, resulting in 
unpredictable rules and decisions.
    A modern economy requires transparent government and regulation. 
Transparent rule-making and licensing are one of the best ways to fight 
corruption in China. Through consistent, adequate notice and comment 
periods and the involvement of key stakeholders in the regulatory 
development process, many outstanding specific trade and investment 
problems U.S. companies continue to confront might be eliminated.
    We also encourage the Chinese Government to seek active 
participation by all stakeholders in regulatory reform. The review of 
the postal legislation, for example, would benefit from active 
consultation with the private express delivery industry. China should 
also consult with the private sector on its pending telecom bill, draft 
insurance law, and other important sectoral legislation. The 
opportunity for meaningful public comment on China's legislative 
measures is required by GATS rules on transparency and China's WTO 
accession commitments on notice and comment.
Strengthening Key Regulatory Institutions
    Chinese officials acknowledge that their regulatory agencies for 
securities, insurance, and other services are not sufficiently 
developed. China's trade negotiators have repeatedly used this argument 
as a reason to deny better offers on services. We suggest that USTR, 
Treasury, and other agencies offer technical assistance to help the 
Chinese strengthen their regulatory institutions. For instance, the 
Chinese telecom regulator is not sufficiently independent in its 
functions and responsibilities from the state-owned telecom monopolies. 
Enactment of a Telecom Law that would establish an independent 
regulator could serve as the basis for a significant expansion of the 
telecom sector and those industries that depend on competitive telecom 
services. U.S. experience with telecommunication regulation could 
surely be useful!
Financial Sector Modernization
    The structural rigidities of the Chinese financial system are well 
known. The system perpetuates bad loans from state banks to state 
enterprises, starves small and medium services companies of funds and 
encourages investment in sectors suffering from overcapacity, which 
leads to China's continued exploitation of export markets. All this 
results in poor savings returns for Chinese citizens and widespread 
economic inefficiencies. Chinese leaders have indicated they are aware 
of these shortcomings and of the need to strengthen the Chinese 
financial services sector.
    China's objective of modernizing its financial sector can be 
achieved by continuing to liberalize foreign investment policies in the 
financial services sector. China will need to redouble its efforts to 
increase regulatory transparency, permit full foreign ownership of 
investments, and offer a full choice of juridical form.
    A more open market will allow foreign financial services suppliers 
to introduce new and innovative products that could serve as models for 
health insurance coverage, retirement savings, and accidental death and 
dismemberment benefit plans. This will require full national treatment 
for foreign firms in all areas affecting operation and expansion of 
business.
Promoting Innovation and Technical Assistance
    Because China and the U.S. share the goal of promoting innovation 
in services to secure economic growth, both countries should 
collaborate on research and development of the new field of ``services 
science.'' Services science is a multidisciplinary field that combines 
training for technology, science, management and engineering skills. 
IBM is partnering with the Chinese Ministry of Education and leading 
universities to develop this new academic field of study, and 
collaboration between research universities in both countries provides 
an excellent partnership opportunity.
    We support and encourage China's ambitious goal of developing a 
competitive IT and computer and related services sector. However, this 
requires the Chinese Government's strong commitment to preparing a 
globally competitive workforce. U.S. associations and their members 
have the necessary expertise in the training and certification of 
highly skilled IT services specialists, and can help Chinese 
authorities to meet their export and domestic IT worker development 
goals.
    In its ``Opinion on the Reform and Development of the Insurance 
Industry'' of June 26, 2006, the Chinese State Council states that 
foreign insurers should be relied upon as a source of innovation and 
high standards, and that market demand should be the driving force in 
determining the need for new products. China Insurance Regulatory 
Commission (CIRC) leadership endorses these goals. Nevertheless, the 
current regulatory process does not allow for the rapid approval of new 
products and appropriate tax treatment to encourage the sale of 
sophisticated new policies. For example, CIRC has failed to allow 
foreign carriers to provide political risk insurance for Chinese 
companies with exposures in foreign markets, even though there is keen 
demand for this product. Additionally, the inadequate tax deductibility 
of producer commissions hinders the sale of sophisticated insurance 
products.
Increased Market Access in Sectors Dependent on Intellectual Property 
        Rights (IPR) Protection
    Elimination of China's trade barriers in audiovisual, software, and 
IT goods and services is one of the factors that can help solve China's 
piracy problem and foster sound investment and economic growth, 
benefiting both U.S. and Chinese producers. However, current trade 
barriers and regulations make it difficult for U.S. companies to enter 
the Chinese market to supply legitimate IPR products, thereby ceding 
the market to counterfeit and pirate products.
    China's piracy and counterfeiting at the wholesale and retail 
levels, end-user piracy, Internet piracy, multi-channel signal piracy, 
and unauthorized access to 'overspill' satellite pay-TV programs remain 
rampant due to lenient penalties, uncoordinated enforcement among local 
and national authorities, and the lack of transparency in 
administrative and criminal enforcement. The piracy rate for optical 
media products and software is reported to be over 90 percent. China's 
law still stipulates inadequate criminal liability for copyright 
offenses, e.g., corporate end-user and Internet piracy, unclear 
protection for temporary copies, and overly broad exceptions to 
protection of computer software. Criminal prosecution of piracy remains 
restricted by the Chinese criminal code, which requires a demonstration 
that piracy is occurring for the purpose of making a profit.
Sector-Specific Issues for Joint Commission on Commerce and Trade
    In addition to its overarching systemic issues, China should 
resolve the following sector-specific issues, which are addressed 
mainly at the Joint Commission on Commerce and Trade (JCCT). We 
appreciate that the U.S. Government also raises these sector-specific 
trade barriers at Transitional Review Mechanism (TRM) meetings in the 
WTO, but we are disappointed at China's lack of responsiveness to these 
efforts. It is essential that China honor its WTO services obligations 
and carry out its commitments in the JCCT.
Financial Sercices
    CSI has been working closely with the U.S. Government to urge the 
Chinese leadership to implement its existing WTO commitments fully and 
liberalize China's financial services sector further. The Chinese 
Government should improve its WTO financial services commitments to 
reflect the following principles: the ability to own 100% of 
investments; establish in the juridical form of choice; enjoy non-
discriminatory, national treatment in all aspects of business; have 
permission to supply services cross-border to sophisticated consumers; 
and rely on greater regulatory transparency with effective notice and 
comment periods. These principles would give U.S. financial firms new, 
commercially meaningful opportunities in China.
Insurance
    After issuing the amendment to China's Insurance Law in 2003, CIRC 
followed with important implementing rules regarding the administration 
of insurance companies, asset management, risk control and other 
aspects of insurance regulation. We appreciate that CIRC also allowed 
interested parties to provide comments on the draft Insurance Law. 
Despite these developments, significant market access and national 
treatment concerns remain:

      Branching. The ability to grow business geographically 
through branch and sub-branch expansion is the most important issue for 
many foreign insurance companies in China. We are concerned that branch 
approvals for U.S. providers are still being granted one at a time, 
while established and start-up Chinese companies receive approval to 
open multiple branches. This practice is contrary to international 
practice, impedes competition, and most importantly violates China's 
WTO national treatment commitment for insurance. Senior officials at 
CIRC have confirmed to USTR their commitment to allow foreign companies 
to establish multiple concurrent branches. We are pleased with this 
statement, and would call on CIRC to confirm this intention in an 
administrative clarification to all CIRC officials. Most important of 
all is a change in actual practice.

    Subsidiary Conversion Despite CIRC's effective requirement that 
foreign-owned insurers convert their Chinese operations from branches 
to subsidiaries (notwithstanding China's WTO commitment to allow 
foreign general insurers to operate on either a branch or subsidiary 
basis), the regulator continues to delay approval of companies' 
applications for such conversion. This delay contravenes CIRC's own 
regulation (Baojian Fa 45, page 3, section 6) that requires its 
response to applications within two months. The delay--over a year for 
some companies--has created uncertainty and confusion in corporate 
planning as insurers eager to expand can only apply for permission to 
open new offices three months after the conversion process is approved. 
We urge CIRC to adhere to its own regulation and approve applications 
on a timely basis.

      Capitalization Requirements. CIRC should confirm that the 
RMB 200 million capital requirement for initial establishment, whether 
as a subsidiary or a branch, includes the right to establish sub-
branches without limitation on numbers, and without having to satisfy 
any additional capital requirements. The Chinese government has yet to 
provide its rationale for requiring additional capital of RMB 20 
million for each additional branch, particularly given that any 
additional branches would still be backed by the full asset base of the 
admitted entity and have to comply with all CIRC solvency rules.
      Overseas Utilization of Insurance Foreign Exchange Funds. 
CIRC's Provisional Measures on the Administration of the Overseas 
Utilization of Insurance Foreign Exchange Funds establish a qualifying 
threshold (total assets of RMB 5 billion) for companies to invest their 
foreign exchange capital in overseas funds or equities. CSI members are 
concerned that even though this limitation applies to both domestic and 
foreign providers, only the largest insurers, i.e., mostly domestic 
companies, will have the necessary assets to qualify. Many foreign-
invested insurers will not qualify unless CIRC recognizes the assets of 
the parent foreign company when determining the asset level of a 
foreign-invested company.
      Insurance Asset Management Restrictions. Under Article 8 
of CIRC's Interim Regulations for Insurance Assets Management 
Companies, only providers that have held licenses for more than eight 
years are permitted to apply to establish an insurance asset management 
company. Although China previously stated that this limitation applies 
to both domestic and foreign providers, it effectively excludes all 
foreign companies entering the market since China's WTO accession in 
2001.
      Reinsurance. Senior officials at CIRC have confirmed to 
USTR their commitment to allow foreign reinsurance and insurance 
companies to conduct cross border reinsurance with Chinese direct 
insurers or reinsurers on a national treatment basis. We applaud this 
action, and would call on CIRC to confirm this intention in an 
administrative clarification to all CIRC officials. This clarification 
should state that China will suspend implementation of the 2005 
Regulations on Administration of Reinsurance Business, as the 
regulation discriminates against foreign reinsurance companies by 
requiring right of first refusal for 50% of each primary company's 
reinsurance program with domestically admitted reinsurers. CIRC should 
also clarify that for purposes of these measures a 100% foreign-owned 
insurance operation may cede to a parent or affiliate insurance 
company.
      Acquired Rights. Companies operating in China at the time 
of WTO accession are entitled to continue operating and geographically 
expand their business on the basis of their previous juridical form.
Asset Management and Securities
    Foreign firms are currently permitted to own 49% of joint-venture 
asset management firms in China, consistent with China's WTO accession 
commitments. We strongly urge China to go beyond its WTO commitments by 
allowing foreign firms to choose their form of establishment and equity 
participation levels, and permitting competition on the same basis as 
domestic firms.
    For asset management firms, the Chinese Joint Venture Rules require 
foreign firms to have at least RMB300 million (U.S.$39 million) in 
paid-in capital to qualify as a joint venture partner. This requirement 
is significantly higher than in other jurisdictions, and serves as a 
market barrier to U.S. companies. Asset management firms do not need 
large amounts of capital to protect investors because their business is 
not capital intensive, and client assets typically are not at risk if 
the asset manager experiences financial difficulties.
    A high regulatory capital requirement disproportionately affects 
foreign asset managers because their operations are typically not as 
significant as their operations in their home country. As a result, 
domestic firms will be able to comply with a large capital requirement 
more easily than foreign firms. Additionally, while large banks or 
broker dealers may not find it difficult to meet high capital 
requirements, many smaller, independent firms are part of the highly 
successful asset management industry in the United States.
    We are encouraged by recent developments that allow Chinese 
nationals and corporations to invest in overseas markets as qualified 
domestic institutional investors (QDIIs). We hope that the new rules 
will be implemented in a fair and transparent manner that allows all 
qualified asset managers--domestic and foreign--to participate on an 
equal basis.
    Although we are pleased that China took steps to open the A-share 
market to foreign investors by adopting rules on qualified foreign 
institutional investors (QFIIs), the CSRC and SAFE have been slow to 
amend the rules to increase their practicality. We understand that 
anticipated revisions would address many of our concerns, including a 
reduction of the lock-up period from one year to three months and a 
simplified approval process for remittances, but these revisions have 
been delayed repeatedly. We urge greater liberalization of the QFII 
regime to remove restrictions on investment by QFIIs.
Pensions
    CSI members are pleased that the Chinese government has issued its 
new enterprise annuity initiative to provide better retirement security 
for its citizens. However, the new regulations are incomplete and 
ambiguous. Thus, we suggest that the enterprise annuity rules be 
clarified further, and implemented in a transparent and predictable 
way. To ensure companies' compliance, China should specifically clarify 
the licensing process and procedures, and provide information on the 
regulatory and supervisory authorities, and operation requirements, 
with a view to securing a level playing field among the various 
financial services entities that offer such products. We would also 
suggest that pension providers be permitted to apply for a 
comprehensive license covering all required entities (Trustee, 
Custodian, Record Keeping and Fund Management), such that they can 
service all aspects, including a pension plan member's retirement plan.
    In May 2005, it was reported that the Ministry of Labor and Social 
Security (MOLSS) had stopped accepting applications for enterprise 
pension funds. Although MOLSS has indicated that there will be future 
application periods, it has not identified the date when applications 
will be accepted again.
    CSI members also suggest that China adopt a universal approach to 
taxation of pension plans and that its tax regime enable employers to 
make tax-favored contributions to employees' pension plans. Tax rules 
should provide tax deferral for individuals that contribute to defined 
contribution pension accounts, similar to U.S. 401(k) plans. As the 
U.S. experience shows, tax incentives are essential for strong and 
healthy development of private pension plans.
    We also encourage the Chinese pension regulator to promote high 
sectoral standards and professional management by separating financial 
companies' pension operations from other businesses. This can be done 
through establishing pension subsidiaries, a trust entity, such as a 
master trust, which would provide for financial protection of pension 
plan members, or setting up a mechanism to better separate pension 
assets from other assets.
Electronic Payment Services
    Although China represents an extremely large potential market for 
the vibrant U.S. electronic payments industry, U.S. electronic payments 
providers, global leaders in these services, have very limited market 
access in China. Currently, foreign electronic payments cards cannot be 
issued by any bank (local or foreign) unless they are co-branded with 
China UnionPay (CUP). CUP was established by the People's Bank of China 
(PBOC) in 2002 as a monopoly domestic electronic payments provider and 
processor. We believe these restrictions violate China's accession 
commitments in financial services, which came into force on December 
11, 2006.
    The PBOC has asserted that allowing foreign banks to issue CUP 
credit and debit cards to Chinese consumers by the December 11 deadline 
was all that was required for China to meet its WTO commitments. This 
is clearly not the case. China's GATS schedule requires that it provide 
for unrestricted market access and national treatment for ``payments 
and money transmission services, including credit, charge, and debit 
cards.'' This means that China must allow financial institutions to 
issue payment cards of their choice and permit foreign providers to 
process both foreign currency and domestic currency transactions 
without CUP involvement. Banks cannot be required to issue only one 
brand or co-branded domestic payment cards.
    In addition, China committed to unrestricted market access and 
national treatment for ``advisory, intermediation, and other auxiliary 
financial services'' for other financial services listed in its 
schedule, including payments. China also committed to open market 
access for the ``provision and transfer of financial information, and 
financial data processing--by supplier[s] of other financial 
services,'' and took no exceptions that would allow any domestic 
payments processor to operate as a monopoly.
    WTO also mandates that countries may not use standards to exclude 
foreign service providers in sectors in which they have made specific 
commitments. Thus, China must adopt standards for electronic payments 
processors that are neutral in law and fact.
Telecommunications
    China's narrow interpretation of market access opportunities for 
foreign participants and lack of an independent regulator remain key 
outstanding issues, which contradict its WTO accession commitments. 
Specifically, foreign market entry is being delayed by the Ministry of 
Information Industry's definition of value-added services (VAS) for 
international value added network service licensing. The regulator has 
construed the meaning of VAS in China's WTO commitments so narrowly 
that any commercially important sectors, such as IP-virtual private 
networks (IP-VPN) services demanded by global enterprises, are 
excluded.
    China's unreasonably high capitalization requirements for basic 
services and the prohibition on resale absent a basic services license 
have also greatly limited market access in both basic 
telecommunications and VAS. We believe that resale should be permitted, 
and subject to appropriately lower market entry requirements. Further, 
the requirement that foreign telecom service providers may only enter 
into a joint venture with one of the existing state-owned enterprise 
telecom providers is problematic.
    Contrary to its claims, China has not implemented its WTO Reference 
Paper commitment to establish an independent regulator. The Chinese 
Government still owns and controls all major telecom operators, and the 
Ministry of Information Industry serves in the chain of command as a 
leader rather than a regulator of the sector.
    Despite the WTO commitment to discuss further sectoral 
liberalization, China has yet to submit an improved telecom offer with 
broader market access, including higher foreign equity participation.
    The industry hoped that the JCCT Telecom Dialogue would offer a 
useful vehicle to ensure China's WTO compliance and advance industry 
interests in liberalizing its telecommunications market. The Telecom 
Dialogue is already well into its second year with no tangible progress 
evident. At last year's JCCT Plenary meeting, the U.S. government was 
able to obtain China's commitment to address the capitalization 
requirement. We look forward to its substantial reduction, but there 
has been no progress to date.
Express Delivery
    U.S. express delivery service (EDS) industry members are concerned 
that the Chinese government has not yet released the details of its 
plans for postal reform and that it has not taken into account the 
serious concerns that the industry has expressed about the draft postal 
law. The opportunity to review the postal reform plan and draft law, 
and the opportunity for meaningful public comment on China's postal 
measures are required by GATS rules on transparency and China's WTO 
accession commitments on notice and comment.
    The current (eighth) draft postal law--which industry has not been 
allowed to see--reportedly attempts to narrowly define express delivery 
services contrary to China's WTO market access commitments, and 
includes national treatment violations for domestic delivery services. 
The law would grant China Post a monopoly on letter delivery with two 
exceptions. The first exception would allow for international express 
letter delivery, subject to a separate set of regulations. The second 
would apply to letters and certain official documents of more than 150 
grams. However, the second exception is not available to foreign-
invested EDS suppliers, and would explicitly prohibit foreign-invested 
enterprises from supplying domestic express letter delivery services in 
China.
    China's draft law and postal reform plan would apply a tax on all 
entities operating under the expanded postal monopoly. The current 
draft does not include specific percentages for a universal postal 
service fund tax. We are concerned that this measure would result in 
millions of dollars of lost revenue for U.S. companies and would 
increase the cost of trade. At the same time, it is unclear how this 
fund would be used by China Post, so there is a possibility that it 
would be used to subsidize its express delivery services.
    The draft would also grant new powers to the State Postal Bureau 
(SPB) to regulate the international express industry. This includes 
subjecting mergers and acquisitions of EDS companies' operations in 
China to review and approval by the SPB.
    We understand that the eighth draft includes several articles that 
give state-owned China Post, its subsidiaries and branches, including 
its express delivery arm EMS, many competitive advantages against 
private companies. These advantages include exemption from traffic 
regulations; expedited priority dispatch ensured by other 
transportation companies; preferential access to air, rail and sea 
transport; as well as potential tax breaks and subsidies. In addition, 
postal enterprises that engage in competitive letter express businesses 
like EMS are not subject to the licensing requirements that other 
express delivery companies must follow.
China Post's Entrustments Issue
    Despite Chinese government assurances and published regulations 
stating that entrustment certificates from China Post would be 
processed one time only and be valid for the duration of the firms' 
international freight forwarder licenses (i.e., several years), the SPB 
granted these certificates for a limited time only, most recently for 
the calendar year 2007. Although those same assurances and regulations 
state that firms would be granted one entrustment at the national level 
and the new branches would be ``recorded'' with the SPB, the SPB has 
directed companies to entrust locally. However, the local Postal 
Authorities in headquarters' jurisdiction claim that they lack the 
authority to entrust more than headquarters' operations. This 
entrustment regime violates China's WTO commitments not to roll back 
companies' market access rights and not to use licensing procedures to 
restrain foreign competition.
Freight Forwarding and Logistics Services
    Revised international freight forwarding (IFF) rules issued on 
December 1, 2005, implement China's commitment to allow wholly foreign 
owned IFF ventures, but regulations published by the Civil Aviation 
Administration limit the ability of wholly foreign owned IFF 
enterprises to provide the full range of such services. To book cargo 
space on an airline in China, an IFF enterprise must obtain an Air 
Freight Sales Agency License from the CAAC. There are two categories of 
air freight sales agency licenses: Class A, which allows the holder to 
book cargo space on international flights; and Class B, which allows 
the holder to book cargo space on domestic flights. Wholly foreign 
owned enterprises are unable to obtain these licenses, which are 
available only to domestic firms and joint ventures.
    We believe this restriction is a violation of China's WTO full 
market access commitments in freight forwarding agency services (CPC 
748 and 749) under ``Services auxiliary to all modes of transport.'' 
The explanatory note to the CPC system clearly and explicitly includes 
aircraft space brokerage services. If China intended to require 
licensing, and such licensing would have limited market access, such an 
exception should have been explicitly scheduled in the services 
schedule included in the Protocol of Accession.
Audiovisual, Publishing, and IT Products and Services
    We encourage China to remove its limitations on foreign ownership 
in distribution and video replication, publishing, TV stations, and 
theater holding companies as one means to curb piracy. The elimination 
of market access barriers to distribute foreign pay TV programs and 
services, and an increase in the number of foreign revenue-sharing 
films allowed into the Chinese market are also important. Some of the 
piracy issues can be alleviated by allowing foreign media companies to 
have a greater stake in their Chinese investments.
    China's WTO accession commitments in audiovisual services allow for 
foreign minority participation in cinema operations. However, China 
refuses to permit foreign majority enterprises, except in select cases 
that were grandfathered under a terminated experimental policy to allow 
up to 75% foreign investment in select cities. China also insists that 
the foreign partner cannot serve as Chairman of the cinema joint 
venture even if approved by its board. In addition, China does not 
permit the licensing of foreign pay television services, which stifles 
the growth of its cable and digital platforms.
    China increased the number of foreign revenue-sharing films allowed 
into the market each year to 20, a minimal market opening measure. The 
terms of the revenue-sharing contract are dictated by the Chinese 
Government, and are not commercially reasonable by any standard. China 
continues to disrupt orderly marketing by instituting blackout periods 
when foreign films cannot be shown, and by imposing revenue targets. 
The orderly distribution of home entertainment products is also 
impaired by the imposition of rules restricting the choice of business 
partners, and by the terms of commercial agreements. In addition, China 
maintains primetime broadcasting and foreign content restrictions in 
pay and non-pay television. All these restrictions, along with the 
lengthy approval process, only serve to expand the spread of illegal 
pirated content.
    In the audiovisual distribution services sector, China is not 
abiding by its retail distribution services commitments, which are to 
allow foreign majority control with the ability to sell AV products. 
Contrary to this commitment, China has restricted foreign majority 
controlled retailers from securing AV retailing licenses.
    In the publishing sector, control over content remains strict and 
China has stated that it will not approve any more foreign titles under 
Chinese publishing licenses except technical and scientific 
publications. We find this decision troubling and urge China to 
reconsider it.
Government Procurement of Software
    We welcome China's commitment to begin formal Government 
Procurement Agreement (GPA) negotiations and submit its Appendix I 
offer by the end of 2007. In the interim, China should withhold 
implementing new procurement regulations that do not conform to GPA 
principles, including the Implementing Draft Measures on Government 
Procurement of Software of March 2005. CSI members are concerned that 
these draft measures provide for strong preferential treatment for 
Chinese suppliers by restricting government procurement to domestic 
software products. To qualify as ``domestic,'' these products must be 
``manufactured'' in China and the China-based development cost of the 
software must be at least 50%. The software copyright must also be 
owned by a Chinese entity or first registered in China.
    China's draft measures also contain a procurement preference for 
open source software that is inconsistent with international practice, 
the WTO Government Procurement Agreement, and sound, efficient, and 
merit-based procurement policy. We believe that any procurement regime 
should be based on performance, and not favor any technology or 
licensing model.
    The draft measures propose the possible purchase of foreign 
software only on the basis of product-by-product waivers, and only if 
the software provider satisfies unspecified requirements with respect 
to the level of the company's investment, R&D expenditures, outsourcing 
work performed, or taxes paid in China. Thus, this exception will 
benefit a small group of providers, and will not promote the ultimate 
goal of developing a competitive, advanced software industry in China, 
based on international best practice.
    China's domestic preference policy contradicts the general trend in 
international trade and procurement law toward open, transparent, 
technology-neutral, and non-discriminatory access to global markets. 
The measures will severely limit market access of our members, 
especially software companies, to China's government procurement, and 
will create a dangerous precedent for other sectors. The rules also run 
counter to the spirit of openness China committed to when it became a 
WTO member and assumed observer status with respect to the WTO 
Government Procurement Agreement.
Conclusion
    China's WTO accession opened a very important services market to 
U.S. suppliers, but China's services sector reforms must be fully 
implemented and, for maximal benefit, go beyond WTO commitments. As 
China's manufacturing experience shows, an open market provided many 
benefits to the Chinese economy. There is no reason why the same policy 
would fail in services.
    China's full implementation of services commitments and continued 
services trade liberalization can promote the development of its 
services sectors, increase the inflow of services investment, and help 
resolve its complex economic and social issues. To build the 
infrastructure of a modern economy, China will have to rely on 
sophisticated services offered by foreign companies.
    As a large exporter, China also has a significant stake in 
promoting globalization under the Doha Development Agenda. Despite its 
growing role in global trade, China has not been an active proponent of 
ambitious trade offers in services. The success of the Doha Round 
depends on constructive participation of key developing countries, such 
as China. We hope the Chinese Government will be a ``responsible 
stakeholder'' and step up its negotiating efforts by submitting a high-
value services offer and encouraging other important developing 
countries to do the same.

                                 
        Statement of Usha C. V. Haley, University of New Haven,
                        West Haven, Connecticut
    Thank you Trade Subcommittee Chairman Levin and honorable members 
of the Committee of Ways and Means, for the invitation to address such 
a distinguished and thoughtful group. I apologize for my inability to 
be present as I am currently conducting research in Asia, but 
appreciate the opportunity to present a written statement for the 
record in lieu of my personal appearance. My statement focuses on the 
roles and effects of on-the book and off-the book subsidies in the 
Chinese market and their impacts on competition with U.S. products in 
China.
    In line with its admittance into the WTO, the Chinese government 
agreed to implement most of its key commitments on the opening of 
markets by December 2004. Yet, in February 2007, China's implementation 
work remains incomplete. China's refusal to adhere to WTO compliance 
efforts stems in part from its inability to accept the key WTO 
principles of market access, non-discrimination and national treatment. 
Additionally, market mechanisms in China remain undeveloped, making its 
trade regime unpredictable and opaque. Although China implemented some 
key reforms, it has continued to use an array of industrial policy 
tools in 2006 to promote or to protect favored sectors and industries, 
and these tools at times collide with China's WTO obligations.
    Industrial subsidies in China derive from governmental dominance of 
the economy and from various factors including the central, provincial 
and municipal governments' strategic goals, patronage, and corruption. 
The subsidies include direct and indirect components that affect both 
the top and bottom lines of industrial operations. My statement stems 
from research that I have conducted over the last eight years on 
business in China, some of which has been published in my book, The 
Chinese Tao of Business: the Logic of Successful Business Strategy 
(John Wiley & Sons). My statement covers forms of subsidies in China, 
impediments to monitoring these subsidies, specific subsidies for the 
11th 5-year program period, Chinese governmental policies behind 
subsidies, and finally, how subsidies affect the profitabilities of 
foreign-invested enterprises (FIEs).
Forms of Subsidies
    State subsidies primarily flow into State-Owned Enterprises (SOEs) 
although some well-connected private firms also benefit from indirect 
subsidies such as Special Market Information. Currently, the state 
controls about half the industrial output and SOEs still account for 
35% of urban employment. Almost all of China's heavy industry and much 
of its technology lies in governmental hands. The government controls 
about a third of China's economy through SOEs in key sectors such as 
defense and utilities. The State Owned Assets Supervision and 
Administration Committee (SASAC) directly manages the top 190 or so 
SOEs, the biggest of which have international stock-market listings.
    Subsidies exist in all industries that the Chinese state and 
provincial governments considered economically or militarily strategic, 
including Resource Extraction, Steel, Computing, Software, R & D, 
Environmental Services and Conservation, and Autos.
    The subsidies exist in various forms, including those directly 
affecting international trade such as:

    a.  export subsidies for FIEs and SOEs that meet certain export 
performance requirements. FIEs accounted for about 60 percent of 
China's exports of manufactured goods in 2005. The vast majority of 
FIEs that exporting goods from China have corporate ties to countries 
neighboring China.
    b.  import-substitution subsidies that discourage purchases of 
foreign products by providing generous incentives for companies in 
China for buying domestic products rather than imports from the USA or 
other countries.

    The Chinese central and provincial governments support both on-the-
book and off-the book subsidies for domestic companies. Off-the book 
subsidies are far more pervasive and influential but also far more 
difficult to measure and to ascertain. Subsidies include:

     1.  Free to Low-cost Loans: The government exercises a vice-like 
grip on banks, stock markets and bond issuance and these translate to 
the ability to make grandiose loans. The most extreme statistics in the 
financial sector deal with loans outstanding. In three years from 2002 
to 2004, loans increased by 58 per cent, or $785 billion. In 2003, new 
lending equaled almost one quarter of gross domestic product (GDP). A 
credit binge fueled this latest boom. Half of all bank loans go to 
SOEs. Most of these loans will never be repaid. Huawei for example, has 
a $10 billion credit line from China Development Bank. Discounted 
lending rates are also available to SOEs and domestic companies that 
satisfy certain export performance requirements
     2.  Asset Injections: The SOEs' parent companies, usually 
municipal governments or ministries, provide their protege s with 
opportunities to acquire state-run businesses, such as toll bridges, at 
highly preferential terms which help pay down their costs.
     3.  No Break-even: Poor book-keeping practices, and lax bottom-
line considerations, grant SOEs freedom from the need to make profits, 
or to break even. ``Pure state-controlled enterprises'' have no 
disclosure requirements.
     4.  Subsidized Purchases: SOEs can purchase their components and 
raw materials below cost and directly from each other, affecting the 
competitiveness of certain sectors in the global economy. This 
tradition propelled the Chinese motorcycle industry's ability to buy 
control of virtually all Indian motorcycle companies short of Bajaj and 
turn them into assemblers of Chinese components.
     5.  International Bargaining Power: Beijing has used its enormous 
buying power to intercede for its SOEs with foreign suppliers and to 
reduce acquisition costs for raw materials. A recent example includes 
the Chinese government's aborted attempt to bully down the cost of iron 
ore for the Chinese steel industry below internationally-negotiated 
price levels. The Chinese government has also secured contracts and 
exploration rights abroad for its SOEs.
     6.  Labor Controls: The government exercises various methods to 
control employees including the dang'an or employment dossier; and to 
reduce labor costs through injection of part-time and migrant workers 
and the use of prison labor. The government also offers exemptions from 
mandatory worker-benefit contributions to companies that satisfy 
certain export performance requirements
     7.  Tax Breaks: Many SOEs avoid taxation or reduce it through tax 
breaks (although this can backfire if a company's management loses 
favor). Income tax reductions and refunds are available to companies 
that satisfy certain export performance requirements and that purchase 
Chinese-made equipment and accessories rather than imports
     8.  Energy and Land Subsidies: The state subsidizes gasoline and 
electricity. Currently, Beijing tightly controls the price of both 
gasoline and electricity at well below their true economic levels. The 
state also offers free land and utilities to SOEs and companies in key 
strategic sectors.
     9.  Tariff and VAT Exemptions: The state offers Value-added tax 
(VAT) and tariff exemptions to companies that satisfy certain export 
performance requirements. The state also offers VAT refunds to 
companies that purchase Chinese-made equipment and accessories rather 
than imports
    10.  Sectoral Credit Allocation: The Chinese economy speeds up or 
slows down on a sector-by-sector basis on credit allocations by 
Beijing. Some sectors such as automotive, steel, ethylene and metals' 
smelting have come off the boil. Others sectors such as coal, railways 
and utilities are still getting huge infusions of policy-mandated 
credit. Very high levels of bureaucratic interference characterize 
credit allocations and industrial-project approvals in China and the 
state banking system does not allow the market to price capital.
    11.  Stock Listings: SOEs and Collectives form over 93 percent of 
the listing of approximately 1300 companies on China's Shanghai and 
Shenzhen Stock Exchanges. Provincial governments pressure government 
regulators to discriminate against private companies and give the 
precious slots to their ailing state dinosaurs. Indeed, private 
companies without state connections cannot obtain a listing on any 
Chinese stock exchange
    12.  Cheap Technology: China runs a deficit on its technology trade 
with the rest of the world and FIEs control 80 percent of technological 
imports and exports in China. The Chinese have made little progress in 
either basic research or advanced design in vital industries. Despite 
this institutional flaw, SOEs such as Huawei owe much of their success 
to lax enforcement of laws governing the theft of intellectual 
property.
    13.  Control over Distribution Channels: Provincial and municipal 
governments control distribution channels to allocate and to manage 
market share, to protect favored industries from competition and to 
shape investment patterns. Regulations on distribution incorporate 
considerable ambiguities leading to both legitimate differences in 
interpretation and considerable legal efforts to find loopholes. 
Central and provincial governments routinely use this ambiguity to 
confer privileges on favored companies or industries, and to withhold 
normal rights from companies or industries as a form of protectionism. 
Local administrators have been known to seize goods being transported 
and to refuse transportation of goods through their jurisdictions. 
Administrative guidance from various and competing sources can override 
the basic laws or regulations either explicitly or unofficially. 
Provincial or municipal governments may interfere with the national 
limits on distribution by their generosity (to lure investment or to 
meet local goals) or restrictions (to protect local interests). Guanxi 
with local army officials assumes particular importance for 
distribution. Some estimates suggest that the Peoples' Liberation Army 
(PLA) controls distribution of goods for up to about 80 percent of the 
Chinese population. Its control over manufacturing facilities also 
makes the PLA China's largest and most diversified manufacturer of 
industrial and consumer goods.
    14.  Special Market Information: Relevant information for strategic 
decisions comes at a premium price in China and often includes what we 
in the USA would consider Insider Information. In China, the central 
government deliberately controls and disseminates information that it 
considers of strategic importance. When restrictions on distribution 
insulate foreign or Chinese companies from their customers, they also 
cannot undertake direct market research and have to rely on less-
sophisticated surrogates. For example, General Motors' (GMs') interns 
in Beijing have scoured the capital's streets to find out who is buying 
their cars after the intermediaries get them, so that GM can build 
guanxi with the buyers.
    15.  Undervalued Currency: The Chinese government's deliberate 
undervaluation of the yuan makes U.S. products more expensive for 
Chinese consumers who therefore purchase fewer of them. Conversely, 
China's undervalued currency also makes Chinese products cheaper in the 
USA, and therefore U.S. consumers purchase more of them, contributing 
to the record-high and still-growing U.S. trade deficit. The 
undervalued Chinese currency harms U.S. competitiveness and encourages 
the relocation of U.S. manufacturing overseas while discouraging 
investments in U.S. exporting industries.
Monitoring Subsidies in China
    Lack of transparency affects ability to monitor all forms of 
subsidy except perhaps Stock Listings. Opacity serves as a tax which

     1.  Reduces ability to determine the true efficiency and 
productivity of China's labor and results in potentially sub-optimal 
foreign direct investment (FDI) decisions until after commitments are 
made. Consequently, our research has shown that FDI enjoys higher ROIs 
and ROEs across entire industrial sectors in India against China, 
including Capital Goods; Food Beverage and Tobacco; Materials; 
Pharmaceuticals and Biotech; and, Software and Services.
     2.  Reduces the ability of U.S. domestic producers to prove 
dumping, especially as so many of those affected are Small and Medium-
sized Enterprises with limited resources.
     3.  Magnifies the weakness of China's statistical system which 
depends too much on reporting and too little on sampling; the 
statistical system shows a systematic bias to over-report growth at the 
bottom of the economic cycle and under-report it at the top, i.e. to 
flatten out a much more volatile economic cycle. Recently, some foreign 
companies have started constructing their own physical-activity indices 
of everything from freight-barge traffic to power consumption and air 
miles flown to find true economic indicators, but the enormous expense 
constrains companies from doing this well.
     4.  Reduces the credibility of the SOEs' books. For example, in 
2003, China's top 500 SOEs reported revenues of 4.07 trillion yuan up 
25 percent from the previous year; and profits of 334 billion yuan, up 
33 percent from the previous year. Only 87 of the 500 reported making 
losses. Unfortunately, outright fraud aside, most SOEs' managers do not 
know their real profits and tell their supervisors what they want to 
hear

    Unreliability in macroeconomic data also seriously compounds the 
problem of estimating the effects of subsidies.

       For example, in February 2002, the Chinese government 
said that China's GDP had grown by 7.3 percent in 2001, making it the 
world's fastest-growing economy. However, growth rates reported by 
individual provinces told another story. Only one, Yunnan, said its 
product had grown slower than the national rate. Taken together, the 
provincial figures produced a national growth rate nearly two points 
higher than the official rate! The National Statistics Bureau (NSB) 
conducts sample surveys and uses these to estimate the country's GDP 
and growth rate. The results have invariably disagreed with provincial 
figures. In 1995, the GDP growth rate suggested by provincial data 
averaged three percentage points higher than the figure of 10.5 percent 
produced by sample surveys. Opinions vary as regards the accuracy of 
the central government's estimates. However, in China, few scholars 
publicly attempt any detailed justification of alternative figures 
because of political sensitivity.
       China's NSB also lacks the capacity to collect data 
outside normal information channels and lower-level officials interfere 
with its surveys. The numbers generated by provincial governments 
remain an important criterion in evaluating local officials' 
performance, creating an incentive for statistical falsification. The 
pressure to exaggerate statistics grew in the late 1990s as Chinese 
officials sought to pump up the economy to stave off the Asian economic 
slump's effects. Beijing declared that the country had to grow at least 
7 percent a year to create jobs and to forestall social unrest. Not 
surprisingly, reported growth rates have not dipped below that level 
since.
       Officials may also routinely underreport other sensitive 
data such as debt numbers, unemployment or even FDI to avoid tax 
payments and governmental scrutiny. The central government's methods at 
ascertaining the validity of data, a process it calls yasuo shuifen or 
``squeezing the water'', involves sample surveys, price-index 
adjustments and plenty of guesswork.
       Technical difficulties, such as staff reductions among 
statistical analysts, have enhanced errors in data. No comprehensive 
measures exist for the size of the fast-growing private-business and 
service sectors or even for what constitutes FDI.
       The Chinese government strictly controls economic and 
industrial data and even classifies some as state secrets. Routinely, 
Beijing has overvalued SOEs' stocks of unsold goods, and underestimated 
inflation. Other provinces underreport growth and activity: for 
example, Zhegiang province in Eastern China may have underreported 
growth to conceal the rapid development of private companies in its 
economy. Additionally, affluent provinces, such as Guangdong in 
Southern China, may have underreported growth to avoid paying more 
taxes to the central government. However, without more systematic data, 
economists cannot definitively state if these factors pushed up growth 
or even if growth occurred.
       Governmental officials downplay unemployment figures to 
mask the suffering that economic reforms and restructuring have caused. 
The official unemployment rate of 3.6 percent in 2001 excluded xiagang 
workers (laborers receiving small, monthly stipends from former 
companies and not counted as unemployed) that economists estimate to 
number about 10 million. The official rate also excluded farmers who 
left their fields to work in cities, a floating population of around 
150 million unemployed migrants. Using international standards, China's 
unemployment rate in 2001 approximated 7.6 percent in rural areas and 
more than 8.5 percent in the cities, well above Beijing's red-flagged 
figure to indicate inevitable social turmoil.
       Most disturbingly, the central government's debt numbers 
look highly erroneous. The Central Bank's governor, Dai Xianlong, 
confessed to Parliament in April 2002 that national domestic debt 
appeared much higher than the official numbers (16 percent of GDP) 
suggested. Dai said the figure appeared closer to 60 percent of GDP if 
one considered unfunded state-pensions' liabilities, local governments' 
debts, and major banks' nonperforming yloans (NPLs). Dai's unusual 
candor may mask more bad news. Independent economists have discovered 
that Dai's statistics drew on China's yearbook GDP growth statistics. 
Debt more realistically appears closer to 100 or 125 percent of GDP. 
The Bank of China reported two different figures for its NPLs in 1999, 
one using Chinese accounting standards, another Western; the latter 
looms 2.6 times greater than the former. Moody's has openly called the 
books of China's ``Big Four'' banks, ``meaningless''
Subsidies for the 11th Five-Year Program Period
    I anticipate that all the subsidies that I identified will 
continue. The 11th 5-year plan specifically identifies certain 
strategically important industries that will receive state subsidies. 
These include

     1.  Integrated circuits and software including technology for 90-
nanometer and smaller integrated circuits
     2.  New-generation networks including digital TV networks and 
mobile communication
     3.  Advanced computing including technology for petaflop computer 
systems
     4.  Biomedicine including commercial production of vaccines
     5.  Civil airplane including general purpose planes and 
helicopters
    6.  Satellite applications including meteorological, oceanographic, 
navigation positioning and telecommunication satellites
    7.  New materials including high-performance materials in 
information biological and aerospace industries

    Researchers may have more difficulties monitoring the rate of 
subsidization as China's 11th Five-Year Plan has only two numeric 
targets: per capita GDP in 2010 must be double the 2000 figure and 
``each work unit must cut its use of energy by 20 percent of current 
levels by 2010''. The plan fails to mention raising the price of 
electricity and gasoline, and unlike the previous ten years, sets no 
economic growth targets.
Governmental Policies Behind Subsidies
    Our research has shown that despite recent deregulation efforts, 
state consumption through its SOEs dominates the Chinese economy. 
Figure 1 indicates difference in state domination of the Indian and 
Chinese economies. Subsidies permeate SOEs and well-connected private 
companies but do not extend to the bulk of private companies.
    The subsidies appear huge. According to a World Bank study, 51 
percent of all SOEs are losing money. Average current assets had risen 
to 319 days of annual sales, suggesting that most of the SOEs' assets 
lay in uncollectible bills or unsaleable inventory. In short, most SOEs 
were illiquid and massive injections of government money kept them 
alive.
    The state offers subsidies to specific sectors and across sectors. 
Generally, SOEs and well-connected private companies with strong 
government network connections can access subsidies. The state is more 
likely to offer subsidies to private companies that promote strategic 
development efforts. The 11th Five-Year Plan identifies the following 
foci for development:

    1.  Advanced computing.
    2.  Internet.
    3.  Programming.
    4.  Environmental services & resource conservation.
    5.  Energy production and reserves.
    6.  Value-chain positioning of Chinese manufacturing.
    7.  Space, satellite and space-launch related capabilities.

    The state grants subsidies to companies that export, as well as to 
those that serve the domestic markets. Political rather than primarily 
economic considerations guide policies on subsidies. For example, many 
provincial governments offer subsidies as rewards to those that 
successfully manipulate government and business networks.
    SOE reforms and strategic goals also shape policies on subsidies. 
However, for China's leadership, SOE reforms do not include concerns 
about profits or privatization. The reforms do not have as their goal 
reducing the state's control over key sectors of the economy, but 
rather making that control more effective. Consequently, the policies 
aim to make SOEs efficient and big enough to have a strong 
international presence such as the FIEs do. Specifically, the Chinese 
government wants its own global stars. The SASAC, which oversees SOEs, 
has the mandate to transform 30-50 SOEs into globally competitive 
national champions by 2010. These include PetroChina, ChinaMobile, 
Sinopec, CNOOC, Baosteel, China Aluminum, Shanghai Auto, Lenovo, TCL, 
and Quingdao Haier. Korea's chaebol, rather than Japan's keiretsu 
provide the guiding model for China's policy on industrial subsidies: 
through subsidies, the state helps the national champions to diversify 
their range of businesses and to link more closely to the state.
    Some of the policies on subsidies stem from long and mid-range 
strategic plans; others derive from emergent planning and mistakes. For 
example, responding to the massive NPLs accumulated by Chinese banks in 
the 1990s, the government ordered they reduce their NPL ratios--bad 
loans as a proportion of total loans. However, this policy had 
unintended consequences. China's banks are technically insolvent but 
enjoy high liquidity. To cut NPL ratios, the banks merely increased the 
denominator of the ratios: their loans. Lending rose rapidly, driving 
growth as a side effect as NPL ratios fell from 28 per cent in 2002 to 
13.2 percent at the end of 2004. Assisting the process were transfers 
of old NPLs, made before the recent credit drive, to newly minted asset 
management companies (AMCs). The largest banks shifted an initial $169 
billion in 1999-2000 and another $50 billion last year. The AMCs have 
become dumping grounds not just for commercial banks' NPLs but also for 
the assets of failed investment conglomerates, securities businesses 
and government-infrastructure projects. The state makes the AMCs issue 
interest-bearing bonds for which it refuses to accept explicit 
liability. Separately, Beijing has raided tens of billions of dollars 
of foreign exchange reserves to shore up banks' capital.
    Policies regarding subsidies become difficult to unravel as the 
Chinese state encompasses central and local governments, with competing 
and often conflicting agendas, and different bureaucratic and political 
factions at the national level. Subsidies and the policies behind them 
reflect this fragmentation and conflict. Thousands of warring units 
that cohabit under the umbrella of the Chinese state control the SOEs. 
Consequently, SOEs enjoy direct subsidies stemming from state 
directives and elicit varying degrees of support.
    AVIC, the national aerospace group, provides a good example of 
subsides to an SOE serving a domestic market. Urged by Deng Xiaoping in 
1985, AVIC had designed a civil airliner from scratch in less than 5 
years. However, it only built two planes and even China's nationalized 
airlines refused to buy them. Two decades later, AVIC has received 
several tax breaks to build a small regional jet but has no idea of its 
commercial prospects
    Generally, despite stated policies, outsiders cannot ascertain the 
true policies that underlie subsidies. A secretive and authoritarian 
organization with unclear aims, closed to scrutiny and debate, controls 
the Chinese state. More effectively placed subsidies appear in the SOEs 
that the Beijing central government has classified as global champions. 
However, recent examples illustrate their complexity. CNOOC, whose $19 
billion bid for Unocal touched off volcanic reactions, is a Hong Kong-
listed firm 70 per cent owned by an unlisted parent company, all of 
whose shares are owned by the central government agency, SASAC. Beijing 
has helped CNOOC to acquire contracts to control foreign-energy 
reserves and the company heavily relies on subsidized finance from 
SASAC. Local governments control other SOEs. These include white goods 
maker Haier (owned by the Qingdao city government), which launched an 
unsuccessful bid for Maytag, and the municipally owned Shanghai and 
Nanjing car companies that have spent the last several months picking 
through MG Rover. These companies also receive subsidies in line with 
Beijing's stated goals of creating state-owned multinationals and 
retaining domestic control over key sectors, such as car making. The 
demands of both the central government, which sets industry policy, and 
their local government overlords, whose interests may conflict with 
Beijing's industrial-policy goals, shape the subsidies the SOEs 
receive, as well as the SOEs' evolution, strategies and policies. 
Huawei, a maker of telecoms-network equipment, illustrates a third 
level of policies and subsidies. Huawei is ostensibly privately owned, 
although many of its shares are owned by the local state telecoms 
authorities to whom it has sold equipment. It enjoys a $10 billion low-
interest credit line from the China Development Bank, whose mission is 
to make concessional loans in support of the state's policy goals. 
Huawei also has strong ties to China's military.
Profitability of FIEs in China
    Few FIEs disclose the real performance of their Chinese operations. 
Most estimates have relied instead on business surveys and anecdotes. 
Our research reveals that only about one-third of the foreign companies 
operating in China have ever made a profit there, and profits have been 
concentrated in the hands of a few companies. In addition, 
historically, foreign affiliates in China have lower profit margins 
than their global average.
    Despite some profitable FIEs, the trends on profitability have not 
changed substantially since China's entry into the WTO. For example, in 
1998, a survey of 229 FIEs by management consultants A. T. Kearney 
showed that only 38 percent of all manufacturers were covering their 
operating costs. If the companies had included their borrowing costs, 
or costs of capital, fewer still could have claimed to have broken 
even.
    Another study done at the Chinese Academy of International Trade 
and Economic Cooperation showed that about one-third of the 354,000 
foreign companies operating in China in 2001 turned a profit. Yet, a 
1999 survey by the American Chamber of Commerce in China showed that, 
while 58 percent of its member companies had lower profit margins there 
than in other global operations, 88 percent had plans to expand. 
Deloitte & Touche's survey in 2002 confirmed that 90 percent of 
foreign-owned companies in China planned to expand their operations 
within the next three years. In 2003, about 424,196 foreign companies, 
big and small, operated in China (MOFTEC). Michael Furst, Executive 
Director of the American Chamber of Commerce, Beijing, informed us that 
about two-thirds of its member companies were making some profits but 
not up to anticipated levels, while about one-third were making losses. 
These figures correspond to those from 2004.
    A 2004 survey by China Economic Quarterly shows that the earnings 
of U.S. affiliates in China, which includes the affiliates' profits, 
and earnings booked through Hong Kong and Singapore, rose to $4.4 
billion. When all other sources of profit are added--including royalty 
and licensing fees and income from private services--these affiliates 
earned $8.2 billion in 2004. However, U.S. companies made $7.1 billion 
in Australia, a market of only 19 million. They earned $8.9 billion in 
Taiwan and South Korea, emerging economies with a combined population 
of 70 million and earned $14.3 billion in Mexico. Most respondents 
could not achieve profit margins above their global average.
    A large proportion of the earnings end up with a small number of 
foreign companies that enjoy lucky breaks in China's heavily regulated 
operating environment. For example, Mobile Telecommunications 
encountered no vested interests in China and contributed about half of 
the U.S. companies' mainland-reported earnings as recently as 2001. 
However, from 2002, Chinese companies, subsidized by the state, moved 
into mobile handsets and their cutthroat pricing destroyed profits in 
that sector.
    More recently, a consumer loan boom financed by state-run banks 
underwrote an explosion in car sales that dropped later like a brick--
but Volkswagen, the market leader, still earned $1.2 billion in China 
in 2003.
    Five U.S. companies, including three car makers, accounted for one 
third of equity profits that mainland affiliates reported. General 
Motors alone booked $437 million in earnings. Fast-food companies Yum 
Brands--owner of KFC--and McDonald's topped off the list. Fast-food 
companies have consistently made profits in the Chinese domestic 
economy. They face no competition from state interests and, as 
services, are less prone to intellectual property abuses. Yum Brands, 
which has 1,200 restaurants in China, and McDonald's, probably earned 
about $200 million and the U.S. car companies in excess of $500m--
equivalent to about one-third of mainland equity income of $2.4 
billion. These figures underline how small China's domestic markets may 
be.
    The exaggerated economic data can have significant effects on 
perceived performance and projected performance of FDI in China. The 
successful companies in our research did not rely on economic and 
industrial data. As Elmar Stachels, Managing Director of Bayer China 
Company, Ltd., told us ``You manage by objectives, objectives that must 
be clearly stated--then determine what kind of tools you can use to 
determine if you achieved them, but stick with your objectives. However 
if it comes to financial figures, it will be challenging. What good 
will numbers be if the base rates used for comparison of performance 
are not reliable.''
    China remains embroiled in overcapacity and excess production as 
state investment and subsidies move across sectors, and companies' 
profits correspondingly whipsaw. A year ago in the auto sector, sales 
growth for many car models dropped from three digits to less than zero 
in a few months. In steel, China flipped from a massive net importer to 
a net exporter in less than a year. In the past nine months, the global 
price of ethylene--a base constituent of plastics--dropped by half as 
Chinese production capacity expanded 35 per cent this year and will 
probably double in the next few years. Soon, smelted copper will join 
the ranks: China has 2.5 million tons of annual production capacity and 
another 2.5 million tons under construction. Similarly, in stainless 
steel, China's annual production capacity approximated 2.5 million tons 
at the end of 2004. Industrial projects and subsidies will expand this 
to 10 million tons in five years.
    Thank you again for providing me with this opportunity to present 
some of my research on subsidies in China and effects on competitive 
environments.

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Graphic link is currently unavailable

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       Statement of National Electrical Manufacturers Association
    Thank you for this opportunity to submit the following comments. In 
recent years China has become the #3 export market and trading partner 
for our industry (after Mexico and Canada), and three years ago NEMA 
opened an office in Beijing with the assistance of the Commerce 
Department's Market Development Cooperator Program. The office has 
become a valuable resource for our members, providing assistance on a 
wide variety of China-related matters including energy efficiency, 
intellectual property rights protection, market access, standards and 
certification.
    Product counterfeiting is a major public safety and trade issue for 
our industry. China in particular needs to keep on strengthening its 
anti-counterfeiting measures and enforcement. As we have stressed at 
the U.S. Ambassador's roundtables on this topic in Beijing and on 
several other occasions, the U.S. electrical industry has fundamental, 
ongoing concerns about intellectual property protections in the 
People's Republic. NEMA members are all too often victimized there by 
repeated, vast trademark infringement and piracy.
    With regards to potentially ``subsidized'' product coming into the 
U.S, some of our members have observed competition from extremely low-
priced Chinese electrical imports. Since the goods in question are 
frequently not labor-intensively produced, these member companies are 
concerned that the Chinese government may be subsidizing the purchase 
of raw materials and/or providing them below cost via state-owned 
enterprises. As you know, the Office of the U.S. Trade Representative 
has just announced its intention to pursue a WTO case pertaining to 
Chinese export subsidies, and we will be working with USTR as it 
develops its approach.
    NEMA is the trade association of choice for the North American 
electrical manufacturing industry, including the subsidiaries of many 
European-based corporations. Domestic production of electrical products 
sold worldwide exceeds $120 billion. Founded in 1926 and headquartered 
near Washington, D.C., its 430 member companies manufacture products 
used in the generation, transmission and distribution, control, and use 
of electricity. These products are used in utility, medical, 
industrial, commercial, institutional, and residential applications. In 
addition to its headquarters in Rosslyn, Virginia, USA, NEMA also has 
offices in Beijing, Sao Paulo, and Mexico City.
    Thank you for your consideration of these remarks.
                                 ______
                                 
NEMA CALLS FOR RENEWAL OF TRADE PROMOTION AUTHORITY
    ROSSLYN, VA, February 12, 2007--The National Electrical 
Manufacturers Association (NEMA) applauds U.S. Trade Representative 
Susan Schwab's call today for the renewal of President Bush's Trade 
Promotion Authority (TPA), which, barring Congressional action, is 
currently scheduled to expire on July 1. NEMA seeks the reciprocal 
opening of foreign markets through the elimination of tariff and non-
tariff barriers for electrical equipment worldwide. Without the TPA, 
the U.S. government's ability to negotiate new free trade agreements, 
thereby opening foreign markets to U.S. exports, becomes significantly 
more difficult.
    ``Free trade is key to the economic growth of our industry,'' said 
Evan Gaddis, NEMA president and chief executive officer. ``As economies 
around the world grow, our members want the electrical equipment they 
make to be used in new and developing infrastructures. With our own 
domestic market already largely open, free trade agreements serve to 
level the trading field for U.S. manufacturers.''
    NEMA cited several rationales for U.S. negotiators to pursue all 
avenues for advancing free trade in electrical goods--bilateral, 
regional, or multinational:

      Since the inception of the North American Free Trade 
Agreement, Mexico has surged ahead of Canada to become the largest 
export market and trading partner for NEMA members.
      Since the elimination of many countries' medical 
equipment tariffs under the last World Trade Organization negotiating 
round, U.S. electro-medical equipment exports to many countries have 
soared.
      Since Beijing's entry into the World Trade Organization, 
China has quickly risen to become the third largest export market and 
trading partner for NEMA members.
      Since implementation of the U.S. free trade agreements 
with Chile and Australia in 2003, electrical equipment exports to these 
countries have risen by 78 percent and 44 percent respectively.
      Improving U.S. competitiveness through, for example, tort 
and tax reform--rather than opposing free trade--is the best way to 
sustain U.S. manufacturing.
      Addressing and enhancing the effectiveness of the Trade 
Adjustment Assistance program should be considered in the context of 
the TPA debate.
      Labor and environmental provisions in the TPA should be 
weighed carefully because they can serve to undermine the overall 
benefits of international economic integration.

    NEMA is the trade association of choice for the electrical 
manufacturing industry. Founded in 1926 and headquartered near 
Washington, D.C., its approximately 450 member companies manufacture 
products used in the generation, transmission and distribution, 
control, and end-use of electricity. These products are used in 
utility, medical imaging, industrial, commercial, institutional, and 
residential applications. Domestic production of electrical products 
sold worldwide exceeds $120 billion. In addition to its headquarters in 
Rosslyn, Virginia, NEMA also has offices in Beijing, Sao Paulo, and 
Mexico City.

                                 

                    Statement of Stewart and Stewart
Introduction
    The protection of intellectual property rights (IPR) through 
adequate laws and enforcement is one of the most serious and persistent 
bilateral issues facing the U.S. and China. Although it is generally 
conceded that China has revised its IP laws and improved its IP 
legislative regime so as to comply with the WTO TRIPS Agreement and 
other international IPR agreements, it is also generally acknowledged 
that China's performance in enforcing IP rights has been far short of 
adequate.
    The rate of intellectual property piracy and counterfeiting in 
China remains extremely high. The problem has been, and continues to 
be, endemic. ``In July 2003, the State Council's Development Research 
Centre estimated that the market value of counterfeit goods in China 
was between U.S.$19 billion and U.S.$24 billion.'' \1\ The World 
Customs Organization estimates that global counterfeiting exceeds $500 
billion annually and that most of that originates in China.\2\ The 
financial impact of Chinese IP piracy and counterfeiting on U.S. 
businesses has been tremendously costly. In its 2004 WTO compliance 
report, USTR estimated that U.S. businesses lost between $2.5-$3.8 
billion annually due to piracy of copyrighted materials alone.\3\
---------------------------------------------------------------------------
    \1\ Trade Policy Review, Report by the Secretariat, WT/TPR/S/161 
(28 February 2006) at para. 303.
    \2\ See Fakes!, Business Week, February 7, 2005.
    \3\ It is estimated that global trade in fake goods amounts to 
between 3% and 9% of total world trade. Studies by the OECD in 1998 and 
the International Chamber of Commerce in 1997 estimated that 
counterfeit goods made up 5-7% of world trade. See Enforcement of 
Intellectual Property Rights, Communication from the European 
Communities, IP/C/W/448 (9 June 2005) at fn. 1.
---------------------------------------------------------------------------
Compliance with Legal Regime Requirements of the WTO TRIPS Agreement
    The general consensus is that China has largely complied with its 
TRIPS commitments as far as establishing a compliant IPR legal 
framework. Before WTO accession, China amended, revised, and improved 
its framework of IPR laws, including copyright, trademark and patent 
laws, so as to be in compliance with the WTO Agreement on Trade-Related 
Aspects of Intellectual Property Rights (TRIPS Agreement).\4\ After 
accession, China agreed that it would adhere to the provisions of the 
TRIPS Agreement, that is, China agreed to abide by internationally-
accepted norms regarding protection and enforcement of the intellectual 
property rights of foreign companies and individuals (including the 
U.S.) in China.\5\ Among the assumed obligations of the WTO TRIPS 
Agreement, China agreed to:

    \4\ Report of the Working Party on the Accession of China, WT/
MIN(01)/3 (10 November 2001) at paras. 251-252.
    \5\ See generally Report of the Working Party on the Accession of 
China, WT/MIN(01)/3 (10 November 2001) at paras. 251-305 (regarding 
China's intellectual property rights commitments).

      set minimum standards of protection for copyrights and 
neighboring rights, trademarks, geographical indications, industrial 
designs, patents, integrated-circuit layout designs and undisclosed 
information;
      set minimum standards for the enforcement of intellectual 
property rights in administrative and civil actions;
      set minimum standards, with regard to copyright piracy 
and trademark counterfeiting, for the enforcement of intellectual 
property rights in criminal actions and actions at the border; and
      provide other WTO Members national and MFN treatment with 
respect to protection and enforcement of intellectual property rights.

    In general, as noted by the U.S. Trade Representative's Office in 
its 2005 WTO compliance report, China has largely done a satisfactory 
job with respect to amending its IPR laws to comply with the TRIPS 
Agreement and bringing its laws into line with international norms in 
most key areas although USTR notes that some improvements (e.g., 
Internet copyright protection) are still needed.\6\
---------------------------------------------------------------------------
    \6\ See USTR, 2005 Report to Congress on China's WTO Compliance 
(December 11, 2005) at 63.
---------------------------------------------------------------------------
    The WTO recently conducted its first Trade Policy Review (TPR) of 
China. The WTO Secretariat's TPR report provides an objective overview 
regarding China's IPR regime. The report notes that China made major 
revisions to its IPR laws in recent years, including the Patent Law 
(2000), the Trademark Law (2001), and the Copyright law (2001), and 
established an ``extensive and complex framework'' to administer and 
enforce IPR.\7\ The report describes the basic provisions of these and 
other IPR laws in China, and notes the importance of IPR to China's own 
development because ``protection of intellectual property rights is 
essential for ensuring the continued inflow of FDI and the associated 
transfer of newly developed technologies, as well as fostering the 
development of new technologies and services in China over the longer 
term.''\8\ Moreover, the report indicates that as China ``makes an 
effort to upgrade obsolete technologies and move production into higher 
value added sectors, it recognizes that there is a need to improve 
legislation on intellectual property rights as well as enforcement, in 
order to attract private sector investment in new and high 
technologies.'' \9\
---------------------------------------------------------------------------
    \7\ Trade Policy Review: China, Report by the Secretariat, WT/TPR/
S/161 (28 February 2006) at para. 272.
    \8\ Id.
    \9\ Id. at para. 302.
---------------------------------------------------------------------------
WTO Secretariat Report Notes Continuing High Levels of IPR Infringement 
        and Inadequate IPR Enforcement in China
    Notwithstanding China's efforts to enact IPR laws that comply with 
its TRIPS obligations, the rate of IPR infringement continues to be 
high and the level of enforcement of IPR continues to be inadequate. 
The TRIPS Agreement requires China to implement effective enforcement 
procedures and to provide civil and criminal remedies that have a 
deterrent effect.\10\ China's efforts in the area of IPR enforcement 
have fallen short of its commitments. The Secretariat's TPR report 
states:
---------------------------------------------------------------------------
    \10\ In particular, TRIPS articles 41 (general obligations) and 61 
(criminal procedures) mandate effective enforcement of IPR.
---------------------------------------------------------------------------
    The main problems identified by China's major trading partners 
include: lack of coordination among the main enforcement agencies; 
local protectionism and corruption; inadequate deterrence provided by 
the system of administrative, civil, and criminal penalties; and a lack 
of sufficient training of personnel.\11\
---------------------------------------------------------------------------
    \11\ Id. at para. 303.
---------------------------------------------------------------------------
    The Secretariat's report notes that enforcement of IPR in China is 
``complex with a large number of responsible authorities.'' \12\ In 
China, intellectual property rights may generally be enforced by two 
means: first, administrative actions which consist of mediation by the 
authorities, and second, judicial measures through the courts, which 
include civil actions and criminal prosecutions.\13\ Under China's 
criminal law, seven types of IPR infringement are crimes: 
counterfeiting registered trademarks (Article 213); selling goods 
bearing counterfeited registered trademarks (Article 214); illegally 
producing and selling representations of registered trademarks (Article 
215); forging another person's patent (Article 216); copyright 
infringement (Article 217); selling infringing reproductions (Article 
218); and infringing commercial secrets (Article 219).\14\
---------------------------------------------------------------------------
    \12\ Id. at para. 304. The ``responsible authorities'' are: ``the 
SIPO for patents and layout designs of integrated circuits; the SAIC 
and its Trademark Office for trademarks and, along with the AQSIQ, for 
geographical indications registration and administration; the National 
Copyright Administration for copyright; the State Drug Administration 
for protected medicines; MOFCOM (previously the State Economic and 
Trade Commission) for administrative protection of agriculture-related 
chemicals; and the Ministry of Agriculture and the State Forestry 
Administration for the protection of new plant varieties. Enforcement 
at the border is carried out by Customs, while the SAIC is in charge of 
enforcement of laws against unfair competition, including the 
protection of trade secrets. In addition, other government agencies 
such as the State Press and Publication Administration and the Ministry 
of Public Security are also involved in enforcement.'' Id.
    \13\ Id. at para. 305.
    \14\ Id. at para. 308.
---------------------------------------------------------------------------
    Enforcement of IPR at the border is governed by Customs regulations 
and administered by China Customs. Different enforcement procedures 
apply depending on whether the IPR has been filed or recorded at 
Customs beforehand. If recorded, ``Customs can seize the goods at the 
border and inform the right-holder in writing if it is found that the 
goods infringe the holder's IPRs.'' \15\ In this case, the ``right-
holder must provide an application letter requesting that the goods be 
detained, along with a guarantee, within three days of receipt of the 
notice from Customs.'' \16\ If the IPR is not recorded, then the right-
holder must apply to Customs with specified documentation.\17\ The 
Secretariat's report notes that Customs has been increasingly active in 
seizures and investigations of infringing goods, the number of 
investigated cases rising from 330 in 2001 to 569 in 2002, 756 in 2003 
and 1,051 in 2004.\18\
---------------------------------------------------------------------------
    \15\ Id. at para. 310.
    \16\ Id. at para. 310.
    \17\ Id. at para. 311.
    \18\ Id. at para. 311.
---------------------------------------------------------------------------
    Despite China's IPR enforcement efforts, the Secretariat concludes 
that a high level of IPR infringement continues and IPR enforcement 
efforts to date have been inadequate.
    Despite these efforts, it appears that enforcement remains weak and 
infringement of intellectual property rights widespread. In addition to 
inadequate deterrents provided through the prosecution system, it is 
also claimed that ``local protectionism'' is a major cause of IPR 
infringement. Local protectionism may be the result of discretionary 
actions that give preference to local traders and producers, and of 
local corruption, which may provide local manufacturers or traders of 
counterfeit goods advance notice of police raids; there is also concern 
that regional administrative agencies lack sufficient knowledge and 
training in IPR enforcement.\19\
---------------------------------------------------------------------------
    \19\ Id. at para. 313.
---------------------------------------------------------------------------
American Businesses in China Continue to Face High Levels of IPR 
        Infringement
    The American Chamber of Commerce in China (AmCham) recently issued 
its 2006 White Paper in which it, inter alia, provides an overview of 
the IPR experience of American businesses in China. In short, AmCham 
finds that there has not been any notable improvement in the IPR 
environment in China.
    Five years after China's accession to the WTO, American businesses 
confronting IPR enforcement issues in China are shifting their focus 
from the symptomatic to the systematic. Across industries, American 
companies have concluded that the returns on case-by-case adjudication 
(whether through administrative, civil or criminal channels) are 
insufficient to change the overall environment, and confidence in 
existing IPR enforcement mechanisms remains low: a consensus is 
emerging that reform is necessary at the most fundamental level.\20\
---------------------------------------------------------------------------
    \20\ AmCham, White Paper 2006: American Business in China (2006) at 
34; available at http://www.amcham-china.org.cn/amcham/show/
content.php?Id=1570&menuid=&submid=.
---------------------------------------------------------------------------
    The White Paper reports that 55 percent of American companies 
surveyed were ``negatively affected by IPR violations'' and that 41 
percent said that ``counterfeits of their products increased.'' \21\ 
With respect to IPR enforcement, AmCham reports that ``generally 
speaking, administrative enforcement is ineffective.'' \22\ Among 
AmCham's findings:
---------------------------------------------------------------------------
    \21\ Id.
    \22\ Id. at 36.
---------------------------------------------------------------------------
    In administrative actions, only 51% of surveyed companies were 
satisfied with the degree of cooperation from Chinese officials;
    System of transferring administrative cases to criminal courts does 
not operate smoothly;
    In court actions, less than half of surveyed companies were 
satisfied with the degree of cooperation from Chinese court officials;
    Despite lowered thresholds for criminal liability, overall criminal 
prosecution remained low;
    Only 22% of surveyed companies believe the 2004 Judicial 
Interpretation of Threshold for Criminal Liability will benefit IPR 
protection either moderately or greatly;
    IPR enforcement in civil courts is hampered because the ``gathering 
evidence is difficult; damages amounts are too low; and judgments are 
problematic to enforce.'' \23\
---------------------------------------------------------------------------
    \23\ Id.
---------------------------------------------------------------------------
    Notwithstanding these less-than-optimistic findings, AmCham reports 
that ``(n)onetheless, American businesses generally agree that 
awareness of IPR issues has increased in China and that the Chinese 
government is making efforts in this area such as in the formation of 
the Leading Group that has been coordinating the Chinese government's 
IPR campaign.'' \24\
---------------------------------------------------------------------------
    \24\ Id. at 34.
---------------------------------------------------------------------------
USTR's 2006 Special 301 Report
    In April 2006, the U.S. Trade Representative's Office issued its 
annual ``Special 301'' report concerning the adequacy and effectiveness 
of intellectual property rights protection provided U.S. trading 
partners. The report identifies China as a top IPR enforcement 
priority.\25\ Given its recentness, the Special 301 report highlights 
the current status of U.S.-China relations concerning IPR problems. The 
report concretely summarizes the problem:
---------------------------------------------------------------------------
    \25\ See USTR, 2006 Special 301 Report (April 28, 2006).
---------------------------------------------------------------------------
    China does not provide American copyright materials, inventions, 
brands, and trade secrets the intellectual property protection and 
enforcement to which they are entitled. China therefore remains a top 
intellectual property enforcement priority.\26\
---------------------------------------------------------------------------
    \26\ See USTR, 2006 Special 301 Report (April 28, 2006).
---------------------------------------------------------------------------
    USTR suggests that a failure to achieve adequate progress in 
improving IPR enforcement will lead to a WTO dispute settlement case:
    Faced with only limited progress by China in addressing certain 
deficiencies in IPR protection and enforcement, the United States will 
step up consideration of its WTO dispute settlement options.\27\
---------------------------------------------------------------------------
    \27\ See USTR, 2006 Special 301 Report (April 28, 2006).
---------------------------------------------------------------------------
    The Special 301 report concludes that despite China's efforts to 
battle piracy and despite increasing IPR court cases, ``overall piracy 
and counterfeiting levels in China remained unacceptably high in 2005'' 
and affected a wide range of products, brands and technologies.\28\ 
USTR found that:

    \28\ See USTR, 2006 Special 301 Report (April 28, 2006). Industries 
affected by IPR piracy include ``films, music and sound recordings, 
publishing, business and entertainment software, pharmaceuticals, 
chemicals, information technology, apparel, athletic footwear, textile 
fabrics and floor coverings, consumer goods, electrical equipment, 
automotive parts and industrial products, among many others.'' Id.

      estimated levels of piracy ``across all lines of copyright 
business'' are 85-93%;
      IPR infringing products from China made up 69% of all imported 
goods seized by U.S. Customs at the U.S. border in 2005, an increase 
from 63% in 2004;
      some counterfeit products from China are potential threats to the 
health and safety of U.S. consumers (e.g., pharmaceuticals, batteries, 
auto parts, industrial equipment, toys, etc.);
      3in addition to consumers and right holders, China itself is 
directly affected by counterfeiting in lost taxes (e.g., it is 
estimated that China failed to collect $3.2-4 billion in 2002 due to 
counterfeiting).\29\

    \29\ See USTR, 2006 Special 301 Report (April 28, 2006).
---------------------------------------------------------------------------
    Inadequate, ineffective IPR enforcement by China continues to be a 
major failing. In general, USTR pointed out that ``enforcement efforts, 
particularly at the local level, are hampered by poor coordination 
among Chinese Government ministries and agencies, local protectionism 
and corruption, high thresholds for initiating investigations and 
prosecuting criminal cases, lack of training, and inadequate and non-
transparent processes.''\30\ In particular, USTR noted that ``China 
suffers from chronic over-reliance on toothless administrative 
enforcement and underutilization of criminal remedies.'' \31\ As 
evidence, USTR cited China's own 2004 data showing that more than 99% 
of copyright and trademark cases were handled by administrative systems 
and less than 1% of cases were handled by the police. In effect, 
because administrative fines are too low to be a deterrent to 
infringement, potential fines from trademark and copyright piracy in 
China have become merely costs of doing business. Although China agreed 
in 2005 to increase the number of criminal IPR actions relative to 
administrative proceedings, USTR reports no discernible relative 
increase as of yet.\32\
---------------------------------------------------------------------------
    \30\ See USTR, 2006 Special 301 Report (April 28, 2006).
    \31\ See USTR, 2006 Special 301 Report (April 28, 2006).
    \32\ For example, USTR states: ``According to Chinese data provided 
in response to U.S. requests, China initiated no copyright retail cases 
under Article 218 of its Criminal Law in 2004 and six cases in 2005. 
Under Article 217 of the same law, covering copyright reproduction and 
distribution, the number of cases initiated rose from 13 to 28. China's 
self-reported numbers of trademark counterfeiting cases initiated also 
rose from 53 to 98 under Article 215 (sale of counterfeit trademark 
goods); from 163 to 221 under Article 213 (manufacture of counterfeit 
trademark goods), and from 100 to 134 under Article 215 (manufacture of 
counterfeit trademark labels).'' Id. Moreover, USTR notes that China's 
State Administration for Industry and Commerce (SAIC) ``recently 
indicated that the number of trademark cases transferred to the police 
during 2005 was expected to be less than 0.3% of the total.'' Id.
    Statistics for 2001-2004 regarding the transfer of administrative 
cases to the courts are reported in the WTO Secretariat's Trade Policy 
Review report, WT/TPR/S/161, at 154 (Table III.18).

----------------------------------------------------------------------------------------------------------------
                                                                  2001         2002         2003         2004
----------------------------------------------------------------------------------------------------------------
Copyright
Number of disputes                                                  4,420        6,408       23,013        9,691
Number transferred to court                                            66          136          224          n/a
Trademarks
Number of disputes                                                 41,163       39,105       37,489       51,851
Number transferred to court                                            86           59           45           96
----------------------------------------------------------------------------------------------------------------

    Among the most egregious continuing problems in IPR enforcement, 
USTR identifies the following issues:

      Implementation of China's December 2004 Judicial Interpretation 
on thresholds for criminal liability. Although this interpretation 
lowered the thresholds for criminal liability (i.e., minimum values/
volumes required to initiate criminal prosecution), they are still too 
high and, in USTR's view, ``a major reason for the lack of an effective 
criminal deterrent.'' \33\

    \33\ See USTR, 2006 Special 301 Report (April 28, 2006).

    Valuation of infringing products. To determine whether infringing 
products meet the threshold for criminal liability, China uses the 
value of the infringing products, rather than the value of the genuine 
goods. This method highly undervalues the infringing goods and 
effectively provides a ``safe harbor'' to infringers.\34\
---------------------------------------------------------------------------
    \34\ See USTR, 2006 Special 301 Report (April 28, 2006).
---------------------------------------------------------------------------
    Customs enforcement procedures. Certain provisions of China's 
customs regulations fail to support border enforcement and, in fact, 
appear to impose burdens on the IP right holder. These include:
      the provision allowing right holders only 3 days to apply 
for seizure of suspected infringing goods held by China customs;\35\
---------------------------------------------------------------------------
    \35\ See USTR, 2006 Special 301 Report (April 28, 2006). Article 16 
of China's Regulations of the People's Republic of China on Customs 
Protection of Intellectual Property Rights states:
    Where discovering any import or export goods suspected of 
infringing an intellectual property right under Customs recordation, 
the Customs shall immediately notify the holder of the intellectual 
property right in writing of such suspected infringement. In case the 
holder of the intellectual property right presents an application in 
conformity with the provisions of Article 13 of these Regulations and 
provide a security in conformity with the provisions of Article 14 of 
these Regulations within three working days from the date of service of 
the notification, the Customs shall detain the suspected infringing 
goods, notify the holder of the intellectual property right in writing 
of such detention and serve a Customs Detention Receipt on the 
consignee or consignor. The Customs shall not detain the goods in case 
the holder of the intellectual property right fails to present an 
application or to provide a security within the period. (emphasis 
added)
---------------------------------------------------------------------------
      the provision regarding disposal of seized goods that 
appears to require public auction, rather than destruction, of 
infringing goods that are not purchased by the right holder or used for 
public welfare.\36\
---------------------------------------------------------------------------
    \36\ See USTR, 2006 Special 301 Report (April 28, 2006). Article 27 
of China's Regulations of the People's Republic of China on Customs 
Protection of Intellectual Property Rights states:
    The suspected infringing goods under detention shall be confiscated 
by the Customs where such goods are considered to have infringed an 
intellectual property right by the Customs after investigation.
    After confiscating the goods infringing an intellectual property 
right, the Customs shall notify the holder of the intellectual property 
right in writing of the information related to the goods of 
infringement.
    Where the confiscated goods infringing an intellectual property 
right can be used for public welfare projects, the Customs shall hand 
such goods over to the relevant public welfare bodies for use in public 
welfare projects; where the holder of the intellectual property right 
intends to purchase the goods, the Customs may have such goods assigned 
to the holder of the intellectual property right with compensation. 
Where either the confiscated goods infringing an intellectual property 
right can not be used for public welfare projects or the holder of the 
intellectual property right has no intention to purchase the goods, the 
Customs may have such goods auctioned according to law after removing 
their infringing features; where the infringing features can not be 
removed, the Customs shall destroy the goods. (emphasis added)
---------------------------------------------------------------------------
    Civil enforcement deficiencies. USTR notes that it ``continues to 
hear complaints of a lack of consistent, uniform and fair enforcement 
of China's IPR laws and regulations in the civil courts. Litigants have 
found that most judges lack necessary technical training, court rules 
regarding evidence, expert witnesses, and protection of confidential 
information are vague or ineffective, and the costs of investigation 
and bringing cases are prohibitively high. In the patent area, where 
civil enforcement is of particular importance, the process is 
inefficient and unpredictable. A single case can take four to seven 
years to complete.'' \37\
---------------------------------------------------------------------------
    \37\ See USTR, 2006 Special 301 Report (April 28, 2006).
---------------------------------------------------------------------------
    Other notable deficiencies in China's enforcement of IPR identified 
by USTR include: ``profit motive requirement in copyright cases''; 
``requirement of identical trademarks in counterfeiting cases''; ``lack 
of criminal liability for certain acts of copyright infringement''; and 
``need to establish minimum, proportional sentences and clear standards 
for initiation of police investigations in cases where there is a 
reasonable suspicion of criminal activity.''\38\
---------------------------------------------------------------------------
    \38\ See USTR, 2006 Special 301 Report (April 28, 2006).
---------------------------------------------------------------------------
China's Efforts to Improve its IPR Regime Have Shown Incremental 
        Improvements
    While the problems of high IPR infringement and inadequate IPR 
enforcement in China are serious and continuing, it must also be 
acknowledged that China has expended great efforts to address the 
problems and, although it has not yet achieved an acceptable level of 
IPR enforcement, it has made some progress toward that goal.
    In the WTO's Trade Policy Review of China, the Chinese Government 
submitted a report that, inter alia, describes the steps it has taken 
to establish its intellectual property rights regime. China believes 
that it has worked strenuously to comply with its WTO TRIPS obligations 
and, despite less-than-perfect results, has worked hard to strengthen 
and improve enforcement of IPR.\39\ In sum, China states:
---------------------------------------------------------------------------
    \39\ Trade Policy Review: China, Report by the People's Republic of 
China, WT/TPR/G/161 (17 March 2006) at paras. 56-66.
---------------------------------------------------------------------------
    China has made significant progress in IPR protection particularly 
in building the IPR-related legal system and raising the consciousness 
of the general public for IPR protection. However, the Chinese 
Government is fully aware that like in all other countries the 
protection of intellectual property rights is constrained by the level 
of economic development and other conditions in reality. IPR protection 
in China cannot be perfected overnight. The Chinese Government is 
determined to continue its persistent and strenuous efforts to achieve 
that goal.\40\
---------------------------------------------------------------------------
    \40\ Trade Policy Review: China, Report by the People's Republic of 
China, WT/TPR/G/161 (17 March 2006) at para. 66.
---------------------------------------------------------------------------
    USTR also has noted that there have been some ``bright spots in the 
areas of enforcement.'' \41\ For example, it finds that China's 
``Mountain Eagle'' campaign against trademark infringement crimes has 
actually increased arrests and seizures of infringing goods. In 
addition, USTR is ``encouraged'' by (1) China's recent amendments to 
rules governing transfer of administrative and customs cases to 
criminal authorities, (2) the willingness of Chinese authorities on 
their own to ``take ex officio enforcement action on behalf of U.S. 
right holders without the need for a complaint'' (e.g., in Shanghai), 
and (3) by initial enforcement actions against Internet piracy in 
2005.\42\
---------------------------------------------------------------------------
    \41\ See USTR, 2006 Special 301 Report (April 28, 2006).
    \42\ See USTR, 2006 Special 301 Report (April 28, 2006).
---------------------------------------------------------------------------
    Other notable actions taken by China that are intended to help 
improve IPR education and enforcement include the following.
China's 2006 Action Plan on IPR Protection
    China has issued a comprehensive and aggressive plan to address the 
whole range of IPR issues. China summarizes the coverage of the Action 
Plan as follows:
    ``The Action Plan covers 4 major areas: trademark, copyright, 
patent and import and export, which involve the IPR protection plans 
and arrangements of 11 departments including the Ministry of Public 
Security, Ministry of Information Industry, Ministry of Commerce, 
Ministry of Culture, Customs General Administration, State 
Administration of Industry and Commerce, Administration of Quality 
Inspection, Supervision and Quarantine, Copyright Bureau, State Food 
and Drug Administration, State Intellectual Property Office, and 
Legislative Affairs Office of the State Council.
    ``The Action Plan covers 9 areas: legislation, law enforcement, 
mechanism building, propaganda, training and education, international 
communication and cooperation, promoting business self discipline, 
services to right holders, and subject research.
    ``In line with the Action Plan, in 2006 China will draft, formulate 
and revise 17 laws, regulations, rules and measures relating to 
trademark, copyright, patent and customs protection, and draft, improve 
and revise 6 judicial interpretations.
    ``The IPR law enforcement efforts will include 7 dedicated 
campaigns such as the ``Mountain Eagle'', ``Sunshine'' and ``Blue 
Sky'', 8 regular enforcement initiatives and 20 specific measures.
    ``The government is going to establish a long standing mechanism 
constituting 11 parts, including a service center for reporting and 
complaining IPR violations and publicizing law enforcement statistics, 
and 18 specific measures. 7 approaches and 39 measures will be adopted 
to raise the general public's awareness of IPR protection.
    ``Twenty one IPR training programs will be organized under the 
Project of Training Thousands of IPR Personnel.
    ``The focus of IPR related international exchanges and cooperation 
will be on legislation, trade mark, copyright, patent and customs 
protection, which will be facilitated through 19 exchange and 
cooperation activities, out of which 7 will be between China and the 
U.S.
    ``With a view to improving enterprises' consciousness and awareness 
of IPR protection, 3 initiatives will be launched, including the 
convening of a conference on enterprises' IPR protection and 
proprietary innovation.
    ``Twelve specific measures covering 9 areas will be put in place to 
better serve the right holders. Besides, countermeasure oriented 
research will be conducted in 5 fields to strengthen IPR protection.'' 
\43\
---------------------------------------------------------------------------
    \43\ http://www.ipr.gov.cn/ipr/en/info/
Article.jsp?a_no=3326&col_no=102&dir=200604.
---------------------------------------------------------------------------
New China IPR Website
    Recently, China's Ministry of Commerce (MOC) announced the launch 
of an intellectual property rights protection website--www.ipr.gov.cn. 
The MOC described its purpose as to introduce domestic and overseas 
readers to China's laws, rules, policies and measures concerning IPR 
protection and to enhance public awareness of IPR.\44\ The website 
provides one-stop access to IPR-related news, policies, documents, laws 
and regulations, information about IPR legal proceedings, and 
government ministries involved in IPR administration and enforcement.
---------------------------------------------------------------------------
    \44\ See Xinhua, China launches IPR protection website, People's 
Daily Online (April 30, 2006); http://english.people.com.cn/200604/30/
eng20060430_262285.html
---------------------------------------------------------------------------
Increasing Public Education and Awareness of IPR
    From April 16-23, 2006, an ``Achievement Exhibition on China's IPR 
Protection'' was jointly-sponsored by numerous Chinese ministries.\45\ 
In conjunction with the exhibition, China also held a ``China High-
level Forum on Intellectual Property Rights Protection 2006.'' \46\ In 
addition, China's Ministry of Commerce announced in April 2006 that it 
intends to set up special service centers in 50 cities to handle 
domestic complaints regarding IPR infringement and provide IPR-related 
consulting services in order to raise public awareness of IPR 
protection.\47\
---------------------------------------------------------------------------
    \45\ Sponsors of the exhibition included the following: State 
Council, the National Office of Rectification and Standardization of 
Market Economic Order, the Propaganda Department of the CPC Central 
Committee, Ministry of Public Security, Ministry of Commerce, Ministry 
of Culture, State-owned Assets Supervision and Administration 
Commission of the State Council, General Administration of Customs, 
State Administration for Industry and Commerce, National Copyright 
Administration, State Intellectual Property Office, and Information 
Office of the State Council.
    \46\ This exhibition ``was the first large-scale exhibition held in 
China with the content of IPR protection.'' Chinese Premier Wen Jiabao 
said that the exhibition showed the ``Chinese government's 
determination to fight piracy.'' The Chinese government described the 
exhibition as follows:
    This exhibition had three areas including Department Area, Local 
Area, and Enterprise Area. Department Area mainly displayed a general 
description of IPR, trademark right protection, patent right 
protection, copyright protection, customs protection of IPR, and 
judicial protection of IPR in other related fields; Local Area mainly 
introduced the progress in the Special Campaigns of IPR Protection in 
15 key localities and the fruitful results of local enterprises' 
independent innovation and fighting for their rights; Enterprise Area 
focused on the following contents: Chinese enterprises' enhancement of 
IPR protection awareness, competition under the IPR system, emphasis on 
the development and innovation of own intellectual property, creation 
of independent brands, promotion of the popularity and international 
competitiveness etc.
    See Achievement Exhibition on China's IPR Protection 2006 (May 8, 
2006); available at http://www.ipr.gov.cn/ipr/en/info/
Article.jsp?a_no=4077&col_no=115&dir=200605.
    \47\ IPR infringement complaints to go to special service centers, 
China View (April 11, 2006); http://news.xinhuanet.com/english/2006-04/
11/content_4411135.htm.
---------------------------------------------------------------------------
IPR Ombudsman
    The Chinese government appointed, effective January 2006, an 
Intellectual Property Rights Ombudsman at the Chinese Embassy in 
Washington, DC. The role of the Ombudsman is to serve as the point of 
contact for U.S. companies, particularly small- and medium-sized 
businesses, respecting IPR issues in China.
    China's gradual improvement in IPR enforcement is also reflected in 
the year-to-year increasing number of seizures of IPR infringing goods 
by China Customs.
    China Customs IPR Seizures (2001-2005)

 
----------------------------------------------------------------------------------------------------------------
                      Year                           2001         2002         2003         2004         2005
----------------------------------------------------------------------------------------------------------------
Cases                                                    330          573          756        1,051        1,210
----------------------------------------------------------------------------------------------------------------
Source: China Customs

    In 2005, of the total 1,210 IPR seizures by China Customs, 51 
(4.2%) were of imports, and 1,159 (98.4%) were of exports.
    Of course, when evaluating China's IPR enforcement performance, one 
should be mindful of the many practical problems that can impede 
efficient enforcement. For example, in the case of border IPR 
enforcement by China Customs, the level of performance will be affected 
by the number of trained personnel available and assigned to the task 
of inspection in the same way that the availability (or lack thereof) 
of U.S. Customs personnel would affect border enforcement in the US. 
Another consideration is that China Customs can only inspect a limited 
percentage of containers, and, statistically, China Customs finds 
containers without IPR problems 3 times more often than it finds 
problem containers. Given these facts, local Chinese customs officials 
may be reluctant to delay suspected infringing goods because of the 
likelihood that the goods will ultimately be found non-infringing and 
such a delay will affect the market.
    In addition to actions by the Chinese government, there have been 
some noteworthy victories in cases brought by IP right holders. Two 
recent examples are:
    Ruling against Silk Alley market landlords. Trademark owners of 
five luxury goods brands (Prada, Chanel, Louis Vuitton, Gucci, and 
Burberry) filed civil claims in mid-2005 against the landlord, Beijing 
Xiushui Haosen Clothing Co. Ltd., for allowing merchants to sell knock-
offs on its premises. In December 2005, the Beijing No. 2 Intermediate 
People's Court's found for the trademark holders, and in April 2006, 
the Beijing High People's Court upheld the previous ruling.\48\
---------------------------------------------------------------------------
    \48\ See, e.g., Luxury brands win trademark lawsuit, China Daily 
(April 19, 2006); http://www.chinadaily.com.cn/ home/2006-04/19/
content_571000.htm.
---------------------------------------------------------------------------
    Pfizer's Viagra patent upheld. In 2004, China's patent review board 
found in favor of Chinese generic drug makers who had challenged 
Pfizer's patent on sildenafil citrate, the main component of Viagra. In 
June 2006, the Beijing No. 1 Intermediate Court overturned the patent 
review board's decision and upheld Pfizer's patent.\49\
---------------------------------------------------------------------------
    \49\ See, e.g., China court upholds Pfizer's Viagra patent, 
BusinessWeek Online (June 5, 2006) (http://www.businessweek.com/ap/
financialnews/D8I1TG680.htm?sub=apn_home_down&chan=db); Pfizer wins 
patent protection for Viagra in China, China Daily (June 4, 2006) 
(http://www.chinadaily.net/china/2006-06/04/content_607962.htm).
---------------------------------------------------------------------------
    Moreover, as Jiang Zhipei, Chief Judge of the Property Rights 
Tribunal of the Chinese Supreme People's Court, has observed: 
``Domestic companies are the real impetus for improving IPR.'' \50\ 
Thus, improvement in the level of IPR protection and enforcement in 
China is likely to increase to the extent that Chinese companies 
recognize the importance of and need for effective IPR protection to 
their own operations, as they increasingly innovate to compete in the 
market.
---------------------------------------------------------------------------
    \50\ Chris Buckley, On piracy, an advocate for China's progress, 
International Herald Tribune (May 1, 2006); http://www.iht.com/
articles/2005/10/04/business/IPRjudge.php.
---------------------------------------------------------------------------
    Though long and arduous the process might be, China will not make 
any discount on the principles and goals on its IPR Protection, said 
Yan Xiaohong, deputy chief of the National Copyright Administration of 
China at a seminar on encouraging self-innovation and advocating the 
use of authentic software.
    If we do not protect IPR, we could not realize the goal of building 
an innovation-oriented nation. China will continue to improve 
legislation and law enforcement in IPR protection to create a sound 
market environment for enterprises, said Yan.\51\
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    \51\ No discount in IPR protection, copyright watchdog, People's 
Daily Online (May 12, 2006) (emphasis added); http://
english.people.com.cn/200605/12/eng20060512_265097.html.
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    AmCham agrees that innovation by Chinese companies will be an 
important driver toward improved IPR protection in the future. AmCham 
states in its 2006 White Paper:
    Vigorous IPR enforcement is obviously a baseline condition 
necessary for innovation to flourish.\52\
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    \52\ AmCham, White Paper 2006: American Business in China (2006) at 
34.
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                                 ______
                                 
    Successful realization of its innovation priorities is the upside 
inducement for the Chinese to implement the fundamental reforms 
necessary to guarantee protection of IPR.\53\
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    \53\ AmCham, White Paper 2006: American Business in China (2006) at 
42.
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    In addition, in the future, the activities of industry groups and 
associations may become an important means to improve IPR enforcement 
in China. For example, it is my understanding that the China Trademark 
Association (CTA) (www.cta.org.cn), a group composed of enterprises, 
trademark agencies and trademark experts, provides its members various 
services such as consulting, research, seminars and training, trademark 
monitoring, and serving as a communications link between its members 
and government agencies. To the extent that U.S. companies operating in 
China become members of CTA and other similar groups, it is likely to 
enhance the development and improvement of the IPR protection system in 
China.
    In sum, China is making gradual and incremental progress in 
developing a more effective IPR protection and enforcement system, but 
chronic, intractable problems remain. The question is--how fast China 
can or will be able to move toward a level of IPR protection and 
enforcement that is acceptable to its trading partners.
JCCT--The Primary Forum for U.S.-China Bilateral Negotiations on IPR
    Since 1994, the main vehicle for U.S.-China bilateral dialogue 
regarding IPR issues has been the annual meeting of the Joint 
Commission on Commerce and Trade (JCCT). At the April 2004 JCCT 
meeting, the U.S. and China made IPR issues one of their highest trade 
priorities. At the meetings in 2004, 2005, and 2006, China committed to 
undertake various actions to reduce IPR infringement and improve IPR 
enforcement. In some cases, China has fulfilled its commitment and, in 
some other instances, China is continuing its efforts toward completing 
the commitment.\54\ USTR's Special 301 report cites the following 
examples of China implementing IPR-related commitments made at the 2004 
and 2005 JCCT meetings:
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    \54\ The U.S.-China Business Council has prepared a useful summary 
of China's 2004, 2005, and 2006 JCCT commitments, with an indication of 
their current status. See http://www.uschina.org/public/ documents/
2006/05/jcct-commitments.pdf.
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    ``At the 2006 JCCT China reaffirmed its commitment, made at 
previous JCCT meetings, to continue efforts to ensure use of legalized 
software at all levels of government, and to adopt procedures to ensure 
that enterprises use legal software, beginning with large enterprises 
and state-owned enterprises.''
    ``China recently fulfilled a 2005 JCCT commitment by adopting 
amended rules governing the transfer of administrative and customs 
cases to criminal authorities, and has taken some steps to pursue 
administrative actions against end-user software piracy.''
    ``China recently posted an IPR ombudsman to its Embassy in 
Washington, who has facilitated contacts between U.S. government 
officials and their counterparts in Beijing, and been a source of 
information for U.S. businesses, including small and medium-size 
companies.''
    ``China has also sought to expand enforcement cooperation as agreed 
at the 2004 and 2005 JCCT meetings.'' In particular, China's General 
Administration of Customs (GAC) and the U.S. Customs and Border 
Protection (CBP) are developing a plan under which ``CBP will cooperate 
with GAC to affect a four-part customs cooperation program aimed at 
improving administrative IPR border enforcement in both countries,'' 
including such elements as data sharing, exchange of statistical 
information on IPR border seizures, establishing a contact for matters 
related to IPR-infringing goods, and technical exchanges (e.g., 
legislative/regulatory improvements, risk modeling and IPR recordation 
administration).
    ``China is also taking steps to meet its 2005 JCCT commitment to 
submit a legislative package to the National People's Congress in June 
2006 for China to join the WIPO Internet Treaties.'' \55\
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    \55\ See USTR, 2006 Special 301 Report (April 28, 2006).
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    The recently completed 2006 JCCT resulted in the following outcomes 
on requests made by the U.S. aimed toward improving enforcement of 
intellectual property rights:
    In support of its commitment to significantly reduce intellectual 
property rights (IPR) infringement levels, China agreed to the 
following specific actions.

      Pirated Optical Disks (ODs). The Chinese government has 
taken action against 14 factories producing illegal optical disks and 
has pledged to step up enforcement in this important area to combat 
copyright piracy of films, music, and software. China and the U.S. will 
also explore new ways to strengthen cooperation in this area.
      Requirements to Install Legitimate Software. The Chinese 
government has issued a notice requiring the pre-loading of legal 
operating system software on all computers produced or imported into 
China, as well as a notice requiring government agencies to purchase 
computers with pre-loaded software. In line with these requirements, 
several Chinese computer manufacturers have recently signed agreements 
to purchase U.S. operating system software.
      Ensuring Use of Legal Software in Government and 
Enterprises. In addition to ongoing efforts to ensure use of legalized 
software at all levels of the government, China has launched efforts to 
ensure the legalization of software used in Chinese enterprises. In 
addition, China has agreed to discuss U.S. proposals regarding 
government and enterprise software asset management in the JCCT IPR 
Working Group.
      Rid Consumer Markets of Infringing Goods. The Chinese 
government has agreed to intensify its efforts to ensure that public 
markets in China are free of infringing products and has announced 
enforcement actions in several major cities.
      Individual Cases. The Chinese government agreed to help 
ensure that individual IPR cases raised by the U.S. government with 
China will be vigorously pursued.
      Action Plan: China has announced a broad action plan to 
improve enforcement of IP rights, including steps in the areas of 
enforcement, legislation and education. Strongly implemented, these 
steps could lead to significant improvement in the IP situation in 
China.\56\
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    \56\ The U.S.-China Joint Commission on Commerce and Trade (JCCT), 
Outcomes on U.S. Requests (April 11, 2006); http://www.ita.doc.gov/
press/press_releases/2006/jcct_outcomes_041106.pdf.
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Potential for a WTO Dispute Settlement Case re IPR Enforcement
    In its 2005 report to Congress, the Commission stated that 
``China's principal IPR deficiency is effective enforcement of its 
laws, which is among its WTO commitments.''\57\ The Commission further 
observed that ``China's failure to protect IPR is clearly within the 
jurisdiction of the WTO, given China's explicit obligations under the 
TRIPS agreement,'' and then recommended that, ``(b)ecause China is not 
making satisfactory progress in this area, the United States should 
initiate action through the dispute resolution process at the WTO to 
address China's failure to comply with both the criminal penalties and 
enforcement provisions of TRIPS.''\58\
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    \57\ 2005 Report to Congress of the U.S.-China Economic and 
Security Review Commission, 109th Cong., 1st Sess. (November 2005) at 
47 (citing TRIPS article 41.1: ``Members shall ensure that enforcement 
procedures as specified in this Part are available under their law so 
as to permit effective action against any act of infringement of 
intellectual property rights covered by this Agreement, including 
expeditious remedies to prevent infringements and remedies which 
constitute a deterrent to further infringements. These procedures shall 
be applied in such a manner as to avoid the creation of barriers to 
legitimate trade and to provide for safeguards against their abuse.'').
    \58\ 2005 Report to Congress of the U.S.-China Economic and 
Security Review Commission, 109th Cong., 1st Sess. (November 2005) at 
48.
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    In its recently-issued Special 301 report, USTR said it was 
``stepping up consideration'' of WTO dispute settlement options against 
China with regard to IPR issues. In doing so, USTR did not identify the 
grounds for any potential WTO complaint. However, a recent press report 
states that USTR is considering a WTO case on the issue of thresholds 
for IPR criminal liability.
    The U.S. Trade Representative's office last week indicated that it 
is getting closer to launching a WTO challenge against China's laws 
that require certain thresholds to be met before intellectual property 
rights violators can be hit with criminal penalties.
    Informed sources have said since March that USTR is looking at a 
case that attacks these thresholds, and industry sources this week 
agreed that the new Special 301 report officially declares that these 
thresholds are a serious problem.\59\
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    \59\ USTR Hints at WTO Case Against China on IPR Criminal 
Thresholds, Inside U.S.-China Trade (May 3, 2006).
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    With respect to the basis for a TRIPS-based complaint, in general, 
the TRIPS Agreement obligates Members to:

      provide minimum standards of protection for copyrights and 
neighboring rights, trademarks, geographical indications, industrial 
designs, patents, integrated-circuit layout designs and undisclosed 
information;
      establish minimum standards for IPR enforcement in administrative 
and civil actions and, respecting copyright piracy and trademark 
counterfeiting, in criminal actions and actions at the border. TRIPS 
requires that enforcement procedures have a deterrent effect; and
      provide national and MFN treatment with respect to the protection 
and enforcement of intellectual property rights.

    A number of interested party groups, in focusing on China's 
inadequate IPR enforcement, have recommended bringing a WTO case 
against China based on alleged violations of TRIPS Article 41 (which 
sets out the general obligations re enforcement of IPR) and/or Article 
61 (dealing with criminal enforcement procedures). The following is a 
representative sampling of such potential claims.

        RIAA (testimony of Jay Berman to House W&M Committee, April 14, 
        2005):

        TRIPS Article 41 states that ``members shall ensure that 
        enforcement procedures--are available under their law so as to 
        permit effective actions against any infringement--covered by 
        this Agreement, including expeditious remedies--which 
        constitute a deterrent to further infringements.'' China's 
        excessive reliance upon administrative sanctions in the form of 
        the seizure of infringing product and, if the guilty party 
        doesn't flee, the imposition of small fines, do not deter 
        further infringements.
        TRIPS Article 61specifically requires that criminal penalties 
        ``be applied in cases of willful trademark counterfeiting or 
        copyright piracy on a commercial scale.'' China has conducted 
        few prosecutions and made very few convictions for copyright 
        piracy. China has persisted in defining ``commercial scale'' 
        through the use of complicated numerical thresholds and 
        ambiguous definitions which, despite the new Chinese ``judicial 
        interpretation'' described below, make it highly unlikely any 
        pirate will face criminal penalties.
        Moreover, the remedies provided in China's criminal code are 
        only available in those instances where the pirate is making a 
        profit. The profit test is actually more difficult to meet than 
        the commercial scale requirement. A ``profit'' test violates 
        the TRIPS Agreement.

        NAM (Comments to USTR re Special 301 out-of-cycle review, 
        February 14, 2005):

        USTR should begin to prepare a WTO case and seek consultations 
        with China as soon as U.S. trade agencies believe they have 
        assembled sufficient information to take this step.
        Such WTO consultations should present the breadth and depth of 
        China's failure to implement the intellectual property 
        protections as required by the WTO, and should present an 
        assessment of the economic cost to U.S. firms as well as the 
        threat to health and safety posed by tolerating the production 
        and export of counterfeit goods

        IIPA (Comments to USTR re Special 301 out-of-cycle review, 
        February 9, 2005):

        China does not presently meet its WTO/TRIPS commitments on 
        enforcement and particularly Articles 41, 50 and 61 (provide 
        enforcement which ``on the ground'' deters further 
        infringements, provide effective ex parte civil search orders, 
        and provide specific deterrent criminal penalties).

        Intel (Comments to USTR re Special 301 out-of-cycle review, 
        February 14, 2005):

        Chinese law's reliance on numerical thresholds as basis for 
        prosecutions and convictions will continue to create irrational 
        obstacles to criminal enforcement. China's Criminal Code 
        (especially articles 213-215) appears inconsistent with TRIPS 
        Article 61 which requires access to criminal enforcement in 
        counterfeiting cases on a ``commercial scale.''

    Moreover, USTR's Special 301 out-of-cycle Review conducted in 2005 
noted some potential bases of TRIPS violations.\60\
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    \60\ See http://www.ustr.gov/assets/Document_Library/
Reports_Publications/2005/2005_Special_301/asset_upload 
_file835_7647.pdf.
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    ``Article 63 of the TRIPS Agreement requires laws, regulations and 
final judicial decisions and administrative rulings of general 
application pertaining to IPR infringement be made publicly available 
to rights holders. Despite this requirement, lack of transparent 
information on IPR infringement levels and enforcement activities in 
China continues to be an acute problem.''
    ``Article 61 of the TRIPS Agreement requires a criminal IPR 
enforcement system with deterrent effect. Presently, however, criminal 
enforcement in China has not demonstrated any deterrent effect on 
infringers.''
    ``Articles 41 and 61 of the TRIPS Agreement require effective and 
deterrent IPR enforcement. Consensus exists among rights holders, 
however, that China's current IPR system relies too heavily on 
enforcement by administrative authorities and is non-deterrent.''
    ``China has yet to implement any meaningful data protections for 
pharmaceutical products, as required by Article 39.1 of the TRIPS 
Agreement.''
    In considering how to approach a potential WTO case, it would 
likely be easier to succeed on specific allegations of TRIPS violations 
as applied in China, in contrast to alleging generally that China's IPR 
laws violate TRIPS obligations. A more general approach might, however, 
if successful, produce a broader effect. Under WTO jurisprudence, it is 
not uncommon for Members to allege that an underlying law ``as such'' 
may violate a WTO legal obligation or otherwise nullify or impair 
benefits under the covered agreements, independent of any application 
of that law.
    At the WTO, there have been nine TRIPS disputes that have resulted 
in panel reports. Six disputes have focused on specific aspects of IPR 
laws and regulations rather than on IPR enforcement per se. These cases 
and the TRIPS articles cited are:
    India--Patents (U.S.), WT/DS50 (Articles 27, 63, 70.8 and 70.9)
    Indonesia--Autos, WT/DS54 (Articles 3, 20 and 65)
    India--Patents (EC), WT/DS79 (Article 70.8(a) and 70.9)
    Canada--Pharmaceutical Patents, WT/DS114 (Articles 27, 30, 33 and 
70)
    U.S.--Section 110(5) Copyright Act, WT/DS160 (Articles 9.1 and 13)
    Canada--Patent Term, WT/DS170 (Articles 33, 62.1, 62.4, 65, 70.1 
and 70.2)
    Article 41 sets out the general obligation that Members ensure that 
enforcement procedures are available ``so as to permit effective action 
against any act of infringement of intellectual property rights'' 
covered by TRIPS, ``including expeditious remedies to prevent 
infringements and remedies which constitute a deterrent to further 
infringements.'' Article 42 requires Members to provide fair and 
equitable civil judicial procedures concerning the enforcement of any 
intellectual property right covered by the TRIPS agreement. While 
Article 42 is included in Section III of TRIPS (covering enforcement of 
IPR), it is focused on procedures, not the general obligation of 
Article 41 to provide effective IPR enforcement.
    Three TRIPS disputes that resulted in panel and/or appellate body 
reports have cited violations of TRIPS enforcement Articles 41 and/or 
42, but in none of these cases did the panel or appellate body find a 
violation. They are:
    EC--Trademarks and Geographical Indications (U.S.), WT/DS/174 
(Articles 1, 2, 3, 4, 16, 22, 41, 42, and 65)

      The U.S. claimed that the EC's regulation was 
inconsistent with Articles 41.1, 41.2, 41.4, 42 and 44.1 of the TRIPS 
Agreement because it denied the owner of a registered trademark the 
right provided for in Article 16.1 of the TRIPS Agreement, and because 
it did not, with respect to a GI, provide the rights provided for in 
Article 22.2 of the TRIPS Agreement. The U.S. requested a finding that 
the enforcement obligations of the TRIPS Agreement applied to the EC 
regulation to the extent that it made unavailable to right holders the 
requisite enforcement procedures and remedies.\61\ However, the Panel 
exercised ``judicial economy'' with respect to these claims and did not 
address them.\62\

    \61\ See Report of the Panel, EC--Trademarks and Geographical 
Indications (U.S.), WT/DS174/R (15 March 2005) at para. 7.759.
    \62\ See Report of the Panel, EC--Trademarks and Geographical 
Indications (U.S.), WT/DS174/R (15 March 2005) at para. 8.2.

    EC--Trademarks and Geographical Indications (Australia), WT/DS/290 
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(Articles 1, 2, 3, 4, 16, 22, 24, 41, 42, and 65)

      Australia argued that the EC failed to ensure that 
enforcement procedures as specified in Part III of the TRIPS Agreement 
are available under its law, contrary to Article 41.1 of the TRIPS 
Agreement, as a consequence of, inter alia, the fact that the EC 
regulation did not grant the Consultative Committee the authority 
required by Articles 43, 44, 45, 46 and 48 of the TRIPS Agreement, and 
did not provide judicial authorities with the authority required by 
Articles 43, 44, 45, 46, 48 and 49. The Panel, however, ruled that 
Australia's inclusion of claims under Articles 43, 44, 45, 48, and 49 
in conjunction with Article 41 were not included in its original claim 
and therefore were outside the Panel's terms of reference.\63\

    \63\ See Report of the Panel, EC--Trademarks and Geographical 
Indications (Australia), WT/DS290/R (15 March 2005) at paras. 7.44, 
7.49.

    U.S.--Section 211 Appropriations Act, WT/DS/176 (Articles 2, 3, 4, 
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15, 16, 42)

      The Panel found Section 211(a)(2) to be inconsistent with 
Article 42 of the TRIPS Agreement but the Appellate Body reversed the 
Panel's finding.\64\

    \64\ See Report of the Panel, United States--Section 211 Omnibus 
Appropriations Act of 1998, WT/DS176/R (6 August 2001) at para. 8.102; 
Report of the Appellate Body, United States--Section 211 Omnibus 
Appropriations Act of 1998, WT/DS176/AB/R (2 January 2002) at para. 
231.

    Although, in each of these cases, neither the panel nor appellate 
body directly addressed a claim of a TRIPS violation based on Article 
41 alone and its obligation of ``effective'' IPR enforcement, it is 
interesting to note their tangential comments regarding the scope of 
Article 41.\65\
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    \65\ Report of the Panel, United States--Section 211 Omnibus 
Appropriations Act of 1998, WT/DS176/R (6 August 2001):
    8.97 In interpreting Article 42, we look next at its context. The 
Article appears in Section 2 of Part III of the TRIPS Agreement, which 
deals with the enforcement of intellectual property rights. The 
inclusion of this Part on enforcement in the TRIPS Agreement was one of 
the major accomplishments of the Uruguay Round negotiations as it 
expanded the scope of enforcement aspect of intellectual property 
rights. Prior to the TRIPS Agreement, provisions related to enforcement 
were limited to general obligations to provide legal remedies and 
seizure of infringing goods. Article 41 of Section 1 of Part III lays 
down the general obligations applicable to all enforcement measures. It 
provides, inter alia, that ``Members shall ensure that enforcement 
procedures as specified in this Part are available under their law so 
as to permit effective action against any act of infringement of 
intellectual property rights covered by this Agreement'' (paragraph 1) 
and that ``[p]rocedures concerning the enforcement of intellectual 
property rights shall be fair and equitable'' (paragraph 2). Article 
42--together with the other provisions of Section 2 of Part III--
elaborates upon the general obligations contained in Section 1 of the 
same Part in respect of civil and administrative procedures and 
remedies. As concerns the requirement of effectiveness, the object and 
purpose of the enforcement provisions of Part III is expressed in the 
Preamble to the Agreement, which recognizes the need of ``the provision 
of effective and appropriate means for the enforcement of trade-related 
intellectual property rights''.
    Report of the Appellate Body, United States--Section 211 Omnibus 
Appropriations Act of 1998, WT/DS176/AB/R (2 January 2002):
    206. Section 1 of Part III lays out ``General Obligations'' of 
Members. According to Article 41.1 of Section 1, Members are required 
to ensure that enforcement procedures as specified in Part III are 
available under their domestic law ``so as to permit effective action 
against any act of infringement of intellectual property rights covered 
by [the TRIPS] Agreement''. These enforcement procedures must include 
expeditious remedies to prevent infringements and remedies which 
constitute a deterrent to further infringements. At the same time, 
these procedures must be applied in such a manner as to avoid the 
creation of barriers to legitimate trade and to provide safeguards 
against their abuse. These procedures provide for an internationally-
agreed minimum standard which Members are bound to implement in their 
domestic legislation.
    Report of the Panel, EC--Trademarks and Geographical Indications 
(Australia), WT/DS290/R (15 March 2005):
    7.48 The Panel considers that Article 41.1 imposes an obligation. 
The language of that provision is expressed in terms of what Members 
``shall'' ensure and is not hortatory. The substance of the provision 
adds qualitative elements to the procedures specified in Part III 
through use of terms such as ``effective'', ``expeditious'' and 
``deterrent'' and is not redundant.
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    In addition to the cases above, the U.S. filed two other sets of 
WTO dispute settlement cases respecting IPR enforcement, but they were 
resolved by mutual agreement without going to a panel. They are:
    Denmark--Measures Affecting the Enforcement of IPR, WT/DS83
    Sweden--Measures Affecting the Enforcement of IPR, WT/DS86

      U.S. alleged that Denmark & Sweden failed to make 
provisional measures available in the context of civil proceedings 
involving IPR, and this violated TRIPS Articles 50, 63 and 65

    EC--Enforcement of IPR for Motion Pictures and Television Programs, 
WT/DS124
    Greece--Enforcement of IPR for Motion Pictures and Television 
Programs, WT/DS125

      U.S. claimed that a significant number of TV stations in 
Greece regularly broadcast copyrighted motion pictures and television 
programs without the authorization of copyright owners.
      U.S. contended that effective remedies against copyright 
infringement did not appear to be provided or enforced in Greece in 
respect of these broadcasts.
      U.S. alleged a violation of Articles 41 and 61 of the 
TRIPS Agreement.

    In sum, as asserted by various companies, interest groups, and the 
USTR, there are multiple potential grounds for alleging TRIPS 
violations by China, whether focused on deficiencies in China's IPR 
laws ``as such'' or on specific cases of inadequate and ineffective IPR 
enforcement. The case against copyright infringement of movies and TV 
programs in Greece provides a prior example of a specific IPR case. 
There are many specific instances in China of inadequate enforcement of 
its IPR laws, such as the issue of criminal liability thresholds being 
too low to be a deterrent to infringement, to which this example could 
be applied. Alternatively, a potential case could be based on the claim 
that specific aspects of China's IPR laws ``as such'' violate its TRIPS 
obligations and have resulted in nullification or impairment of 
benefits to the U.S. A determination of the best approach would likely 
depend on the amount and quality of specific evidence of TRIPS 
violations available, as well as strategic policy decisions as to 
whether it would more advantageous to take a targeted approach or to 
focus on achieving as large an effect as possible.\66\
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    \66\ In contrast to the dispute settlement path, the EC has made a 
number of submissions to the WTO TRIPS Council urging the Council to 
``carefully examine compliance of Members with the enforcement 
provisions of TRIPS.'' See Enforcement of Intellectual Property Rights, 
Communication from the European Communities, IP/C/W/448 (9 June 2005) 
at para. 3. In particular, the EC said:
    19. It is unquestionable that the TRIPS Agreement establishes the 
freedom of each Member to determine the appropriate method of 
implementing its provisions. However, ultimately such implementation 
must allow the adequate prosecution of the objectives of TRIPS.
    20. In that respect, the EC would like to recall that, according to 
Article 41.1 of the TRIPS Agreement, ``Members shall ensure that 
enforcement procedures as specified in this Part are available under 
their law so as to permit effective action against any act of 
infringement of intellectual property rights covered by this Agreement, 
including expeditious remedies to prevent infringements and remedies 
which constitute a deterrent to further infringements . . .''. Hence, 
we have an obligation to take account of the present situation and find 
the ways to combat and reduce counterfeiting and piracy.
    21. Considering the TRIPS Council assignments, in particular its 
task to ``monitor the operation of this Agreement and, in particular, 
Members' compliance with their obligations hereunder . . .'' explicitly 
mentioned in Article 68 TRIPS, there is no doubt that this Council is 
the appropriate forum to address the issue.
    22. In view of the above, the EC submit that the deficient 
enforcement of IPRs is a major concern that should be carefully 
considered in the forthcoming months.
    Id. at paras. 19-22 (emphasis in original). The EC recently renewed 
its proposal that the TRIPS Council foster a dialogue among WTO Members 
with a view to identifying solutions to implementation deficiencies on 
IPR enforcement. See Enforcement of Intellectual Property Rights, 
Communication from the European Communities, IP/C/W/468 (10 March 
2006).
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The Way Forward Requires Practical Approaches
    The above discussion describes how IPR issues have been playing 
out. The practical question before us, however, is how the U.S. and 
China can make real progress in improving IPR protection and 
enforcement. At this point, based on my past research and presentations 
to the Commission as well as my experiences in China meeting with 
government and industry officials, I would like to offer some personal 
observations on the way forward.
    While a WTO case is always a possibility, the U.S. generally tries 
to work with new Members to provide assistance in achieving their 
obligations rather than to turn to the dispute settlement path. The 
ultimate object is an acceptable IPR system in China. It is hoped of 
course that additional pressure applied to China will lead to greater 
and better results. But we are at this stage so far from an acceptable 
situation that it would be useful to look ``outside the box'' for 
possible solutions.
    First, to the extent China can accomplish ``quantum leaps'' in IPR 
improvement by means of government mandate, all the better. Thus, 
China's directive regarding use of genuine software on government 
computers and pre-loading of genuine software on all computers 
manufactured or imported into China is a positive development.
    Second, China can and should make changes to their statues and 
regulations to improve and enhance IPR protection and enforcement. 
Thus, for example, it would be a helpful development if China would 
revisit the subject of IPR criminal liability and provide real 
deterrence.
    Third, there is a need to reduce the portion of trade that needs to 
be reviewed or inspected for possible IP violations by Customs here and 
there. For example, the U.S. and China could look to the programs that 
U.S. Customs and Border Protection have instituted as models, such as 
C-TPAT (Customs-Trade Partnership Against Terrorism) program. C-TPAT is 
a voluntary government-business initiative aimed at strengthening and 
improving the overall international supply chain and U.S. border 
security. Among the benefits to those who participate in C-TPAT are 
reduced number of CBP inspections (therefore, reduced border delay 
times) and priority processing for CBP inspections. The U.S. and China 
could apply the same model to their IP trade issues. Thus, they could 
enlist the private sector to become partners in IP border enforcement. 
Like C-TPAT, those who participate could benefit from lessened border 
scrutiny, fewer inspections, and expedited customs processing. The goal 
of such a program would be to identify IP-compliant importers and their 
suppliers who would be subject to reduced inspections so that the 
customs authorities could focus heightened scrutiny on high-risk 
importers. The cost of increased inspections for high-risk imports 
could be passed on to the import community, which would allow the 
government to hire more border inspection resources. The point is that 
there is a need for innovative programs that will provide an incentive 
for importers to work with their foreign suppliers to guarantee that 
the goods they import from China are IP compliant.
    Fourth, there is a gap in IP enforcement rights that needs to be 
closed through appropriate legislation. Specifically, the U.S. should 
consider legislation to ensure that companies that buy IPR-protected 
equipment have some legal ability to reach imported products made on 
IP-infringing equipment. It is the case that in certain situations, 
manufacturing equipment protected by intellectual property rights has 
been misappropriated by foreign equipment manufacturers. Such IPR-
infringing equipment has then been used to produce other products which 
are exported to the U.S. U.S. companies that lawfully use IPR-protected 
equipment to manufacture similar products are disadvantaged by having 
to compete with imported products manufactured using IPR-infringing 
equipment. Currently, this situation is not addressed by U.S. law for 
the downstream industry. It is critical that U.S. companies lawfully 
producing products using IPR-protected manufacturing equipment who are 
forced to compete with producers using IPR-infringing equipment be 
permitted a legal means to sue the beneficiaries of IP-infringing 
equipment.

                                 

       Statement of R. John Theriault, Pfizer, New York, New York
    Pfizer is a diversified, global health care company and the world's 
largest pharmaceutical company. Our core business is the discovery, 
development and marketing of innovative pharmaceuticals for human and 
animal health, and we are committed to ensuring the integrity of those 
products when they reach the market.
    We have developed a focused anti-counterfeiting program to protect 
the integrity of our products and supply chain. Staffing for that 
program now includes seventeen security professionals, including two 
based in Hong Kong, one based in Beijing, and one based in Shanghai. 
Since expanding our presence in China in 2004, we have seen remarkable 
results, including a steady increase in the number and quality of 
enforcement actions taken, some of which are discussed in detail below.
    In China, we have successfully partnered with the Public Security 
Bureau (PSB), the Ministry of Public Security (MPS), the State 
Administration for Industry and Commerce (SAIC), and various provincial 
offices of both the SAIC and the State Food and Drug Administrations 
(SFDA) to identify and raid counterfeiters. The partnership is grounded 
in trust, facilitated by Pfizer's anti-counterfeiting training programs 
with the Chinese and our sharing of leads. While there is still much 
room for improvement in regard to the enforcement of Intellectual 
Property rights in China, the following facts indicate that some 
progress is being made.
2006 Seizures and Arrests
    Recent enforcement actions by Chinese authorities demonstrate the 
improved protection of Pfizer's intellectual property rights:

      Of the more than 8.9 million counterfeit Pfizer tablets 
seized globally, more than 4.2 million (47.94%) were seized in China
      Of the 2289 kg of active pharmaceutical ingredient (API) 
for Pfizer products seized globally, 98.07% (2245 kg) was seized in 
China
      Of the 506 arrests made globally for IP violations, 113 
(22%) were by Chinese authorities
      In response to leads provided to them, the SFDA and local 
FDAs inspected pharmacies in 50 cities, confiscating counterfeit 
medicines, imposing stiff financial penalties and, for the most severe 
violations, closing pharmacies and detaining their owners.
      78 herbal medicines containing sildenafil citrate, the 
API for Viagra, were removed from the retail market by Shanghai FDA
      Between February 2006 and February 2007, China Customs 
made eleven export seizures, totaling 196,484 counterfeit Viagra 
tablets
Investigation and Case Studies
    Overall, our relationship with Chinese authorities has been 
productive and positive. The following case studies are representative 
of our recent accomplishments in the region.
International Internet Distribution Network Disrupted (2005)
    ``Operation Cross Ocean'', a joint investigation by MPS and U.S. 
Immigration and Customs Enforcement (ICE), resulted in Chinese 
authorities seizing ten lines of manufacturing equipment as well as 
counterfeit pharmaceuticals valued at $4.3 million (USD), four printing 
machines and counterfeit packaging, in what one U.S. Customs official 
has described as ``one of the most significant investigations involving 
counterfeit pharmaceuticals.'' The network, which relied on the 
Internet to attract brokers and customers, included hundreds of brokers 
in the U.S. and EU and, based on records seized, appeared to have been 
in operation for at least two years. Chinese authorities arrested the 
ringleader, David Wang aka Li Wenhui, and at least 10 others; U.S. 
authorities arrested one of Li's U.S. brokers.
    Between August 27 and September 1, Chinese authorities executed two 
raids. In the first, which took place in Tianjin, they seized 230,000 
counterfeit ED tablets, including 130,000 counterfeit Viagra, and 
arrested the ringleader, David Wang. In the second, they raided a 
factory in Zheng Zhou City, which was identified as Li's source. 
Authorities, who made an additional 10 to 12 arrests, have provided 
preliminary reports of the seizure of 10 lines of manufacturing/
packaging equipment, 400,000 counterfeit Viagra tablets, 200 kg of 
sildenafil citrate (enough for approximately 1.4 million 100mg 
tablets), and an undisclosed quantity of counterfeit Lipitor. Based on 
business records that were also seized, it would appear that the 
network has been in operation for at least two years.
Raids Net Almost Two Million Counterfeit Tablests (2005)
    The January 2005 raids by the MPS were credited by authorities as 
one of China's best cases under the ``Mountain Eagle'' campaign 
designed to capture IP violators and pursue criminal charges. The 
raids, which were coordinated in three cities and included a licensed 
and very successful pharmaceutical factory in Guangdong, China, netted 
almost 2 million counterfeit Pfizer tablets--1,000,000 Lipitor; 499,200 
Norvasc; and 446,400 Viagra--as well as production equipment including 
punches and dies for Pfizer products.
200 Officers Mobilized for Raids (20060)
    An investigation referred by Pfizer to PSB Guangdong resulted in 
the seizure of more than 10.7 million counterfeit tablets from various 
pharmaceutical companies, including 1.14 million Viagra and 100 kg 
sildenafil, enough to manufacture 700,000 100mg tablets. Through our 
investigation, we had identified Cao Ming as a major manufacturer and 
international distributor of counterfeit pharmaceuticals. During the 
joint investigation that followed, one manufacturing site and two 
warehouses were identified as part of the criminal operation. 
Authorities mobilized 200 officers to conduct raids at the three 
locations. In addition to the finished tablets and API, they seized 30 
pieces of equipment used to manufacture the counterfeits and made 33 
arrests.
Factory in Guangzhou Dismantled (2006)
    Based on information we provided, authorities dismantled a factory 
in Guangzhou, capable of producing 5000 kg of sildenafil citrate a 
month. The raids, conducted by more than 70 Guangdong Provincial and 
Guangzhou PSB officers, were the culmination of a year-long 
investigation conducted by the Chinese authorities. During the raids 
they conducted, authorities made twelve arrests and seized 1514 kgs 
sildenafil citrate (Viagra), 7 kgs tadalafil (Cialis), and more than 
100 machines used to manufacture the APIs. According to authorities, 
those operating the factory knowingly sold API to a number of 
counterfeiters throughout China. We continue to work with authorities 
to identify those customers.
Harsh Sentences Imposed on IP Violators
    In two separate cases, defendants arrested in late 2005 based on 
information provided by Pfizer received harsh jail sentences.
    In the first, Wang WeiPing was sentenced to 10 years in jail and 
fined approximately $250,000 following his conviction for the 
manufacture and sale of counterfeit pharmaceuticals. Wang had been 
arrested in November 2005 after his factory was raided and 
approximately 400,000 counterfeit Viagra and 2.4 counterfeit Cialis 
were seized. This represents the quickest conviction and harshest 
sentence imposed to date by the Chinese courts.
    In the second, four defendants were sentenced to terms ranging from 
1 to 8 years for their participation in a criminal network that had, 
since 2001, sold more than 60,000 kg of sildenafil citrate to 
counterfeiters.
Other Major Seizures by Chinese Authorities
      January 2005: almost two million counterfeit tablets: 
1,000,000 Lipitor; 499,200 Norvasc; and 446,400
      Viagra July 2005: 100,000 counterfeit Viagra tablets + 
100 kg API (700,000 100mg tablets) and counterfeit U.S. packaging. 
Follow up investigation led to raid on printing factory and seizure of 
more than 80,000 U.S. type bottle labels and patient information
      February 2006: 1,840,000 counterfeit Viagra tablets + 200 
kg API (1,400,000 100mg tablets)
      August-September 2006: 87,400 counterfeit Norvasc tablets 
+ 100 kg API (28,840,000 5mg tablets)
CONCERNS
    Despite these successes, there are still areas of concern:
Defects in PRC Criminal Code (JI)
``Harmful enough'' Standard
    Prosecution of cases involving counterfeit medicines remains a 
concern, since the burden of proof rests with the brand owner. For 
example, a company can be charged with drug counterfeiting under the 
current criminal law but unless the illicit product is proven ``harmful 
enough to endanger human health'', it is virtually impossible to 
initiate a criminal investigation on ``drug counterfeiting''. The 
standard for the legal term ``harmful enough'' was set by a 2001 
Judicial Interpretation on Criminal Cases of Production and Sale of 
Fake and Inferior Products, which is often too high and impractical for 
efficient criminal prosecution. (The rationale here is that it is easy 
for drug counterfeiters to acquire the kind of active ingredient they 
need from chemical companies or even over the Internet.) The standard 
for a harmful substance to be ``harmful enough to endanger human 
health'' is also both ambiguous and outdated. In addition, we have 
found that the procedural requirement of acquiring a certificate from a 
provincial-level, SFDA-designated drug inspection agency as a 
precondition to initiating criminal investigation presents even more 
hardship for criminal sanction against drug counterfeiting.
Method of Calculating Value
    In December 2004, the Supreme People's Court disseminated the 
Judicial Interpretation on Issues Concerning Application of Laws in 
Handling Criminal Cases Involving the Infringement of Intellectual 
Property (``New JI''). While Pfizer applauds the positive impact this 
New JI has had on enforcement by materially reducing the monetary 
thresholds to trigger criminal IPR prosecutions and giving clarity on 
some of the key terms of IPR crimes in the Criminal Code, we are is 
still concerned with drawbacks, including methods for calculating the 
value of infringing products.
Unregulated API: No Criminal Liability
    An important factor contributing to the counterfeit drug problem in 
China is that bulk chemicals with medical uses, broadly available from 
under-regulated chemical manufacturers, are increasingly becoming the 
source of APIs used in the production of counterfeit medicines. This 
view is supported by the easy access that the public has to API 
products on the Internet and the fact that almost no requirements are 
imposed on purchases of API products, which can easily be turned into 
counterfeit drugs by the purchasers. Pfizer favors strengthening 
China's regulations relating to the manufacture and sale of bulk 
chemicals having medical use and the creation of an SFDA-led inter-
ministerial task force to investigate and supervise the manufacture and 
sale of API substance labeled as ``chemical products''.
    Especially relevant to the pharmaceutical industry, is that 
supplying API in bulk form may not be subject to criminal liability for 
IPR infringement under either the Criminal Code or the New JI.

                                 

             Statement of United States Chamber of Commerce
    The U.S. Chamber believes that the economic and commercial 
relationship remains at the core of broader bilateral engagement with 
China. This core must be nurtured--especially because it provides clear 
benefits to both countries. China should move to address problems of 
concern to the U.S. business community; the U.S. Congress and 
Administration should avoid yielding to the temptations of 
protectionist policies; and across America, we must ensure that we have 
policies in place--e.g., on healthcare, education, tax policy, 
incentives and funding for research and development, etc.--that support 
our continued status as the world's most dynamic and innovative 
economy.
    The U.S. Chamber applauds the Department of Treasury and other 
participating branches of the U.S. government for organizing the 
constructive Strategic Economic Dialogue (SED) with the Chinese on a 
range of topics deemed vital to U.S.-China relations. We hope that the 
SED will improve mutual trust and understanding and lead to improved 
results for American business as well as serve as a substantive 
complement to the Joint Commission on Commerce and Trade (JCCT). The 
JCCT remains an essential forum for resolving bilateral disputes and 
securing improvements to the business environment in China for American 
business. The Chamber will continue to support both dialogues by 
providing the U.S. government with our membership's priorities and 
timely analysis of both the challenges and opportunities in our 
economic and commercial engagement.
    Notwithstanding the many challenges in the bilateral commercial 
relationship, the Chamber underscores that the relationship continues 
to offer significant benefits and opportunities to U.S. exporters, 
investors, and the broader U.S. economy. According to recently released 
statistics, exports to China grew by 32 percent from 2005 to 2006, 
making it the fastest growing major market for U.S. goods. Since 
China's accession to the World Trade Organization (WTO) in 2001, U.S. 
exports to China have grown over 150 percent, five times faster than 
they have to the rest of the world.
    Given the breadth of its membership, the Chamber has seen how the 
China market has become an integral component in the successes of large 
multi-nationals and small- and medium-size enterprises (SMEs) alike. 
Through a number of innovative programs, including our China Business 
Initiative--the nation's leading, sustained grassroots education 
program on China business opportunities--the Chamber continues its 
commitment to expanding export opportunities to China for American SMEs 
and to ensuring that our member companies have the necessary tools to 
compete in the China market.
    Indeed, despite their challenges accessing the market, SMEs have 
found China to be a relatively welcoming export market. Of the 21,360 
U.S. firms known to have exported merchandise to China in 2004 (the 
last year for which data are available), 19,201, or 90 percent, were 
SMEs.
    The number of SMEs exporting to China has been rising much faster 
than the number of large companies. From 1992 to 2004 the number of 
SMEs exporting to China surged by 511 percent, compared to 128 percent 
for large-company exporters. Together, SMEs represent 35.1 percent of 
all known merchandise exports to China--compared with only a 28.6 
percent share of U.S. exports to the world as a whole.
    These data, among others, underscore the tremendous benefits U.S. 
companies and workers gain from our economic relationship with China. 
That said, we emphasize that there needs to be continued and 
significant progress on critical issues of concern to American business 
if the bilateral economic and commercial relationship is to endure and 
deepen.
    Specifically, we hope to see timely progress from China in the 
following areas:

      Industrial Policies: Some in the Chinese government and 
academic circles believe China can spur growth and innovation through 
government directed industrial policies, including measures that tilt 
the playing field in favor of Chinese firms. Such policies are bad for 
China and will lead to significant, increased trade frictions with the 
United States. China should resolve concerns regarding its domestic and 
outbound investment and industrial policies in various ``strategic'' 
sectors, particularly as many of these sectors--from financial services 
to autos to telecommunications to energy--remain closed or mostly 
closed to foreign investment by American companies. Moreover, the 
Chamber believes that China should refrain from utilizing non-trade 
laws to impose non-tariff barriers on U.S. products and suppliers. 
Recently announced initiatives to promote ``self-reliant innovation'' 
by decreasing China's use of foreign technologies are worrisome to the 
Chamber and our members. Of immediate concern to U.S. industry is 
ensuring that China's evolving competition laws; proposed patent law 
reforms; proposed standards policies, regulations, and policies; and 
government procurement regime are non-discriminatory and transparent 
and fully respect the rights of U.S. inventors and authors.
      Subsidies: The Chamber publicly supported the U.S. 
government's recent action to bring a case in the WTO against China for 
offering prohibited subsidies for exports and import substitution. We 
believe that China should provide a much more detailed report to the 
WTO on its use of subsidies, with particular attention to subsidies of 
state-owned companies provided through its banking system, provincial 
government-level subsidization, and the amount of subsidies involved.
      Currency: On the currency issue, the Chamber believes 
that China should move as quickly as possible to a system that allows 
market forces to determine the exchange rate of the renminbi. Given 
this goal, we strongly support Treasury Secretary Henry Paulson's 
efforts in the context of the SED to encourage broader financial sector 
reforms that will enable China to accelerate its removal of capital 
controls and allow market forces to fully determine the value of its 
currency. The U.S. Chamber also believes that any legislation against 
China's currency regime that would be inconsistent with the rules of 
the WTO would be an ineffective and counterproductive tool. Such 
measures could amount to a steep tax on millions of lower-income 
American consumers and could engender legitimate Chinese retaliation 
against U.S. exports to China.

    In late March, U.S. Chamber President and CEO Tom Donohue will 
travel to China for high-level discussions with China's government and 
business community and to host a global forum on innovation and the 
protection of intellectual property rights (IPR). The forum is but one 
example of the U.S. Chamber's continuing commitment and leadership on 
the global stage to foster multilateral cooperation with governments, 
member companies, and business associations around the world, including 
our counterparts in China, to address the serious challenges associated 
with the counterfeiting, piracy, and patent theft that harm American 
businesses and the U.S. economy.
    During his visit, Mr. Donohue will continue to press the Chinese 
government to protect and enforce the IPR of American firms operating 
inside and outside the China marketplace. He will also travel to one or 
two provinces to promote cooperation in provincial and local efforts to 
improve protection and enforcement of domestic and foreign intellectual 
property (IP). The U.S. Chamber continues to work closely with the 
People's Republic of China (PRC) government and the Chinese business 
community at all levels of society to develop constructive and 
effective solutions to outstanding IPR protection and enforcement 
challenges. These efforts, along with the overarching IPR protection 
and enforcement challenges, are discussed below.
Intellectual Property Rights
    Over the past three years the central government of China has 
sharply increased its efforts to improve IPR protection in China. 
Progress has been made in certain areas, although the overall the level 
of IPR violations in China during 2006 did not improve from previous 
years and remains at critical levels. Advances within China have been 
offset to some degree by apparent increases in Chinese exports of 
counterfeit and pirated goods, facilitated to a great extent by the 
Internet.
    The central government and a number of provincial governments 
appear committed to dealing more proactively with counterfeiting and 
copyright piracy going forward, and cooperation with industry and with 
IPR enforcement authorities in the United States has increased. 
Significant reductions in the levels of piracy and counterfeiting in 
the market are, however, the only true measures for determining the 
fulfillment of these commitments.
Progress and Ongoing Challenges
    The Chinese government took important steps between 2004 and early 
2006 to improve legislation on IPR protection and at the same time 
increased the number of criminal cases against trademark 
counterfeiters. For example, the government reported a 52 percent 
increase in the number of criminal convictions for IPR offences during 
2006. However, the total number of such cases was only 796, and most of 
these cases appeared to involve local IPR owners, rather than foreign 
parties. Further, a majority of foreign companies polled in one recent 
industry survey indicated that counterfeiting in China during 2006 had 
either remained the same or worsened.
    The Chinese government recently reported the results of robust 
administrative enforcement campaigns undertaken in 2006 to address 
optical disk and online copyright piracy. Still, American film, music, 
software, and book publishers report that these campaigns only appeared 
to reduce the superficial visibility of piracy, and overall losses 
remained at critical levels during 2006--anywhere between 85 percent 
and 95 percent for optical disks. Meanwhile, our members report that 
China is increasingly the preferred location for copyright pirates to 
establish Internet servers providing access to pirated films and music 
distributed worldwide.
    China's General Administration of Customs meanwhile reported a 100 
percent increase in seizure of infringing goods (mainly counterfeits) 
during 2006, to 2,473, involving goods valued over U.S.$25 million. 
This laudable increase in enforcement does not appear, however, to have 
slowed the overall growth of counterfeit exports from China. The 
Department of Homeland Security (DHS) disclosed that China (including 
the Hong Kong SAR) was the source of 87 percent of all infringing items 
seized at America's borders last year, and the value of seizures from 
China and Hong Kong almost doubled, to over U.S.$135 million.
    The PRC pledged at the April 2006 JCCT that ``IPR trial chambers 
will be open in courts across China'' and that ``50 IPR Infringement 
Reporting Centers will be set up in 50 key cities in China.'' The 
Chinese government completed the establishment of these centers in late 
August 2006, and they may prove useful for IP owners that have in the 
past been confused as to the correct authority with which to file 
enforcement complaints. But it remains unclear whether these centers 
will have other functions, such as the job of intervening when 
difficulties arise in the course of administrative transfers to 
judicial authorities or with protectionism. We hope the Chinese 
government will move to address this issue.
    The PRC also announced at the April 2006 JCCT that it had issued a 
notice requiring the pre-loading of legal operating system software on 
all computers manufactured in or imported into China as well as a 
notice requiring government agencies to provide adequate budget for, 
and the purchase of computers with pre-loaded legal software. In line 
with these requirements, several Chinese computer manufacturers signed 
agreements last year to purchase U.S. operating system software. These 
announcements built upon commitments undertaken by China at the July 
2005 JCCT to complete its legalization program designed to ensure that 
all central, provincial, and local government offices use only licensed 
software, and to extend this program to enterprises (including state-
owned enterprises) in 2006. This is a very positive step.
    Moreover, China issued new Internet regulations last year to 
protect IPR in the digital environment. While helpful, the Chamber has 
concerns regarding the scope of the rights protected by the new law and 
vague terminology in the law that could result in significant 
loopholes. An effective Internet law is critically important given the 
rapid uptake in broadband in China, the increase in Internet piracy, 
and the fact that all peer-to-peer web sites streaming broadcast 
content without authority are headquartered in China.
    These commitments underscore the central government's efforts to 
improve IPR protection and enforcement, and create a basis for optimism 
that the Chinese government will continue to achieve progress in IPR 
protection. However, because there has not been a substantial reduction 
in the scope and depth of the overall IPR problem over the last two 
years, and to ensure sustainable forward movement in areas where strong 
commitments have been made, more aggressive actions, especially in the 
areas of enforcement and transparency, are urgently needed.
The Need for Deeper Reforms and Additional Policy Resources
    There are many factors which contribute to ongoing IPR problems in 
China. Foremost among them is China's lack of sufficient criminal 
enforcement, and a corresponding lack of resources, training, and 
awareness at the local level. These are problems which are symptomatic 
of IPR enforcement in most countries, regardless of their level of 
development. But the U.S. Chamber and its partner organizations believe 
that the problems in China are particularly acute given their size and 
scope. Both the central and local governments can--and must--do better, 
not only to comply with WTO obligations, but also to promote long-term 
growth and innovation in China.
    Central authorities have also been unable to implement more timely 
and effective improvements in certain local hot-spot regions across the 
country, including the Chaoyang District of Beijing (home of the Silk 
Market), and elsewhere. Local protectionism remains a key barrier to 
progress, and one which will require greater political commitment in 
the coming months and years if it is to be overcome.
    There are, however, steps proposed by foreign governments, industry 
and China's own IPR experts that the central government can take in the 
short- to medium-term which can lead to more progress in the fight 
against IPR infringements. These include structural changes, including 
the updating of the PRC Criminal Code, clarification of existing laws 
and regulations to eliminate loopholes and simplify enforcement 
procedures, the introduction of greater transparency and information 
sharing, and other measures.
    While the WTO technically renders IPR protection as a ``trade 
issue'', we hope the Chinese government recognizes that foreign 
concerns over China's difficulties in IPR protection are motivated by a 
good faith desire to promote the rule of law, to stop the growth of 
organized crime, and to facilitate the growth of a vibrant healthy 
economy for both Chinese and foreign enterprises equally. We are 
particularly cognizant and appreciate that China's desire to ascend the 
value chain and develop an economy based on innovation rather than low-
cost manufacturing are driving its new focus on IP.
    In this regard, the U.S. Chamber is monitoring closely China's 
post-WTO accession use of industrial policies--including antitrust law, 
standard setting, and patent reform--to foster the development of 
strategic sectors and that could reduce the value of foreign-held IPR. 
We are closely tracking several different draft laws and regulations 
that could substantially weaken legal protection for U.S. rights' 
holders, and we would be pleased to provide the committee with 
additional information on this topic.
U.S. Chamber China Intellectual Property Action Plan
    The U.S. Chamber is hopeful that more intensified dialogue and 
research on these structural problems and ongoing legislative changes 
in China's IPR regime will take place during 2007, in tandem with 
continued exchanges and training activities undertaken in cooperation 
with the Chamber's provincial government initiatives.
    Beginning in 2004, the U.S. Chamber has attempted to promote 
change, raise capacity and awareness and strengthen industry and 
government cooperation on IPR protection in China through a number of 
its own initiatives. These are summarized below:
    (1) Enhancing coordination of policy messages delivered to the U.S. 
and Chinese governments on China IP concerns.
    (2) Providing an overarching, inclusive platform for substantive 
dialogue on IP-related legal and policy matters between U.S. corporate, 
legal, and academic IP experts and Chinese government officials at the 
national, provincial, and local levels.
    (3) Establishing new benchmarking initiatives at the national and 
provincial levels to more accurately monitor the government's 
performance, including effectiveness in IPR enforcement, and 
responsiveness to domestic and foreign industry concerns. Just last 
month, the Chamber signed a memorandum of understanding with the 
Jiangsu Provincial IP authorities, which includes collaboration on 
education, training, and benchmarking. The Jiangsu provincial 
leadership and its IP authorities have demonstrated substantial good 
will in our engagement, and we are hopeful that we can achieve 
measurable progress in IP protection and enforcement for both American 
and Jiangsu companies.
    (4) Creating new joint working groups in the provinces to 
collaboratively identify obstacles in enforcement at the provincial and 
local level and to generate possible solutions.
    (5) Conducting joint enforcement seminars in Guangdong, Jiangsu, 
and Zhejiang provinces to educate local stakeholders and further 
research important IP issues. The Chamber has conducted many seminars 
in China and in the United States since July 2005, and will conduct 
additional seminars on IPR protection and enforcement in Jiangsu and 
Guangdong later this year.
    In the year ahead, the Chamber will continue to work with all 
levels of the PRC government with the goal of reducing the level of 
counterfeiting and piracy of IPR in China. To strengthen IPR protection 
and enforcement, the Chamber will stimulate expert discussions on a 
wider range of necessary legal reforms, introduce more international 
``best practices,'' and continue efforts to raise awareness. 
Furthermore, the Chamber plans to expand its program of targeted 
seminars with provincial authorities and initiate a broader range of 
cooperative projects both with individual ministries and other U.S., 
Chinese, and foreign industry associations.
Conclusion
    The U.S. Chamber and our members appreciate the opportunity to 
participate in China's continuing development. We applaud the many 
cases in which Chinese authorities have worked closely with the U.S. 
business community to implement WTO commitments as well as to resolve 
disputes that have arisen during the implementation process. As stated 
at the outset of this testimony, China is now the fastest-growing 
trading partner of the United States. Rapidly expanding bilateral 
economic and commercial ties underscore the market opportunities that 
China offers to U.S. exporters and investors, which support the 
creation of high value-added jobs at home.
    But China can and must do more. The U.S. business community and 
others that vigorously advocated China's WTO membership premised their 
support on expectations that China is evolving into a more open and 
transparent market based on the rule of law. China's unsuccessful 
efforts to consistently enforce its IPR laws and to vigorously deter IP 
theft represent the most visible examples of these expectations 
remaining unfulfilled.
    Similarly, China has continued its reliance on state guidance and 
industrial policies--capitalization requirements, mandated national 
technology standards, subsidies, investment restrictions--in key 
sectors. Not only are such policies a breach of the spirit of China's 
market access commitments and openness that China embraced when joining 
the WTO, but they also give credibility to China's critics who doubt 
China's commitment to create a business environment that values equally 
the economic contributions of domestic and foreign companies. Thus, the 
need for both proactive and substantive government efforts remains 
pressing.
    Given the manner in which issues across all aspects of the 
relationship impact each other, the U.S. Chamber applauded the 
Department of Treasury and other participating branches of the U.S. 
government, along with their Chinese counterparts, for organizing the 
SED. The Chamber has provided input to the U.S. government on priority 
issues for our membership--including capital markets, industrial 
policy, IPR, health, energy, and transparency--since the inception of 
the SED, and we will continue to work with the relevant agencies 
through the various SED working groups. The Chamber also continues to 
strongly support the JCCT as an important forum for discussion and 
resolution of issues of concern, many of which have been touched on in 
this testimony. The importance of progress on IPR, and the need to 
address concerns with regard to market access in a number of 
industries, can not be underestimated.
    The Chamber underscores, however, that for all the fits and starts, 
for the examples of China's sluggish WTO compliance, none of these 
trumps the value of engaging the world's most populous nation in the 
rules-based trading system. For all those who care about the future of 
our economy, jobs for Americans, stability and peace in the world, the 
protection of global health, and the advancement of environmental 
quality and human rights, we must continue to encourage China to become 
an active and committed member of the world trading system. Working 
within the WTO framework remains the most promising path to progress 
and is vastly superior to approaches that seek to punish and isolate 
this emerging global power. Moreover, in demanding that China adhere to 
the standards of a rules-based trading system, we too must honor those 
rules and take no action that is illegal under WTO agreements.

                                 

                Statement of U.S.-China Business Council
    Like all World Trade Organization (WTO) members, China is required 
to provide legal protection against intellectual property infringement 
and to provide penalties for enforcement that are sufficient to deter 
future violations. Despite this obligation, inadequate protection for 
intellectual property continues to impede U.S. companies in China. 
Respondents to the U.S.-China Business Council's (USCBC) 2006 
membership survey ranked intellectual property rights (IPR) enforcement 
as China's most serious shortfall in implementing its WTO commitments. 
Though 33 percent of respondents said there had been some improvement 
in China's IPR enforcement, more than half of survey respondents said 
there had been no improvement in China's enforcement of IPR in the 
previous 12 months.
    As policymakers consider ways to address China's problems in IPR 
protection, it is important to keep in mind that ``IPR'' is a broad 
term encompassing many distinct areas, including copyrights, 
trademarks, patents and trade secrets. Companies view the IPR problem 
differently depending on their industry and the nature of their 
problem. A motion picture company sees the problem differently from a 
pharmaceutical company, and both have a different view than an 
industrial company. The severity of the problem is different for each 
sector, the policy redress is different, and importantly, the actions 
companies support are different in each of these areas. Furthermore, 
for some companies, particularly in the media sectors, IPR problems are 
aggravated by market-access restrictions that limit the availability of 
legitimate products to Chinese consumers. In the end, a differentiated 
approach to the IPR problem in China--one that accounts for the unique 
problems and solutions in the various areas--is the most productive way 
to achieve advancement for U.S. companies on this issue.
    The ineffectiveness of China's IPR enforcement regime stems in part 
from China's primary reliance on administrative authorities, which are 
able to impose only very low penalties to enforce IPR laws, instead of 
the court system, in which civil suits and criminal prosecutions could 
impose higher penalties on IPR infringers. PRC courts handled only 385 
IPR-related cases in 2004, according to China's 2005 White Paper on 
IPR. In contrast, local copyright administrations resolved nearly 9,500 
copyright infringement cases, local administrations of industry and 
commerce handled nearly 52,000 trademark violations, and local patent 
administrations dealt with roughly 10,000 patent infringement cases. 
While government agencies are generally responsive to the requests of 
IPR holders to take administrative actions against infringers, the low 
penalties these government bodies can impose without court 
authorization serve as only a minimal deterrent to future 
infringements.
    To be fair, China's central government has taken a number of steps 
in an attempt to address these and other issues that limit the 
effectiveness of its IPR enforcement. These steps generally have been 
in response to the U.S. government's persistent pursuit of improving 
IPR protection via the Joint Committee on Commerce and Trade (JCCT) 
process. In March 2006, China's National IPR Working Group, an 
interagency body under the State Council and chaired by Vice Premier Wu 
Yi, issued its 2006 IPR Protection Action Plan. Though much of the plan 
focuses on ways to promote innovation, it also expresses an intention 
to boost enforcement activities. Most of the plan's provisions are 
still in the implementation process, so its effectiveness cannot yet be 
fully determined.
    Stemming from the action plan, China's Supreme People's 
Procuratorate, the Ministry of Public Security (MPS), the Ministry of 
Supervision, and the Leading Group on National Rectification and 
Standardization of Market Order jointly issued an opinion in March 2006 
to facilitate the transfer of IPR cases from administrative agencies to 
public security bureaus for criminal investigations. MPS and the 
General Administration of Customs in March 2006 also jointly issued 
rules to boost coordination in IPR cases involving products scheduled 
for export. China has also conducted a handful of special IPR 
enforcement campaigns in accordance with the action plan. These include 
Mountain Eagle, aimed at copyright violators; Sunshine, designed to 
clear cities of pirated recorded materials; and Blue Sky, targeted at 
individuals who distribute infringing products at trade fairs.
    Continuing in China's pattern of taking incremental steps toward an 
improved IPR environment, the Ministry of Culture issued in November 
2006 regulations giving local culture authorities more tools to address 
piracy of recorded music and cinema products. In December, the Beijing 
Number One Intermediate Court ruled that Pfizer, Inc.'s patent on the 
drug Viagra is valid, thereby reversing an early ruling that had 
revoked the patent and had allowed Chinese producers to legally 
manufacture what were, in essence, counterfeit pills. Also in December, 
the PRC National People's Congress approved the World Intellectual 
Property Organization Copyright Treaty and Performances and Phonograms 
Treaty, thus meeting a commitment China made at the 2006 session of the 
JCCT. In early 2007, China's Supreme People's Court issued an opinion 
that could streamline judicial proceedings on IPR cases and make them 
more accessible and cost-effective for companies protecting their 
rights.
    These are welcome steps, but China's legal capacity for effectively 
protecting IPR remains limited. China's use of value thresholds to 
determine whether IPR infringers face criminal charges reduces the 
efficacy of Beijing's recent steps to facilitate criminal prosecutions 
of IPR violators. These thresholds, although lowered in China's Supreme 
People's Court December 2004 judicial interpretation, provide a 
loophole for IPR infringers to escape criminal prosecution by, for 
example, keeping the value of inventory stored at any one location 
below the threshold level. Moreover, calculations to determine whether 
the thresholds have been met are based on the price of the counterfeit 
product rather than that of the legitimate--and higher priced--product 
it imitates. China's use of numerical value thresholds appears to be 
inconsistent with its commitments as a signatory of the WTO Agreement 
on Trade Related Aspects of Intellectual Property (TRIPS), which calls 
for criminal sanctions in all cases of IPR violations on a ``commercial 
scale.'' The Supreme People's Court is reviewing its 2004 judicial 
interpretation as part of the action plan; U.S. officials should press 
for a TRIPS-consistent application of criminal sanctions on IPR 
violations.
    For its part, USCBC has urged the PRC government to take this 
course. In numerous meetings in 2006 with Vice Premier Wu Yi and other 
senior and working-level PRC officials in various agencies, USCBC 
advocated the abandonment of thresholds and the adoption of the 
``commercial scale'' criteria. USCBC complemented these meetings with a 
written submission to several PRC government bodies suggesting detailed 
changes to PRC laws that would provide for an enhanced legal framework 
for enforcing IPR protection. Those recommendations are attached to 
this statement. Adopting the ``commercial scale'' criteria and other 
changes to its laws governing IPR enforcement would be important steps 
the PRC government can take to benefit numerous companies in a broad 
array of sectors.
    To fully solve the country's IPR protection problems, China must 
make improvements in several areas on a sustained basis. China must 
engage in initiatives such as increasing enforcement resources; 
training prosecutors and judges in IPR investigations and case law; and 
educating officials and the public at all levels on how IPR 
infringement harms China's consumers and the development of its own 
innovative economy. Greater market access for legitimate products would 
provide consumers an alternative to pirated products. And, specific 
revisions to aspects of China's legal code--including the revision of 
the current thresholds used to determine criminality--are important 
steps to addressing this top problem faced by U.S. companies in China 
and, increasingly, in other markets.
RECOMMENDED IMPROVEMENTS TO CHINA'S IPR LAWS AND REGULATIONS

  INTERPRETATION BY THE SUPREME PEOPLE'S COURT AND SUPREME PEOPLE'S PROCURATORATE ON SEVERAL ISSUES OF CONCRETE
                 APPLICATION OF LAWS IN HANDLING CRIMINAL CASES INVOLVING INTELLECTUAL PROPERTY
----------------------------------------------------------------------------------------------------------------
                       (DECEMBER 22, 2004)
----------------------------------------------------------------------------------------------------------------
EXISTING                                                                                 SUGGESTED MODIFICATION
----------------------------------------------------------------------------------------------------------------
The Judicial Interpretation includes thresholds for determining   Eliminate thresholds for criminal violations,
 copyright, trademark and patent criminal violations.              and define criminal violations as infringing
                                                                        activities that occur on a ``commercial
                                                                    scale.'' Revise Criminal Code Articles 214,
                                                                                      217, and 218 accordingly.
----------------------------------------------------------------------------------------------------------------
Articles 5 and 6 specify that violations must have been made           Eliminate the requirement that copyright
 with the purpose of making profits.                              offenders be proven to have acted with profit-
                                                                      making motive. Replace with language that
                                                                     adjudicates cases based on inflicted harm.
----------------------------------------------------------------------------------------------------------------
No provisions stipulating the treatment of unauthorized rental,    Confirm that unauthorized rental, broadcast,
 broadcast, and exhibition of software, film, sound recordings,         and exhibition of software, film, sound
 and other works.                                                 recordings, and other works may be transferred
                                                                                      for criminal prosecution.
----------------------------------------------------------------------------------------------------------------
N.A.                                                                                       Suggested additions:
----------------------------------------------------------------------------------------------------------------
                                                                     Make repeat offenders subject to automatic
                                                                                            criminal liability.
----------------------------------------------------------------------------------------------------------------
                                                                  In cases where no sales transaction occurs or
                                                                          no sales records exist, make criminal
                                                                         penalties applicable based on value of
                                                                           inventory, using the victim's price.
----------------------------------------------------------------------------------------------------------------
                                                                          Include presumptions of knowledge for
                                                                        landlords on intellectual property (IP)
                                                                   crimes, including counterfeiting trademarks,
                                                                    pirating copyrighted material, or providing
                                                                                         production technology.
----------------------------------------------------------------------------------------------------------------
                                                                  Restrict access for violators to raw materials
                                                                  and other ancillary services like electricity,
                                                                     in accordance with international practice.
----------------------------------------------------------------------------------------------------------------
                                                                  Confirm that criminal liability applies to end-
                                                                                   users of infringed software.
----------------------------------------------------------------------------------------------------------------
PRC CRIMINAL CODE
----------------------------------------------------------------------------------------------------------------
EXISTING                                                                                 SUGGESTED MODIFICATION
----------------------------------------------------------------------------------------------------------------
Part I, Chapter 4, Section 1, Article 64 requires that illegally    Include provision that property used in the
 obtained property be recovered or restitution and compensation   commission of a crime shall be confiscated and
 paid.                                                                                               destroyed.
----------------------------------------------------------------------------------------------------------------
Part II, Chapter 3, Section 2, Article 214 does not specify that  Include the export, rental, and possession of
 exports constitute a type of sale.                                counterfeit trademark goods as types of sale
                                                                                             under Article 214.
----------------------------------------------------------------------------------------------------------------
Part II, Chapter 3, Section 2, Articles 217 and 218 specify that       Eliminate the requirement that copyright
 violators must have acted ``for the purpose of reaping           offenders be proven to have acted with profit-
 profits.''                                                        making motive. Replace with requirement that
                                                                    offenders be proven to have inflicted harm.
----------------------------------------------------------------------------------------------------------------
Part II, Chapter 3, Section 2, Article 218 sets the threshold     Remove all value thresholds for criminalizing
 for the crime of knowingly selling pirated copyright works at    trademark and copyright violations and define
 RMB 100,000 and sets the threshold for knowingly selling         violations as infringing activities that occur
 counterfeit trademark goods at RMB 50,000.                                          on a ``commercial scale.''
----------------------------------------------------------------------------------------------------------------
                                                                  Criminalize end use of pirated copyright works
                                                                      or counterfeit trademark goods, including
                                                                  unauthorized rental, broadcast, or exhibition
                                                                  of software, film, sound recordings, or other
                                                                                                         works.
----------------------------------------------------------------------------------------------------------------
Part II, Chapter 3, Section 2, Article 219 limits punishment for   Eliminate ``significant loss'' threshold for
 violating commercial secrets to those who cause ``significant                                      violations.
 loss.''
----------------------------------------------------------------------------------------------------------------
N.A.                                                                                        Suggested addition:
----------------------------------------------------------------------------------------------------------------
                                                                      Subject violators with repeat offenses to
                                                                                            stronger penalties.
----------------------------------------------------------------------------------------------------------------


                                           PRC CRIMINAL PROCEDURE LAW
----------------------------------------------------------------------------------------------------------------
                            EXISTING                                          SUGGESTED MODIFICATION
----------------------------------------------------------------------------------------------------------------
Part II, Chapter II details the standards for criminal                  Allow public security bureaus (PSBs) to
 investigations. Article 83 indicates that cases are filed and     initiate investigations based on prima facie
 investigations conducted ``upon discovering criminal facts or    evidence of probable cause so that assets may
 criminal suspects.''                                                     be frozen before raids are conducted.
----------------------------------------------------------------------------------------------------------------
N.A.                                                                                        Suggested addition:
----------------------------------------------------------------------------------------------------------------
                                                                    Revise the Opinion on Promptly Transferring
                                                                  Suspected Criminal Cases during Administrative
                                                                  Investigation, issued by the Supreme People's
                                                                     Procuratorate, Ministry of Public Security
                                                                           (MPS), Ministry of Supervision, and Leading
                                                                            Group on National Rectification and
                                                                       Standardization of Market Order, and the
                                                                     Interim Rules on Strengthening Cooperation
                                                                   between PSBs and Customs in IPR Enforcement,
                                                                        issued by the General Administration of
                                                                          Customs (GAC) and MPS, to clarify PSB
                                                                         obligations to file cases and initiate
                                                                  investigations based upon reasonable suspicion
                                                                                                      of crime.
----------------------------------------------------------------------------------------------------------------
PRC IMPLEMENTING REGULATIONS TO THE TRADEMARK LAW
----------------------------------------------------------------------------------------------------------------
EXISTING                                                                                 SUGGESTED MODIFICATION
----------------------------------------------------------------------------------------------------------------
Chapter VII, Article 52 sets the maximum fine for violations of      A minimum fine that is sufficient to deter
 trademarks at three times the illegal revenues or, when            future infringements should be specified to
 revenues cannot be calculated, at less than RMB 100,000.            remove the infringer's monetary incentive.
----------------------------------------------------------------------------------------------------------------
                                                                   Include punitive damages sufficient to deter
                                                                                          future infringements.
----------------------------------------------------------------------------------------------------------------
N.A.                                                                                       Suggested additions:
----------------------------------------------------------------------------------------------------------------
                                                                       Require violators to pay for storage and
                                                                       destruction costs for counterfeit goods.
----------------------------------------------------------------------------------------------------------------
                                                                        Mandate that counterfeit merchandise be
                                                                                                     destroyed.
----------------------------------------------------------------------------------------------------------------
IMPLEMENTING MEASURES ON THE PRC CUSTOMS IPR PROTECTION RULES
----------------------------------------------------------------------------------------------------------------
EXISTING                                                                                 SUGGESTED MODIFICATION
----------------------------------------------------------------------------------------------------------------
Chapter 3, Article 15 requires brand owners to post a bond to     Mandate the transfer of bonds from Customs to
 request Customs to seize possible infringing goods. Once             people's courts so that two bonds are not
 Customs seizes the goods, Chapter 4, Article 27 requires brand                                       required.
 owners to get an order from a people's court to sustain the
 validity of the seizure, which requires a second bond with the
 people's court.
----------------------------------------------------------------------------------------------------------------
Chapter 4, Article 26 gives Customs 30 working days to report to     Provide IP owners with immediate access to
 IP owners with the findings of their investigations.              information on counterfeiting cases gathered
                                                                                                    by Customs.
----------------------------------------------------------------------------------------------------------------
Chapter 4, Article 27 stipulates the conditions for transferring       Include presumptions of knowledge in the
 cases from Customs to people's courts.                             transfer rules that include individuals who
                                                                      would have reasonable grounds to know IPR
                                                                                      violations are occurring.
----------------------------------------------------------------------------------------------------------------
                                                                   Stipulate that if counterfeit labels are not
                                                                         on the products but being shipped with
                                                                  products, the products can be seized as well.
----------------------------------------------------------------------------------------------------------------
                                                                  Make trading companies liable for counterfeit
                                                                  products shipped using their permits or under
                                                                                                   their names.
----------------------------------------------------------------------------------------------------------------
                                                                  Require import/export companies to make public
                                                                      information on destination and purchaser/
                                                                             receiver of counterfeit shipments.
----------------------------------------------------------------------------------------------------------------
                                                                      Create a system to monitor counterfeiters
                                                                  involved in previous Customs seizures and list
                                                                  their names publicly. Require future shipments
                                                                        from the same counterfeiters to undergo
                                                                     Customs auditing for a specified period of
                                                                                                          time.
----------------------------------------------------------------------------------------------------------------
Chapter 4, Article 29 allows travelers to carry a ``reasonable             This provision should be deleted--no
 amount of counterfeit or pirated goods for personal use.''       counterfeit or pirated goods should be allowed
                                                                           to be used or carried under the law.
----------------------------------------------------------------------------------------------------------------
N.A.                                                                                       Suggested additions:
----------------------------------------------------------------------------------------------------------------
                                                                    Apply presumption of knowledge and criminal
                                                                    procedures to factory suppliers and trading
                                                                  companies that export counterfeit and pirated
                                                                                                         goods.
----------------------------------------------------------------------------------------------------------------
                                                                    Give Customs power to impose fines that are
                                                                    sufficient to deter future infringements on
                                                                  exporters of counterfeit and pirated products.
----------------------------------------------------------------------------------------------------------------

                                  
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