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




                  CURRENCY MANIPULATION AND ITS EFFECT
                     ON U.S. BUSINESSES AND WORKERS

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

                                HEARING

                               before the

                         SUBCOMMITTEE ON TRADE

                                 of the

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

                             joint with the

                  SUBCOMMITTEE ON COMMERCE, TRADE, AND
                          CONSUMER PROTECTION

                                 of the

                    COMMITTEE ON ENERGY AND COMMERCE

                                and the

               SUBCOMMITTEE ON DOMESTIC AND INTERNATIONAL
                 MONETARY POLICY, TRADE, AND TECHNOLOGY

                                 of the

                    COMMITTEE ON FINANCIAL SERVICES
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 9, 2007

                               __________

                           Serial No. 110-38

                               __________

         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
                    COMMITTEE ON ENERGY AND COMMERCE

                  JOHN D. DINGELL, Michigan, Chairman

HENRY A. WAXMAN, California          BARON P. HILL, Indiana
EDWARD J. MARKEY, Massachusetts      JOE BARTON, Texas, Ranking Member
RICK BOUCHER, Virginia               RALPH M. HALL, Texas
EDOLPHUS TOWNS, New York             J. DENNIS HASTERT, Illinois
FRANK PALLONE JR., New Jersey        FRED UPTON, Michigan
BART GORDON, Tennessee               CLIFF STEARNS, Florida
BOBBY L. RUSH, Illinois              NATHAN DEAL, Georgia
ANNA G. ESHOO, California            ED WHITFIELD, Kentucky
BART STUPAK, Michigan                BARBARA CUBIN, Wyoming
ELIOT L. ENGEL, New York             JOHN SHIMKUS, Illinois
ALBERT R. WYNN, Maryland             HEATHER WILSON, New Mexico
GENE GREEN, Texas                    JOHN SHADEGG, Arizona
DIANA DEGETTE, Colorado, Vice Chair  CHARLES W. ``CHIP'' PICKERING, 
LOIS CAPPS, California               Mississippi
MIKE DOYLE, Pennsylvania             VITO FOSSELLA, New York
JANE HARMAN, California              STEVE BUYER, Indiana
TOM ALLEN, Maine                     GEORGE RADANOVICH, California
JAN SCHAKOWSKY, Illinois             JOSEPH R. PITTS, Pennsylvania
HILDA L. SOLIS, California           MARY BONO, California
CHARLES A. GONZALEZ, Texas           GREG WALDEN, Oregon
JAY INSLEE, Washington               LEE TERRY, Nebraska
TAMMY BALDWIN, Wisconsin             MIKE FERGUSON, New Jersey
MIKE ROSS, Arkansas                  MIKE ROGERS, Michigan
DARLENE HOOLEY, Oregon               SUE MYRICK, North Carolina
ANTHONY D. WEINER, New York          JOHN SULLIVAN, Oklahoma
JIM MATHESON, Utah                   TIM MURPHY, Pennsylvania
G. K. BUTTERFIELD, North Carolina    MICHAEL C. BURGESS, Texas
CHARLIE MELANCON, Louisiana          MARSHA BLACKBURN, Tennessee
JOHN BARROW, Georgia

                   Dennis Fitzgibbons, Chief of Staff

                 David Cavicke, Minority Chief of Staff

                                 ______

        SUBCOMMITTEE ON COMMERCE, TRADE, AND CONSUMER PROTECTION

                   BOBBY L. RUSH, Illinois, Chairman

JAN SCHAKOWSKY, Illinois, Vice       CLIFF STEARNS, Florida, Ranking 
Chair                                Member
G. K. BUTTERFIELD, North Carolina    J. DENNIS HASTERT, Illinois
JOHN BARROW, Georgia                 ED WHITFIELD, Kentucky
BARON P. HILL, Indiana               CHARLES W. ``CHIP'' PICKERING, 
EDWARD J. MARKEY, Massachusetts      Mississippi
RICK BOUCHER, Virginia               VITO FOSSELLA, New York
EDOLPHUS TOWNS, New York             GEORGE RADANOVICH, California
DIANA DEGETTE, Colorado              JOSEPH R. PITTS, Pennsylvania
CHARLES A. GONZALEZ, Texas           MARY BONO, California
MIKE ROSS, Arkansas                  LEE TERRY, Nebraska
DARLENE HOOLEY, Oregon               SUE MYRICK, North Carolina
ANTHONY D. WEINER, New York          MICHAEL C. BURGESS, Texas
JIM MATHESON, Utah                   MARSHA BLACKBURN, Tennessee
CHARLIE MELANCON, Louisiana          JOE BARTON, Texas (Ex Officio)
JOHN D. DINGELL, Michigan (Ex 
Officio)
                    COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      DAN BOREN, Oklahoma
MAXINE WATERS, California            SPENCER BACHUS, Alabama
CAROLYN B. MALONEY, New York         RICHARD H. BAKER, Louisiana
LUIS V. GUTIERREZ, Illinois          DEBORAH PRYCE, Ohio
NYDIA M. VELAZQUEZ, New York         MICHAEL N. CASTLE, Delaware
MELVIN L. WATT, North Carolina       PETER KING, New York
GARY L. ACKERMAN, New York           EDWARD R. ROYCE, California
JULIA CARSON, Indiana                FRANK D. LUCAS, Oklahoma
BRAD SHERMAN, California             RON PAUL, Texas
GREGORY W. MEEKS, New York           STEVEN C. LATOURETTE, Ohio
DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, North Carolina
RUBEN HINOJOSA, Texas                JUDY BIGGERT, Illinois
WILLIAM LACY CLAY, Missouri          CHRISTOPHER SHAYS, Connecticut
CAROLYN MCCARTHY, New York           GARY G. MILLER, California
JOE BACA, California                 SHELLEY MOORE CAPITO, West 
STEPHEN F. LYNCH, Massachusetts      Virginia
BRAD MILLER, North Carolina          TOM FEENEY, Florida
DAVID SCOTT, Georgia                 JEB HENSARLING, Texas
AL GREEN, Texas                      SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri            GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois            J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin                JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee             STEVAN PEARCE, New Mexico
ALBIO SIRES, New Jersey              RANDY NEUGEBAUER, Texas
PAUL W. HODES, New Hampshire         TOM PRICE, Georgia
KEITH ELLISON, Minnesota             GEOFF DAVIS, Kentucky
RON KLEIN, Florida                   PATRICK T. MCHENRY, North Carolina
TIM MAHONEY, Florida                 JOHN CAMPBELL, California
CHARLES WILSON, Ohio                 ADAM PUTNAM, Florida
ED PERLMUTTER, Colorado              MICHELE BACHMANN, Minnesota
CHRISTOPHER S. MURPHY, Connecticut   PETER J. ROSKAM, Illinois
JOE DONNELLY, Indiana                KENNY MARCHANT, Texas
ROBERT WEXLER, Florida               THADDEUS MCCOTTER, Michigan
JIM MARSHALL, Georgia                KEVIN MCCARTHY, California

                   Jeanne Roslanowick, Staff Director

                Larry Lavender, Minority Staff Director

                                 ______

SUBCOMMITTEE ON DOMESTIC AND INTERNATIONAL MONETARY POLICY, TRADE, AND 
                               TECHNOLOGY

                 LUIS V. GUTIERREZ, Illinois, Chairman

CAROLYN B. MALONEY, New York         RON PAUL, Texas
MAXINE WATERS, California            MICHAEL N. CASTLE, Delaware
PAUL E. KANJORSKI, Pennsylvania      FRANK D. LUCAS, Oklahoma
BRAD SHERMAN, California             STEVEN C. LATOURETTE, Ohio
GWEN MOORE, Wisconsin                DONALD A. MANZULLO, Illinois
GREGORY W. MEEKS, New York           WALTER B. JONES, North Carolina
DENNIS MOORE, Kansas                 JEB HENSARLING, Texas
WILLIAM LACY CLAY, Missouri          TOM PRICE, Georgia
KEITH ELLISON, Minnesota             PATRICK T. MCHENRY, North Carolina
CHARLES WILSON, Ohio                 MICHELE BACHMANN, Minnesota
ROBERT WEXLER, Florida               PETER J. ROSKAM, Illinois
JIM MARSHALL, Georgia                KENNY MARCHANT, Texas
DAN BOREN, Oklahoma

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 May 2, 2007, announcing the hearing..................     2

                               WITNESSES

The Honorable Donald L. Evans, Chief Executive Officer, Financial 
  Services Forum.................................................    15
M. Brian O'Shaughnessy, President and Chief Executive Officer, 
  Revere Copper Products, Inc., Rome, New York...................    21
Stephen S. Roach, Ph.D., Managing Director and Chief Global 
  Economist, Morgan Stanley, New York, New York..................    35
C. Fred Bergsten, Ph.D., Director, Peterson Institute for 
  International Economics........................................    42
Mustafa Mohatarem, Ph.D., Chief Economist, General Motors Corp., 
  Detroit, Michigan..............................................    48
Thea M. Lee, Policy Director, American Federation of Labor and 
  Congress of Industrial Organizations...........................    60
William Hickey, President, Lapham-Hickey Steel Corp., Chicago, 
  Illinois.......................................................    66
The Honorable Mark Sobel, Deputy Assistant Secretary for 
  International Monetary and Financial Policy, U.S. Department of 
  Treasury.......................................................    99
The Honorable Stephen Claeys, Deputy Assistant Secretary for 
  Antidumping and Countervailing Duty Operations, Department of 
  Commerce.......................................................   104
The Honorable Daniel Brinza, Assistant U.S. Trade Representative 
  for Monitoring and Enforcement, Office of the U.S. Trade 
  Representative.................................................   107

                       SUBMISSIONS FOR THE RECORD

American Foundry Society, letter.................................   127
Retail Industry Leaders Association, statement...................   129

 
                  CURRENCY MANIPULATION AND ITS EFFECT
                     ON U.S. BUSINESSES AND WORKERS

                              ----------                              


                         WEDNESDAY, MAY 9, 2007

             U.S. House of Representatives,
                       Committee on Ways and Means,
                          Subcommittee on Trade, Joint with

                  Committee on Energy and Commerce,
                       Subcommittee on Commerce, Trade, and
                                   Consumer Protection, and

                   Committee on Financial Services,
                 Subcommittee on Domestic and International
                      Monetary Policy, Trade and Technology
                                                    Washington, DC.

    The Subcommittees met, pursuant to notice, at 9:39 a.m., in 
room 1100, Longworth House Office Building, Hon. Sander Levin 
(Chairman of the Subcommittee on Trade, Committee on Ways and 
Means) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                         SUBCOMMITTEE ON TRADE

                                                CONTACT: (202) 225-6649
FOR IMMEDIATE RELEASE
May 02, 2007
TR-4

                Chairman Sander M. Levin Today Announced

                 A Tri-Partite Subcommittee Hearing On

                Currency Manipulation and Its Effects on

                       U.S. Business and Workers

    Ways and Means Trade Subcommittee Chairman Sander M. Levin today 
announced a tri-partite subcommittee hearing on currency manipulation 
and its effects on U.S. business and workers. Three subcommittees will 
participate in the hearing: the Ways and Means Subcommittee on Trade; 
the Financial Services Subcommittee on Domestic and International 
Monetary Policy, Trade, and Technology; and the Energy and Commerce 
Subcommittee on Commerce, Trade and Consumer Protection. The hearing 
will take place on Wednesday, May 9, in the main Ways and Means 
Committee hearing room, 1100 Longworth House Office Building, beginning 
at 9:30 a.m.
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be heard from invited witnesses only. 
However, any individual or organization not scheduled for an oral 
appearance may submit a written statement for consideration by the 
three Subcommittees and for inclusion in the printed record of the 
hearing.
      

FOCUS OF THE HEARING:

      
    The purpose of this hearing is to consider: (1) whether, and to 
what extent, the Chinese renminbi (RMB) and the Japanese yen are 
undervalued as a result of foreign government intervention in the 
currency markets; (2) the immediate and long-term impact an undervalued 
RMB or yen has on the economies of the United States and other 
countries and on the global economy; and (3) what action, if any, the 
United States should take to address exchange rate manipulation.
      

BACKGROUND:

      
    Over the past several years, economists and U.S. stakeholders have 
expressed growing concern regarding the value of the RMB and the yen, 
and the role of the Chinese and Japanese governments in determining 
those values.
      
    For over ten years, China has fixed its exchange rate by 
intervening in currency markets. Economists have estimated that the RMB 
is undervalued by at least 9.5 percent and by as much as 54 percent, 
according to a recent survey by the Congressional Research Service. In 
July 2005, China began to allow the RMB to appreciate, and it has 
appreciated 7.3 percent since then. Nevertheless, in December 2006, 
U.S. Federal Reserve Chairman Ben Bernanke stated that the currency 
situation ``has likely worsened recently,'' as the RMB's trade-weighted 
effective real exchange rate has fallen about 10 percent over the past 
five years. He described the Government of China's currency policies as 
a ``subsidy to exports'' from China. The Government of China must 
accumulate foreign exchange reserves to maintain the fixed exchange 
rate. As a result, the Government of China today holds more than $1.2 
trillion in foreign exchange reserves--more than any other country in 
history. (U.S. government foreign exchange reserves are approximately 
$69 billion.)
      
    Although Japan has not formally intervened in its currency market 
since 2004, the Japanese yen has been described by The Economist 
magazine recently as ``perhaps the world's most undervalued currency.'' 
This year the trade-weighted value of the yen fell to its lowest level 
in more than 30 years. J.P. Morgan recently estimated that the yen was 
14 percent undervalued relative to the U.S. dollar. As a result of 
currency interventions in the recent past, the Government of Japan now 
holds over $900 billion in reserves, the second highest level in the 
world.
      
    In 2006, the U.S. goods trade deficit with China was $232.5 billion 
(a world record) and $88.4 billion with Japan. An undervalued RMB or 
yen could contribute to these deficits, although other factors, 
including disparities in personal savings rates, also may play a role.
      
    The Omnibus Trade and Competitiveness Act of 1988 (P.L. 100-418) 
requires the Secretary of the Treasury to determine whether foreign 
countries manipulate their exchange rate with the U.S. Dollar for the 
purpose of ``gaining unfair competitive advantage in international 
trade.'' Such a finding would require the Treasury Secretary to 
initiate negotiations on an ``expedited basis'' for the purpose of 
eliminating the unfair advantage. The Treasury Department has 
repeatedly declined to find that either China or Japan manipulates the 
rate of exchange. The Treasury Department was required to submit its 
most recent report to Congress on international economic and exchange 
rate policies on April 15, 2007. That report has not yet been submitted 
to Congress.
      
    The Office of the U.S. Trade Representative (USTR) also has decided 
not to investigate China's currency practices under Section 301 of the 
Trade Act of 1974, or to initiate a World Trade Organization (WTO) case 
to address these practices. In September 2004, members of the public 
(the ``China Currency Coalition'') and several Members of Congress 
requested a Section 301 investigation. USTR refused the request, 
stating that an investigation would be counterproductive to Treasury's 
efforts toward achieving a more flexible, market-based exchange rate 
for the RMB. Members of Congress filed another petition seven months 
later, in April 2005. USTR again declined to accept the petition, but 
acknowledged that ``China is now ready to move toward a flexible, 
market-based exchange rate and should move without delay in a manner 
and magnitude that is sufficiently reflective of underlying market 
conditions.'' In December 2006, Chairman Bernanke again called for a 
``greater scope for market forces to determine the value of the RMB''.
      
    The Administration has engaged China on the currency issue under 
the ``Strategic Economic Dialogue'' (SED). The first SED took place in 
Beijing in December. The next SED will begin in Washington, D.C., on 
May 23, 2007.
      
    ``This is an innovative hearing to address the serious problem 
posed by currency manipulation,'' stated Trade Subcommittee Chairman 
Levin, in announcing the hearing. ``Currency manipulation places 
American workers, farmers and businesses at a competitive disadvantage 
and this Congress will work with the Administration to hold trading 
partners accountable to the rules of trade.''
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    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, ``Committee Hearings'' 
(http://waysandmeans.house.gov/Hearings.asp?congress=[18]). Select the 
hearing for which you would like to submit, and click on the link 
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submission as a Word or WordPerfect document, in compliance with the 
formatting requirements listed below, by close of business Wednesday, 
May 23, 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. For questions, or if you encounter 
technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
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not alter the content of your submission, but we reserve the right to 
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Committee relies on electronic submissions for printing the official 
hearing record.
      
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      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 
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materials in alternative formats) may be directed to the Committee as 
noted above.

                                

      
    Chairman LEVIN. I think we will start. If everybody could 
take their seats, we are a couple minutes late.
    This is the first of two hearings, the first scheduled for 
this morning at 9:30, and there are two for seven witnesses. 
Then at 2:00 o'clock we will reconvene to hear from three 
representatives of the administration. So hopefully all of us 
will be able to return, because we want very much to get the 
reactions of the administration, the Assistant Secretaries of 
Treasury, Commerce and USTR, to the testimony that we have all 
heard this morning.
    As you can see, this is a rather unusual hearing. I don't 
know that we have held a hearing with three Subcommittees 
before. What we are going to do is ask the chair and the 
ranking of each of the three to make a brief opening statement. 
I know the practice has varied Committee to Committee.
    But I hope it is acceptable that everybody else who has an 
opening statement will submit them for the record. If there is 
no objection, we will proceed on that basis.
    Then after the opening statements, we will proceed with the 
witnesses.
    In the case of Energy and Commerce, Mr. Rush will be 
recognized and he will have the privilege of yielding to the 
Chairman of the Committee.
    This, as I said, is an unusual hearing, three 
Subcommittees. The reason why is because this is an exceptional 
issue. There clearly is an exceptional problem.
    We have unusual trade balances. We have unusual reserves 
held by two countries, historic, two trillion plus among them. 
We also have currencies that virtually everybody acknowledges 
are very much undervalued.
    We have had in the case of China statements that they were 
going to take steps. But today, in part because of their 
intervention, it is not the only reason. In real dollar terms, 
the valuation problem remains the same.
    With Japan, we have a somewhat different situation, in the 
sense that for the last years there hasn't been direct 
government intervention. But what we have had are government 
policies leading to the same situation. For example, The 
Economist magazine recently said that the yen was perhaps the 
world's most undervalued currency.
    I close by just saying, and we will have testimony as to 
this, this has had real life impact on the United States, on 
its businesses and on its workers.
    I met several weeks ago with companies, most of them small 
and middle size companies, often family-owned, in the fiber 
business. The raw materials that they use are essentially the 
same throughout the world. The cost to them is essentially the 
same. But what has happened is that there has been an influx 
and often the cost of the final product is about the same in 
those cases of imports as the cost of the original resource. 
These companies made it clear that one of the problems was the 
undervaluation of the currencies in the countries with whom 
they are dealing.
    So, we have called this unique hearing. Someone asked has 
it happened before, and Mr. Dingell has been here the longest, 
and I don't think he can remember when there were three 
Subcommittees holding a hearing together. It is because of the 
importance of the problem and the fact that it hasn't been 
resolved.
    We are today where we were years ago. We need to consider 
the next steps by the administration and also next steps that 
we can take legislatively. So, this is the real thing, this 
hearing, to get at a real problem leading hopefully to real 
action.
    Mr. Herger, for your opening statement. Mr. Herger is 
ranking on the Subcommittee on Trade.
    Mr. HERGER. Thank you, Chairman Levin. Today's issue is 
multifaceted. Yes, China's currency is unacceptably 
undervalued, which makes our exports less competitive. Yes, we 
run a large trade deficit with China because we import more 
from China than we export there. But although we demand more 
from China, we recognize that China's financial institutions 
are too fragile for us to reasonably expect an immediate, 
market-driven reevaluation of the RMB.
    Japan's presence presents an easier challenge. The yen is 
weak, but Japan has not overtly intervened since 2004. 
Secretary Paulson has stated that the yen's value naturally 
reflects Japan's sluggish economy, not government policy.
    As for the deficits, currency is not the lone culprit. 
Americans have been overspending and undersaving. In China and 
Japan, it is the reverse. We have created huge import demand in 
United States both for inexpensive consumer goods and 
manufacturing inputs which has kept inflation in check and 
provided our companies with inputs needed to stay competitive, 
but has also fueled the deficit.
    We can improve the deficit, not so much by curtailing our 
imports but by increasing demand for our exports, working with 
the Chinese and Japanese to reduce savings and increase 
consumption of our goods.
    We also need to work with China to develop its financial 
services so that it can float its currency. The administration 
has made some progress, but more is needed. I hope that the SED 
talks later this month will bring us further progress.
    But the lingering, more difficult question is, what do we 
do in the near term to address currency and undervaluation? Our 
approach must weigh the risks of too rapid a change in currency 
policy and domestic risks for the Chinese economy against the 
problems inherent in an exchange rate that is not market based.
    My fear is that we force the Chinese to create a more 
flexible currency, we get what we have asked for, and then we 
see little or no impact on U.S. jobs or exports. Former Federal 
Reserve Chairman Greenspan shares this concern.
    Given the complexities, perhaps it is easier to start with 
what we ought not to do. Some may say a retaliatory tariff is 
the solution. But retaliation should be a last resort, and I 
don't think we're there yet. We need to think carefully and act 
constructively.
    I can't help but recall the overbroad Smoot-Hawley tariffs 
of 1930, which caused a drastic decline in international trade 
and contributed to the Great Depression. These tariffs and 
other beggar-thy-neighbor policies eroded trust among nations 
when international cooperation was needed most.
    Both for economic and political purposes, we in Congress 
owe U.S. businesses and workers more than merely throwing up 
our hands in frustration, slapping punitive tariffs on imports 
and then moving on to the next problem. For starters, we need 
to insist that China comply with its WTO obligations, 
especially subsidies and intellectual property. We need to 
implement more export promotion programs for our small and 
medium-size enterprises. We need to allocate more resources to 
streamline the visa process for our Chinese customers and 
partners. Finally, we need to help the Chinese set technical 
standards that our companies can meet.
    Let us focus on the total picture. This is too important to 
let our frustration get the better of us.
    Chairman LEVIN. Thank you. Mr. Gutierrez.
    Chairman GUTIERREZ. Good morning, Chairman Levin. I want to 
thank you for agreeing to convene and host this hearing, and I 
would like to thank Chairman Rush for your participation and 
for helping me ensure that we put a Chicago stamp on the 
proceedings.
    This format is certainly unconventional but I think it's 
appropriate to highlight the difficult and unconventional 
problem we face in addressing currency misalignment or 
manipulation by China or Japan.
    For the American economy and the American worker, currency 
undervaluation by China in particular is reaching critical 
mass. For over 10 years, China has fixed its exchange rate by 
intervening in currency markets. Economists estimate that the 
RMB or yuan is undervalued by at least 9.5 percent and by as 
much as 54 percent. Many economists, including Federal Reserve 
Chairman Bernanke, characterize this underevaluation as a 
subsidy for exports from China.
    We will hear from our witnesses on today's first panel 
about the impact of this subsidy on Chinese goods has on the 
U.S. economy, and the American worker. Suffice it to say, we 
cannot compete with this kind of ongoing government subsidy and 
we cannot continue down the path with our second largest 
trading partner, because the imbalance hurts U.S. workers and 
businesses and threatens the long-term stability of our economy 
and our relationships.
    In 2006, the U.S. goods trade deficit with China rose by 
almost 15 percent to nearly $233 billion, a historic high. 
Meanwhile, because the Chinese government must buy U.S. dollars 
to keep the value of the yuan low, China holds more in foreign 
exchange reserves than other country in history.
    Although there are other factors in play, the Chinese 
government's daily intervention in the currency market plays a 
key role in expanding U.S. trade deficit.
    When it comes to Japan, economists indicate that the yen is 
at its weakest level in real trade weighted terms in more than 
20 years. This clearly benefits Chinese exporters at a time--at 
the expense of U.S. manufacturers.
    In the case of China, some economists believe that no 
matter how much pressure we exert, Beijing will not allow the 
yuan to fluctuate, and any attempt we might make would be 
futile or even counterproductive. It is okay that some experts 
believe it is impossible to get China to move on this issue; I 
can accept that. But keep in mind that many experts on Capitol 
Hill would say it is impossible to get Financial Services and 
Energy and Commerce to appear on the same dais together and 
here we are.
    I hope that our Subcommittees from three exclusive House 
Committees coming together today will send a powerful message 
to the administration that Congress is serious about the 
problem of currency undervaluation in Asia and that we intend 
to put turf battles aside and focus on resolving this matter of 
utmost importance to our economy and the well-being of our 
workforce. Even more, I hope this hearing will send a strong 
message to U.S. manufacturers and American workers. We hear you 
and we are serious about tackling this problem.
    Thank you, Mr. Chairman, and I yield back the balance of my 
time.
    Chairman LEVIN. I think I will call next on the Ranking 
Member, Dr. Paul, and then the Chairman of the Committee has 
joined us.
    So, if I might, Dr. Paul, you wanted to say a few words, 
and then Barney.
    Mr. PAUL. Thank you, Mr. Chairman. I have a brief 
statement, but I would ask unanimous consent my complete 
statement be placed in the record.
    Chairman LEVIN. So, ordered.
    Mr. PAUL. Mr. Chairman, the imbalances in international 
trade and, in particular, trade between China and the United 
States, have prompted many to demand the realignment of the 
Chinese yuan and the American dollar. Since we are running a 
huge trade deficit with China, the call now is for a stronger 
yuan and a weaker dollar. This trade imbalance problem will not 
be solved so easily.
    If a stronger yuan is implemented, increased exports to 
China from the U.S. may or may not resolve. The weaker dollar 
may lead to higher U.S. prices and crowd out hoped-for benefits 
of a realignment of the two currencies.
    One thing certain is that the immediate impact would be 
higher prices for consumer goods for middle class Americans. In 
many ways, a weaker dollar would act as an import tax, just as 
if it were a tariff. Both are considered protectionist in 
nature.
    The fact that the Chinese keep their currency artificially 
weak is a benefit to American consumers, and long-term is 
inflationary for the Chinese. This deep and legitimate concern 
for the trade imbalance between China and the United States 
will fall short if the issue of fluctuating world fiat 
currencies is not addressed.
    The fact that the U.S. dollar is the principal reserve 
currency of the world gives us a benefit that others do not 
enjoy. It allows us to export paper dollars and import goods 
manufactured in countries with cheap labor. It also allows us 
to finance the welfare, warfare state with cheap loans from 
China and Japan. It is a good deal for us but, according to 
economic law, must come to an end and the end will be messy for 
the U.S. consumer and world trade.
    The current system can only last as long as the trust in 
the dollar is maintained and foreigners are willing to accept 
them as if they had real value. Ironically, the most serious 
problem we face is a sharply weakening dollar in danger of 
collapse. Yet many are now asking for a policy dealing with the 
Chinese that would accelerate the dollar's decline. At the same 
time, we're told that we maintain a strong dollar policy.
    Financing deficits with monetary inflation is in itself a 
weak dollar policy in the long term. Trust in our currency due 
to our economic and military strength artificially props up the 
dollar on international exchange markets. Since these benefits 
come not from production or sound monetary policies, they only 
contribute to the instability and imbalances of international 
trade. Neither tariffs nor forced devaluations can solve the 
problem.
    Our current account deficit and huge foreign indebtedness 
is a reflection of the world monetary system of fiat money. The 
longer the trade imbalances last, the more difficult the 
adjustment will be. The market will eventually force these 
adjustments to come. Eventually, it will be necessary to 
consider worldwide commodity-based money to solve the trade 
imbalances that concern so many here in the Congress.
    I yield back.
    [The prepared statement of Mr. Paul follows: PENDING]
    Chairman LEVIN. Thank you. Chairman Barney Frank.
    Chairman FRANK. Thank you, Mr. Chairman. I assume people 
have taken account of the fact that Subcommittees from three of 
the major Committees in this Congress have assembled. That is 
the first time in my memory this has happened. If my memory 
doesn't impress, the dean of the House seated to my left has a 
memory even greater and I think it is probably the same for 
him.
    I hope people will take from this the grave significance of 
this issue. I say that because I read the testimony and there 
are people of goodwill who disagree with the approach we are 
taking. I want to make it very clear to people that if you 
disagree with this approach, and I am very supportive, I want 
to say, of what the Chairman of the Subcommittee on Trade has 
outlined, I think he has been consistently one of the most 
articulate and thoughtful exponents of what American 
international economic policy ought to be, and if people had 
listened to him, we would be a lot better off.
    But for those of you who disagree, I think you want to come 
up with an alternative. People have talked about the dangers in 
this approach. That is a legitimate argument. But in the 
absence of an alternative, that is what is going to happen.
    The fact is that the economic position of the average 
American worker has been eroding. It is one thing to see your 
position erode when conditions are bad. It is much worse when 
you are being told how there is great growth and great 
prosperity but you are not profiting from it.
    We had a period that now looks like it was a brief period, 
when real wages had started to go up and now they are starting 
to go back down again. You know, we continue to have a 
situation, and I read it in the financial pages even of so-
called liberal newspapers, there is a good news bad news story. 
The good news is that profits are up. The bad news is that 
wages are up.
    As long as that is the mindset of the people who run the 
financial operation, you are going to have these kinds of 
responses.
    Now, I think what we have here is temperate and reasonable. 
If you disagree, then come up with an alternative. I will give 
an example. Dr. Roach, whose commentary on the economy has 
seemed to be very good and has helped, I think, try to alert 
the business community of some of the imbalances that we are 
talking about, and Dr. Roach says in his testimony, and I hope 
I am not giving away the ending unfairly, that he finds better 
than this approach the recent decision by the USTR to go after 
China for violations of intellectual property.
    You know, if they had done that 10 years ago, maybe things 
would be different today. This is a good example. But the fact 
is that there was no serious effort by the U.S. Trade 
Representative to vindicate the interests of American 
intellectual property until we in Congress thought of these 
complaints.
    If people are going to ignore problems and ignore the 
economic deterioration of the average worker until we get 
involved, and then it is not, it seems to me, reasonable to sit 
back and criticize, only criticize. People have a right to 
criticize. But simply to criticize our response to a problem 
that other people have long ignored just isn't going to work. 
As I say again, I think the Chairman has taken a very 
reasonable approach.
    But this is not going away. If this is not the approach, 
then there better be some other one. If you think if you can 
talk the American worker out of her dissatisfaction with an 
economy in which there is growth and she gets very little of 
it, you are wrong. We are going to have to act.
    So, I appreciate the fact that we have had this three-
pronged hearing. The Committee on Ways and Means, the Committee 
on Energy and Commerce, the Committee on Financial Services 
represent among us the economic jurisdiction of this Congress 
in the legislative context. What you see here is symptomatic of 
a determination on the part of those of us who are in the 
majority in Congress today to change the situation in which 
growth in the economy as a whole and an increase in the well-
being of the average worker have become disconnected. We 
believe this is one way to deal with that.
    Those of you who don't think this is the way to deal with 
it, in your own interests, ought to come up with another.
    Thank you very much.
    [The prepared statement of Mr. Frank follows: PENDING]
    Chairman LEVIN. Thank you very much.
    You mentioned the third Committee, of great importance. Let 
me suggest, Chairman Rush, if it is agreeable to you, I think I 
will call on Chairman Dingell, and then you will take over for 
your 5 minutes and then Mr. Stearns. Okay?
    Chairman Dingell.
    Chairman DINGELL. Mr. Chairman, I want to thank you for 
your leadership in this matter, and also our good friends and 
colleagues, Chairman Rangel and Frank. Also Subcommittee 
chairmen Rush and Gutierrez. Of course, I can't say enough 
about my good friend and colleague from the Commerce Committee 
here.
    I also want to thank our distinguished witnesses for their 
testimony and willingness to participate, particularly my old 
friend Secretary Evans, who is down there, and Mr. Mohatarem.
    Currency manipulation stifles the intention of free trade 
and must be dealt with decisively. For too long, the Department 
of the Treasury has been reticent to cite countries such as 
Japan, China and Korea for currency manipulation, in spite of 
clear evidence that they have used such policies to gain an 
unfair trade advantage against the United States. These 
countries and others must not be allowed to continue in this 
illegal trade-distorting practice.
    Since 1994, the Treasury Department has not cited a single 
country for currency manipulation. Japan, however, was 
estimated in 2006 alone to have a current account surplus of 
167 billion and a bilateral trade surplus with the United 
States that exceeded $88 billion.
    Strong evidence exists that Japan has manipulated its 
currency in order to facilitate an export-led growth strategy 
to the detriment of our people and the United States economy. 
Although Japan ceased direct currency interventions in 2004, 
its government has engaged in verbal interventions in order to 
keep the value of the yen artificially low. Additionally, it 
has encouraged banks and pension funds to buy great numbers of 
U.S. Treasury bonds. This, in combination with historically low 
Japanese interest rates and other practices artificially 
decreases the yen's value.
    By maintaining a current account surplus and bilateral 
trade surplus with the United States, and also manipulating its 
currency for the purpose of gaining an unfair trade advantage 
vis-a-vis the United States, Japan fulfills the three necessary 
and sufficient criteria for currency manipulation as outlined 
in the 1988 Omnibus Trade and Competitiveness Act. Nowhere in 
the United States Japanese trade are the effects of a weak yen 
more pronounced than in the automobile industry.
    The weak yen provides Japanese auto makers, who now enjoy a 
35 percent market share in the United States, with record 
profits. Indeed, the manipulated yen/dollar exchange rate 
results in what amounts to a $2,400 price advantage to Japanese 
auto makers on a $20,000 vehicle.
    Some, I think those who think about it, would term this an 
export subsidy. In light of this, it should come as no surprise 
that Toyota's 2006 third quarter profits were bolstered by $250 
million as a result of yen/dollar exchange rates.
    As I represent a part of Michigan that has seen tens of 
thousands of auto manufacturing jobs disappear in the last 
decade, this trend is most troubling to me and the people I 
serve. I am further concerned by the Department of the 
Treasury's continuing reluctance to cite Japan as a currency 
manipulator, despite the fact that Japan seems to have 
fulfilled all of the necessary criteria outlined in the law. 
Thus, I am forced to conclude that it is incumbent upon this 
Congress to pass legislation that would require the 
administration to monitor and to address unfair foreign 
currency practices more adequately, so as to allow for more 
effective adjustments in international balances of trade.
    I hope that our panelists will speak to my concerns and 
suggest solutions to amend current law pertaining to currency 
manipulation in order to give our nation the tools it needs to 
combat this clearly trade distorting practice.
    I would like to conclude by observing, Mr. Chairman, that 
the fact that three major Committees of this Congress, all 
having jurisdiction over matters related to the hearing today 
are conducting these hearings with the vigor in which they are 
conducting them should serve as a warning to all that the 
Congress is losing patience with the Administration on this 
important matter.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Dingell follows: PENDING]
    Chairman LEVIN. Thank you, Mr. Dingell.
    Chairman Rush.
    Chairman RUSH. Thank you, Mr. Chairman. I would like to 
thank my colleagues for agreeing to hold this historic 
trinitarian Subcommittee hearing as well as I would like to 
also thank our witnesses today for their participation in these 
hearings.
    My special thanks also to Mr. Bill Hickey of Lapham-Hickey 
Steel Corporation. While his company's Chicago facility is not 
in my district, I would like to join with my colleague, 
Congressman Gutierrez from the Chicago City Council to extend a 
warm welcome to him as two Chicagoans to another.
    Several of our major trading partners, China, Japan and 
Korea included, have long intervened in currency markets in 
order to drive down the value of their respective currencies, 
much to the detriment of the American economy and job market. 
This practice which has for years continued unimpeded by action 
on the part of this administration, must be curtailed so that 
the U.S. may preserve its manufacturing job base and trade with 
its partners on a level field of play.
    It is imperative that this Congress voice its most 
stringent opposition to this practice, which will force 
unsustainable economic development for some and unfair trade 
imbalances for others. Moreover, my colleagues and I must work 
together in order to provide this nation with more adequate and 
precise instruments with which to address and catalog the 
effects of currency manipulation.
    As my Chairman, my colleague and my friend Chairman Dingell 
has stated, the Treasury Department has neglected to cite any 
foreign country for currency manipulation since 1994. In two of 
our major trading partners, China and Japan, we observe their 
accumulation of massive current account and bilateral trade 
surpluses.
    In addition, these countries have ostensibly engaged in 
currency manipulation in order to achieve export led economic 
growth. These three indices constitute the necessary and 
sufficient conditions for which the Treasury Department may 
classify a country as a currency manipulator.
    Given this, I am deeply troubled by the Treasury 
Department's reluctance to reach what would appear to be a 
common sense assessment of the illegal currency practices of 
two of our largest trading partners.
    In a 2005 report entitled Treasury Assessments Have Not 
Found Currency Manipulation, but concerns about exchange rates 
continue, the GAO concluded that while the Treasury Department 
has general complied with the reporting requirements for its 
exchange rate reports, its discussion of U.S. economic impacts 
has become less specific over time.
    Indeed, in its response to that report, the Treasury 
Department stated that it does not consider the impact of the 
exchange rate on the economy. In light of increased imports 
from both China and Japan which could partially be attributed 
to the interventionist currency policies as well as the decline 
in our own export industry, it seems irresponsible to me on the 
part of the Treasury Department to ignore the effects of 
foreign exchange rates on the U.S. economy.
    I appreciate the calls by many economic and policy analysts 
that currency policy be conducted under the framework of a 
broader, multilateral process. But in an absence of any 
meaningful action by either the IMF, which itself has no 
enforcement mechanism for currency disputes, or the WTO, it is 
my conclusion that this Congress must pass legislation that 
will further empower the United States to counter the 
pernicious and trade-distorting effects of currency 
manipulation by other countries.
    Let me close by noting that this is not an abstract problem 
that resides in the world financial markets. Currency 
manipulation has a very real and devastating effect on average 
Americans looking for decent jobs.
    I represent the South Side of Chicago and neighborhoods 
like the Inglewood community were once thriving middle class 
neighborhoods. However, as the manufacturing base collapsed, 
when the steel mill jobs disappeared, prosperity vanished from 
Inglewood and other communities on the South Side of Chicago. 
Without jobs, without income, without economic stability it is 
impossible to build and sustain thriving, healthy communities. 
Thus, when currency manipulation undermines America's ability 
to compete overseas, it is also undermining our ability to 
provide well-paying jobs here at home. This is a matter to be 
taken seriously.
    I look forward to the testimony of all of our witnesses and 
hope that they will shed greater light on the steps that the 
Congress must take in order to provide our Nation with stronger 
and more effective tools to address currency manipulation. 
Thank you, and I yield back.
    [The prepared statement of Mr. Rush follows: PENDING]
    Chairman LEVIN. Thank you, Mr. Chairman. The distinguished 
Ranking Member of the full Committee, Ranking Member Barton.
    Mr. BARTON. Thank you, Mr. Chairman. I am going to put my 
written statement in the record.
    We appreciate this hearing. We have heard of the Trilateral 
Commission. We now have the trilateral Committee hearing. So, I 
look forward to it.
    I want to welcome my good friend, Don Evans. It's good to 
see another Texan here. We appreciate the Committee on Ways and 
Means and the Financial Services Committee letting the 
bedraggled Energy and Commerce Committee participate.
    With that, Mr. Chairman, I yield back.
    [The prepared statement of Mr. Barton follows: PENDING]
    Chairman LEVIN. Thank you.
    Ranking Member Cliff Stearns.
    Mr. STEARNS. Thank you, Mr. Chairman. Let me echo my 
colleagues. What a great day it is to have the three 
distinguished Committees meeting and discussing on this 
important issue.
    The Subcommittee on Commerce, Trade and Consumer Protection 
that I chaired in the last Congress has examined a number of 
trade issues of importance while I was Chairman. We have 
examined free trade agreements, the impact of different 
standards and harmonization efforts on U.S. competitiveness and 
more discrete issues such as counterfeiting and the protection 
of intellectual property rights.
    My colleagues, many of the trade issues we monitor focus on 
China and its obligation to fulfill its commitment as a member 
of the World Trade Organization. These include the 
administration's ongoing efforts to address shortfalls in the 
enforcement of intellectual property right violations.
    There is good reason that China has been occupying so much 
concern and discussion among business, workers and 
policymakers. Congress rightfully wants to ensure that our 
trading partners operate under fair and equitable rules that do 
not disadvantage American trade.
    With the extraordinary growth in China's economy, we have 
watched our balance of trade with them become an expanding 
deficit, notwithstanding the fact that China is now our fourth 
largest export market for such manufactured goods such as 
aerospace and health care equipment. Our exports to them have 
grown 350 percent in the last decade. Our trade deficit, 
obviously, continues to grow larger and larger.
    There is a mutual attractiveness to bilateral trade that 
benefits both countries and our respective desires to economic 
prosperity. We all agree with that. We have a growing economy 
with 1.3 billion people in need of goods and services essential 
to their infrastructure. We have the wealthiest nation of 
consumers that is a natural market for some of their exports. 
Both conditions should provide the foundation for mutually 
beneficial trade.
    Unfortunately, China's seemingly endless supply of 
inexperienced labor has severe consequences to our country and 
the competitiveness of some of our industries. This has not 
gone unnoticed, especially by anyone employed in any one of 
these respective industries.
    The result of this imbalance in wage rates and national 
wealth has contributed in large part to a net trade deficit 
with China that reached $232 billion last year. Such imbalances 
cannot persist and be healthy for both countries and the global 
finance system in the long run.
    My colleagues, what causes more concern is a notion that 
this imbalance is also facilitated by China's desire to keep 
its currency pegged to the dollar. Such actions are perceived 
by many as manipulation that keeps the yuan undervalued. Most 
experts, including the administration recognize China's 
currency is undervalued significantly, despite China's 
commitment to pursue a floating rate that is freely traded.
    Since 2005, when China moved away from a fixed exchange 
rate and moved to a, quote, managed float system, their 
currency has appreciated approximately 7 percent. This is an 
improvement. We should recognize it. But it falls far short of 
where experts actually believe it should be. The narrow trading 
range to which China limits its currency effectively leaves it 
fixed to the dollar, for all intents and purposes.
    We know that an undervalued currency makes their exports 
cheaper and more affordable to us, whereas our exports are more 
expensive and less affordable. This has largely been good for 
our consumers but bad for many of our exporters and our 
domestic industries affected by cheaper imports.
    Over time, this situation normally corrects and the global 
financial system reevaluates the currencies and the exchange 
rate at the same time. That has not happened in the case of 
China. Instead, we continue to see an exchange rate relatively 
unchanged as China adjusts its purchases of dollar denominated 
assets.
    The question for policymakers is, where do we go from here? 
This is not an easy question that can be solved with one quick 
solution. China by most accounts cannot switch to a purely 
floating currency overnight. Their financial system is not 
quite ready. But that does not obviate the need to make 
continued progress expeditiously.
    My fear, my colleagues, that absent evidence of real 
progress by China and the administration, the U.S. will grow 
increasingly impatient as our companies and workers are 
disadvantaged. Policymakers will have few options, few options 
remaining, and will naturally explore more immediate changes if 
we do not see the improvement soon.
    So, with that, Mr. Chairman, I welcome the witnesses and 
appreciate their forbearance here as we go through the normal 
procedures here to let people have their opening statements. I 
believe the administration and Secretary in particular has 
embarked on a course to try and show China that the merits of a 
market-based economy and to start to reflect reality in the 
economic situation.
    With that, Mr. Chairman, I yield back.
    [The prepared statement of Mr. Stearns follows: PENDING]
    Chairman LEVIN. Thank you very much.
    All right, here we go. Here we go. This is an extraordinary 
meeting, I think, affecting an extraordinary problem, a crucial 
problem. So, we have assembled on a bipartisan basis an 
extraordinary panel. You all don't agree. That will make it all 
the more interesting.
    There is a red light. I've tried to abide it. As you think 
about your remarks, see if you can condense them into 5 minutes 
so that we can have a really good back and forth.
    I am going to introduce all of you at one time so you can 
then go on. I really hope that we can get into this.
    First will be former Secretary of Commerce, Don Evans, a 
longtime friend of ours, the chief executive officer, Financial 
Services Forum.
    Next, Mr. Brian O'Shaughnessy, president and CEO, Revere 
Copper Products. We know that company well.
    Steve Roach, who is managing director and global economist 
for Morgan Stanley, who has been with us before.
    Another person of longstanding authority, Dr. Fred 
Bergsten, who is the director of the Peterson Institute for 
International Economics.
    Another veteran of these wars, Mustafa Mohatarem, who is 
chief economist for GM.
    Also another person who has testified here many times and 
we very much welcome her, Thea Lee, who is policy director of 
the AFL-CIO.
    Then Mr. Hickey, who is with the steel corporation in 
Chicago.
    So, let's go at it. Secretary Evans, we will start with you 
and go right down the line.
    Welcome to all of you and thank you for coming.

              STATEMENT OF DONALD L. EVANS, CEO, 
                    FINANCIAL SERVICES FORUM

    Mr. EVANS. Thank you, Mr. Chairman. I am honored to be a 
part of this extraordinary hearing, as you say, to all the 
distinguished leaders of this nation that are here, the 
distinguished Members of this Congress, it is good to see all 
of you again. I thank you for your continued service.
    I think fondly about my years here serving in government 
and being able to work with distinguished public service 
Members like Chairman Frank. Mr. Chairman, I look forward to 
coming to your hearing again in June when we are going to also 
discuss this very important issue. Chairman Dingell and 
Chairman Levin and Ranking Member Barton and my friend Tom 
Reynolds, there are just so many of you that I have worked with 
over the years. So I am honored to be a part of this. Chairman 
Tanner, also, good to see you, sir. I enjoyed so much working 
with you through the years.
    We all do agree in one very important thing, that we are 
all trying to do what is in the very best interests of today's 
workers and tomorrow's workers. So, that is one thing that we 
can begin this hearing in saying that we all agree on. I have a 
brief opening comment, Mr. Chairman.
    Ensuring that our major trading partners' currencies are 
valued according to market forces has major implications for 
the U.S. economy and American workers, as does broader 
financial sector reform in China. I applaud Chairman Frank for 
scheduling a hearing in June on this critically important 
topic.
    I am here as chief executive officer of the Financial 
Services Forum, an association comprising the chief executive 
officers of 20 of the largest and most diversified financial 
institutions with business operations in the United States. The 
forum's members share Congress's commitment to maintain a 
strong U.S. economy, enhancing savings and opening world 
markets to American made products as the most effective means 
of addressing America's trade deficit. Also important is for 
the currencies of our major trading partners to be determined 
by the markets.
    As the Members of these Committees know very well, two of 
our most important trading partners are Japan and China. In 
both relationships, imports into the United States have for 
years surpassed our exports. There is no question that the 
Japanese yen is currently trading at very low levels, recently 
dropping to multi-month lows against the dollar and an all-time 
low against the euro. Indeed, Bank of Japan data indicate that 
the yen is at its weakest level in real trade weighted terms in 
more than 20 years, circumstances that clearly benefit Japanese 
exporters.
    While problematic for U.S. businesses competing with 
Japanese producers, there is no evidence that the yen's current 
trading levels are the result of currency manipulation. Indeed, 
as the Treasury Department reported in December, Japanese 
authorities have not intervened in foreign exchange markets in 
more than 3 years. Rather, the low relative value of the yen 
reflects economic fundamentals. Namely, a fragile Japanese 
economy still recovering from a decade of stagnation and 
deflation during the 1990s and low interest rates designed to 
nurture, encourage and extend the recovery.
    More importantly, we clearly cannot credibly argue to China 
that it should stop intervening in foreign exchange markets, 
buying up billions of dollars to maintain the desired value of 
the yuan, while at the same time urging Japan to sell its 
currency reserves to drive up the value of the yen.
    Dissatisfaction with the value of the yen as determined by 
world markets would only signal that U.S. currency demands are 
unreasonable, ad hoc, self-motivated and impossible to satisfy. 
Undermining the credibility and legitimacy of our continuing 
efforts to encourage a market-determined yuan.
    Turning to China, for years the United States has worked 
with China toward achieving a yuan whose value is determined by 
market forces. Indeed, shortly after taking office, the Bush 
administration committed to helping China develop the capital 
market knowhow and expertise necessary to end the yuan's peg to 
the dollar.
    In July of 2005, those efforts bore fruit, as China 
revalued its currency upward by 2 percent and eliminated the 
peg to the dollar. Since mid-2006, the pace of appreciation has 
accelerated to about 5.4 percent a month on an annualized 
basis. In total, the yuan has appreciated by about 6.5 percent 
and it has been estimated that by 2011, the yuan will have 
appreciated by a substantial 25 percent. The United States 
should continue to press China to accelerate progress in that 
direction.
    But even as we do, we should not allow the currency issue 
to overshadow the broader potential of the U.S.-China economic 
relationship. Of far greater significance to the policy goals 
of maintaining strong U.S. economic growth and job creation in 
this country is expanding access to China for American 
businesses and helping to activate China's 1.3 billion 
potential consumers, a fifth of the world's population. A 
simple example shows why.
    Last year, the United States exported to Japan goods and 
services worth $60 billion, approximately the same amount 
exported to China, which was $55 billion. But China's 
population of 1.3 billion is 10 times Japan's population of 127 
million. If China's citizens were to eventually consume 
American-made goods and services at the same rate that Japan's 
citizens did last year, the United States would export more 
than $600 billion worth of goods and services to China, 11 
times what America exported to China last year, an amount 
equivalent to 5 percent of America's GDP, and more than twice 
what we imported from China last year.
    Chairman LEVIN. The light is on. I was saying, it's hard to 
tap the gavel on a former Secretary. But----
    Mr. EVANS. Quite all right.
    Chairman LEVIN [continuing]. But try to wrap up because I 
hope everybody else will try to keep more or less within the 5 
minutes so we have the fullest opportunity for back and forth. 
So, that was just a very light tap.
    Mr. EVANS. Thank you very much, Mr. Chairman----
    Chairman LEVIN. Keep going.
    Mr. EVANS [continuing]. I will--well, the fastest way for 
China to develop the modern financial system, which is what 
they need to do, is by opening its financial sector to greater 
participation by foreign financial services firms. By providing 
the financial products and services that China's citizens and 
businesses need to save, invest, ensure against risk, raise 
standards of living and consume at higher levels, foreign 
financial institutions including U.S. providers would help 
create what every U.S. manufacturer and service company wants, 
unleash the Asian tiger hungry for U.S. products.
    Thank you very much for the opportunity to appear in front 
of this extraordinary meeting, Mr. Chairman.
    [The prepared statement of Mr. Evans follows:]
    
    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman LEVIN. Thank you, sir.
    Mr. O'Shaughnessy.

STATEMENT OF M. BRIAN O'SHAUGHNESSY, PRESIDENT AND CEO, REVERE 
             COPPER PRODUCTS, INC., ROME, NEW YORK

    Mr. O'SHAUGHNESSY. Good morning, Chairman Levin, Gutierrez, 
Rush, Frank and Ranking Members Herger, Paul and Stearns. 
Indeed, all Members, thank you for this opportunity to 
testify----
    Chairman LEVIN. The rest of you can leave off the thank 
yous. There are too many of us.
    Mr. O'SHAUGHNESSY. Okay. Can I start my time over?
    Chairman LEVIN. Start all over.
    Mr. O'SHAUGHNESSY. As to China currency issues, on behalf 
of the China Currency Coalition, the witness guidelines for 
potential conflict of interest require that government 
contracts be disclosed. You should be aware that U.S. Secretary 
of War Henry Knox rode to Boston and offered Paul Revere a 
$10,000 U.S. Government loan to build a copper rolling mill to 
sheathe the USS Constitution with copper made in the U.S.A..
    So, my company was founded by Paul Revere in 1801, perhaps 
the oldest manufacturing company in the U.S.A.. Today, our mill 
in Rome, New York, produces copper and brass sheet, strip and 
coil for U.S. manufacturing companies.
    Since 2000, about 30 percent of these customers have shut 
down or moved offshore. Just look at an item made of copper or 
brass in a big box store and you will see that the product is 
now made in China. That's because the cost of manufacturing in 
China is cheaper, you believe. Once you look at the facts, 
however, you will see a different picture.
    Say the production cost of a brass doorknob in China is 100 
yuan. If the exchange rate for converting yuan to dollars is 
controlled by the government of China at eight yuan to one 
dollar, then the production cost is equivalent to $12.50. But 
if the exchange rate was market driven, it would be about five 
yuan to a dollar and the production cost in China would be 
equivalent to $20. So, a factory that produces brass doorknobs 
for $18 in the U.S. is going to shut down.
    The manipulation of its currency reduces the 
competitiveness of every other product, good and service in the 
world compared to its production in China. Such protectionism 
is reaping huge rewards as China's export-based economy is 
growing three times faster than the rest of the world. 
Meanwhile, factory jobs are disappearing in the U.S. and the 
world. Even manufacturing plants in Mexico are moving to China.
    Multinationals that benefit from Chinese protectionism 
really don't want it to stop and often accuse those that do of 
protectionism. The irony is that domestic manufacturing 
companies are the victims of protectionism, not the 
benefactors. China managed its currency to be undervalued about 
40 percent and since then allowed it to appreciate only 3.5 
percent a year, while the underlying rate of appreciation was 5 
percent.
    China's strategy is to delay as long as it can and make 
corrections as small as it can. The market driven exchange rate 
simply put all nations back at the starting gate for the race 
to determine who will win the battle to competitively produce 
goods and services assuming all other things are equal. Of 
course, all other things are not equal. Because of this, our 
Nation's inability to compete with China and the rest of the 
world means that our currency will continue to depreciate and 
the standard of living of all Americans will decline and our 
Nation will grow weaker.
    This is because all other major trading nations use 
revenues generated by value added tax, VATs, to reduce the tax 
and health care burden on their production of goods and 
services. The most ambitious are developing energy policies 
which give them a competitive edge.
    The loss of manufacturing jobs to date in the U.S.A. is 
only the tip of the iceberg. Future losses will go far beyond 
this and extend to food and service industries.
    What should be done to counter this protective behavior by 
other nations? First, the U.S. cannot continue to negotiate 
FTAs as long as the other country is free to manipulate its 
currency and VATs to offset any tariff reduction.
    Second, Congress should pass the Ryan-Hunter bill. If this 
is not successful, then the U.S.A. must take stronger measures, 
even if it means stepping outside WTO rules.
    Third, the U.S.A. must reform its tax and health care 
systems and institute VATs on a scale that gives production of 
goods and services in the U.S.A. a competitive advantage.
    Fourth, the U.S. needs to ensure that its businesses have 
access to substantial, low-cost, clean energy so that they are 
able to compete on the world stage and keep the environment 
clean. My written testimony points to nuclear.
    When Paul Revere tried to rouse the countryside with his 
wakeup call, what did the people do? We all need to wake up and 
listen, but we must be careful who we listen to. Honorable 
Members of Congress, Revere does not take disclosure laws 
lightly. In the interest of full disclosure, we believe all 
witnesses, consultants should answer, does your company have or 
is it considering investing in or financing facilities in China 
or Japan? Does your company sell to or import components or 
products from there?
    Thank you for your attention. Wake up, America. Visit 
RevereCopper.com and learn more of these views.
    [The prepared statement of Mr. O'Shaughnessy follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Chairman LEVIN. Thank you very much.
    Dr. Roach.

  STATEMENT OF STEPHEN S. ROACH, MANAGING DIRECTOR AND CHIEF 
      GLOBAL ECONOMIST, MORGAN STANLEY, NEW YORK, NEW YORK

    Mr. ROACH. Thank you, Mr. Chairman. I will dispense with 
the thank yous. But by my calculation, that would take up most 
of my 5 minutes. But I do appreciate both the honor and the 
privilege to participate in these historic hearings.
    I sincerely worry that you and the Congress are moving into 
very dangerous territory as you contemplate trade legislation 
aimed directly at China. I fear this approach could backfire 
and unleash forces that would have an adverse impact on the 
U.S. economy and on middle class American workers.
    Let me just highlight five potential risks to the U.S. 
economy that are contained and detailed in my prepared 
statement. Number one, sanctions on China could raise the cost 
of imports and that would be the functional equivalent of a tax 
on American consumers.
    Number two, sanctions on China would raise the cost of 
foreign components and inputs for U.S. multinationals that 
could lead to higher inflation and would be a tax on corporate 
America.
    Number three, sanctions on China could lead to a sharply 
weaker dollar, as we would be hitting a major buyer of dollar 
denominated assets in international capital markets.
    Number four, because of dollar weakness, sanctions on China 
could lead to sharply higher real long-term interest rates in 
the United States.
    Number five, because of all of the above, trade sanctions 
on China could tip an already weakened U.S. economy into 
recession.
    I would also underscore three key risks to the global 
economy. Number one, a large move in the Chinese currency, 
which is what you are seeking, could do damage to an embryonic 
Chinese financial system, which would be a major setback for 
reform in China.
    Number two, actions against China would hit the rest of 
Asia. Very important, because China is less of a factory than 
you think and more of an assembler, with direct and important 
ties to other major Asian economies, including Japan, Korea and 
Taiwan.
    Number three, sanctions on China which would impact the 
rest of Asia would push this very important region away from 
the U.S. sphere of influence in terms of economic integration, 
financial integration and geopolitical integration. These are 
all, in my view, clear and very important risks of making what 
I fear could be a major policy blunder of monumental 
proportions.
    I want to stress that I think that your approach is also 
flawed not just because of the risks I have highlighted, but 
also because it rests on faulty macroeconomic analysis. You in 
the Congress, I think, should be less concerned about last 
year's $232 billion bilateral trade deficit with China and more 
concerned about America's $836 billion multilateral trade 
deficit with the entire world in 2006. At the core of this 
problem, and Mr. Paul has certainly underscored this in his 
opening statement, is America's unprecedented shortfall of 
domestic saving. America's net national savings rate, the 
combined saving of households, businesses and the government 
sector adjusted for depreciation averaged only 1 percent over 
the past three years. This is the lowest in our history. It is 
the lowest in the history of any leading nation in the modern 
day world economy.
    So, lacking in domestic saving, the U.S. must import 
surplus savings from abroad in order to grow and run massive 
current account and multilateral trade deficits to attract the 
foreign capital. This is much more a U.S. savings problem than 
a China problem. Why this does not get more into the debate in 
the Congress concerns me very much.
    If you close down trade with China, the impacts I believe 
would be like a water balloon. The deficit would go somewhere 
else, unless America saves more. That somewhere else most 
likely will be a higher cost producer which, again, would 
impose the functional equivalent of a tax hike on the American 
middle class.
    The bottom line, as I see it, you're treading on very 
dangerous territory here and the macro analysis that underpins 
this approach has highly risky implications. I think we need to 
be very careful what we wish for.
    Thank you very much.
    [The prepared statement of Mr. Roach follows:]

  Prepared Statement of Stephen S. Roach, Ph.D., Managing Director and
       Chief Global Economist, Morgan Stanley, New York, New York
    Congress is now moving into a critical phase in the ongoing 
deliberations over America's international trade policies. These 
tripartite hearings are a clear indication of the deep concerns that 
are shaping your efforts. Such angst is understandable. In a broad 
sense, this is a debate about America's commitment to globalization--
the overarching force that is reshaping the U.S. and the global 
economy. In a narrow sense, the focus is unmistakably on China--the 
world's most extraordinary development story and yet the largest slice 
of America's gaping trade deficit. Much is at stake as you grapple with 
these weighty issues. You cannot afford to get it wrong.
    But I worry that may be the case. There can be no mistaking the 
momentum in Congress to tighten the noose on China. My own experience 
underscores this point: This is the third time I have testified on 
U.S.-China trade policy in the past three months. You have framed the 
debate as a legislative response to America's outsize bilateral trade 
deficit with China. This point of view is seriously flawed--
underscoring the risk of a policy blunder of monumental proportions. By 
going after China, you in the Congress are playing with fire.
Playing with Fire
    For starters, the legislative ``remedies'' currently under 
discussion are based on faulty macroeconomic analysis. China bashing 
doesn't address the real problem that Congress believes is bearing down 
on American workers--a massive trade deficit that hit a record $836 
billion in 2006. Since the Chinese bilateral deficit of $232 billion 
amounted to the largest slice of America's overall multilateral trade 
gap--28% for all of 2006 and fully 34% in the final period of the 
year--Congress has concluded that China is the major culprit behind the 
trade-related squeeze on middle-class U.S. workers.
    That deduction overlooks one critical point: The United States runs 
trade deficits not because it is victimized by unfair competition from 
China or anyone else but because it suffers from a chronic shortfall of 
domestic saving. That's right, lacking in saving--as evidenced by a net 
national saving rate that plunged to a record low of 1% of national 
income over the 2004-06 period--the U.S. has no choice other than to 
import surplus saving from abroad if it wants to keep growing. That 
means running current account and trade deficits in order to attract 
the foreign capital. China turns out to be the biggest piece in this 
equation not because it is unfairly undercutting American-made products 
but because it offers a menu of products that satisfies the tastes and 
preferences of a chronically saving-short U.S. economy. China bashers 
continually overlook the macro context of America's bilateral trade 
deficits at great peril.
    Consider the consequences if a bipartisan coalition in Congress 
gets its way and U.S. trade with China is significantly curtailed: The 
immediate impact would be a tax on U.S. multinationals like Wal-Mart, 
which sourced some $18 billion of goods from China in 2006. That would 
either squeeze profit margins or, if passed through to retail prices, 
raise the cost of living for American consumers. Over time, if the 
sanctions were onerous enough, the impact would be to divert U.S. trade 
away from China. But here's where the problem gets especially thorny: 
Unless America increases its domestic saving, sanctions on Chinese 
products will do nothing to alleviate the overall trade deficit. The 
outcome would fit the ``water balloon analogy'' to a tee--squeezing the 
Chinese piece would simply redirect the deficit elsewhere. And most 
likely that would reallocate saving-short America's multilateral trade 
deficit away from low-cost Chinese producers toward higher-cost foreign 
sourcing. That would be the functional equivalent of a tax increase on 
American consumers.
    Unfortunately, by going after China, Congress is also biting the 
hand that feeds it. China is one of America's most important external 
lenders. To a large extent this is an outgrowth of the same currency 
policy that has U.S. politicians so up in arms--a ``managed peg'' that 
has allowed the renminbi to increase by only about 7% versus the dollar 
since July 2005. To keep the RMB in this range, China must recycle a 
disproportionate share of its massive build-up of foreign exchange 
reserves into dollar-denominated assets. As of February 2007, China 
held $416 billion of U.S. Treasuries--second only to Japan and up 
nearly $100 billion from the level a year earlier. And there is good 
reason to believe that the Chinese hold another $300-400 billion in 
other dollar-based assets, such as agencies and corporate bonds. By 
continuing to allocate at least 60% of its ongoing reserve accumulation 
into dollar-denominated assets, China remains an important source of 
demand for American securities--thereby helping to keep U.S. interest 
rates lower than might otherwise be the case. In effect, Chinese 
currency policy is subsidizing the interest rate underpinnings of 
America's asset economy--long the driver of the wealth effects that 
support the income-short U.S. consumer.
    Congressional pressure on China could put its bid for dollar-
denominated assets at risk for two reasons: On the one hand, if China 
accedes to U.S. pressure and allows the RMB to appreciate a good deal 
more against the dollar, there would be less of a need to recycle FX 
reserve accumulation into dollar-based assets. Absent such buying, 
interest rates could rise for a saving-short U.S. economy that still 
needs massive capital inflows. On the other hand, if Washington enacts 
onerous trade sanctions on China, the Chinese might understandably have 
less of an appetite to maintain their overweight in dollar-based 
assets. In fact, there is a good chance that the Chinese government 
would simply instruct its reserve managers to diversify incremental 
reserve accumulation out of dollars. In that case, the dollar could 
plunge and longer-term U.S. real interest rates could rise sharply--a 
crisis-like scenario that could tip an already weakened U.S. economy 
quickly into recession. Either way, by imposing sanctions on one of its 
major foreign lenders, Congress could be putting a saving-short U.S. 
economy in a very precarious situation.
    Trade sanctions might also subject China to intense internal 
pressure that extends beyond the impact on its exporters. Despite its 
rapid growth and increasingly important role as one of America's major 
suppliers of goods and financial capital, China is still a very 
undeveloped economy. That's especially the case with respect to its 
financial system, dominated by four large banks that are only just 
starting to go public. Banks and China's other international borrowers 
need to be able to hedge their currency exposure--especially in the 
face of the large exchange-rate fluctuations that Washington lawmakers 
are seeking. Lacking in well-developed capital markets, such hedging 
strategies are very difficult to implement in China. A large RMB 
revaluation could, as a consequence, deal a lethal blow to China's 
embryonic financial system.
    There is also the distinct possibility that Washington-led China 
bashing could inflict major collateral damage on the rest of Asia. 
Contrary to popular folklore, China has not become the world's factory. 
Instead, it is functioning much more as the final destination of a huge 
pan-Asian supply chain--directly involving intermediate inputs and 
supplies from the region's other major economies like Korea, Taiwan, 
and Japan. China is, in fact, the largest export market for the first 
two of these externally-led economies and is rapidly closing in on the 
U.S. as Japan's largest export market.
    Academic studies emphasize the pan-Asian linkages to the Chinese 
export machine. Professor Lawrence Lau of Stanford and the Chinese 
University of Hong Kong has estimated that domestic PRC-based content 
accounts for only about 20% of the total value of Chinese exports to 
the U.S.\1\ More recent research by economists at the central bank of 
Finland underscores how shifts in the RMB would reverberate throughout 
a vertically integrated pan-Asian production platform.\2\ Congress is 
operating under the false presumption that trade sanctions would be a 
surgical strike solely on China. That is unlikely to be the case. 
Instead, there would undoubtedly be major cross-border spillovers that 
could quickly put pressure on the rest of a China-centric Asian supply 
chain.
---------------------------------------------------------------------------
    \1\ See Lawrence Lau's 2003 paper, ``Is China Playing by the 
Rules?'' presented as testimony in September 2003 before the U.S.-China 
Economic and Security Review Commission.
    \2\ See Alicia Garcia-Herrero and Tuuli Koivu, ``Can the Chinese 
trade surplus be reduced through exchange rate policy?'' Bank of 
Finland, BOFIT discussion paper #6, 2007.
---------------------------------------------------------------------------
    There is a final misperception about the oft-feared Chinese 
exporter. It turns out that China has become an important efficiency 
solution for many of the world's multinational corporations. China's 
so-called foreign-invested enterprises--basically, Chinese subsidiaries 
of multinationals--have accounted for more than 60% of the explosive 
growth of overall Chinese exports over the past decade. That raises 
serious questions about the real identity of the all-powerful Chinese 
exporter. It may be less of a case of the indigenous Chinese company 
and more likely an outgrowth of conscious decisions being taken by 
Western companies. That poses the critical question: Who is the new 
China--is it them or us?
    With all due respect, I worry that you in the Congress are seeing 
the China problem from a very narrow perspective. At the root of this 
approach are understandable concerns about increasingly acute pressures 
bearing down on American middle-class workers. But the link between 
this painful problem and China is based on flawed macro analysis--
mistakenly focusing on a large bilateral piece of a major multilateral 
trade imbalance of a saving-short U.S. economy. As is often the case, 
one error can beget another, and the real risk is that Washington-led 
China bashing could trigger a host of unintended consequences--not only 
taxing American consumers and U.S. multinational corporations but also 
triggering currency and real interest rate pressures that could tip the 
U.S. economy into recession. But the biggest tragedy of all could come 
from a United States that squanders an historic chance to engage China 
as a strategic partner in an increasingly globalized world. If 
Washington pushes China away, I fear the rest of an increasingly China-
centric Asia won't be too far behind.
Protectionism and Inflation
    At the same time, I also fear that disinflation could be at risk as 
Congress rushes headlong down the path of protectionism. The cross-
border arbitrage of costs and pricing--one of the unmistakable 
hallmarks of globalization--could well turn unfavorable if China 
bashers get their way. This could be a recipe for the dreaded 
stagflation scenario--a perfectly awful outcome for financial markets 
and the functional equivalent of yet another tax hike on an already 
beleaguered American middle class.
    The U.S. economy has benefited greatly from an outbreak of 
``imported disinflation'' over the past decade. Researchers from the 
IMF have estimated that the so-called import-price effect has lowered 
the U.S. CPI inflation rate by an average of about one percentage point 
per year since 1997.\3\ Such an externally-driven reduction in domestic 
U.S. inflation is basically an outgrowth of rising import penetration 
from the low-cost developing world. U.S. import penetration--purchases 
of foreign-made products as a share of domestic goods consumption--has 
risen from 22% in the early 1990s to about 38% today. At the same time, 
Morgan Stanley calculations suggest that developing economies have 
accounted for 58% of the surge in total U.S. imports over the past 
decade. China and Mexico have led the way--making up nearly 60% of the 
cumulative increase of imports to the U.S. from developing economies 
since 1995.
---------------------------------------------------------------------------
    \3\ See ``How Has Globalization Affected Inflation?'' Chapter III 
in the IMF's World Economic Outlook, April 2006.
---------------------------------------------------------------------------
    Nor have currency swings or business cycles altered the 
disinflationary forces of globalization. Over the past 12 years, prices 
of non-petroleum imports into the U.S. have been basically unchanged, 
punctuated by brief cyclical breakouts that never exceeded 4% that 
were, in turn, followed by periodic declines of approximately equal 
magnitude. This compares with a cumulative increase in the so-called 
core CPI of 31% over the 1995 to 2007 interval. Even during periods of 
modest cyclical acceleration in import prices, spillovers from foreign 
to domestic inflation have been limited. That's due in large part to 
the still-wide disparity between price levels of foreign and 
domestically-produced goods--a disparity which has continued to open up 
in recent years. According to the U.S. Bureau of Labor Statistics, 
prices of nonagricultural U.S. exports, a good proxy for inflation of 
internationally-competitive goods produced within the United States, 
have recorded a cumulative increase of about 10% since early 1995. 
While that's hardly a major surge, it nevertheless stands in contrast 
with the stability of nonpetroleum import prices noted above. That only 
adds to the compelling arithmetic of imported disinflation the U.S.
    I suspect there is an equally important productivity angle to this 
as well. Globalization and the record expansion of world trade it has 
engendered have played a new and important role in the execution of 
global efficiency solutions by U.S. businesses. This arises from 
increasingly powerful synergies of cross-border supply chains available 
to U.S. multinational corporations, as well as from the arbitrage 
between relatively antiquated high-cost facilities at home with newer 
vintages of low-cost production platforms abroad.\4\ Similarly, there 
is compelling evidence of innovation-driven productivity spillovers 
from inward foreign direct investment.\5\ To the extent that ``imported 
productivity'' growth dampens overall cost pressures in the domestic 
economy, globalization has created yet another powerful headwind 
holding back U.S. inflation.
---------------------------------------------------------------------------
    \4\ See Federal Reserve Vice Chairman Donald L. Kohn, ``The Effects 
of Globalization on Inflation and Their Implications for Monetary 
Policy,'' June 2006.
    \5\ See Jonathan Haskel, Sonia Pereira, and Matthew Slaughter, 
``Does Inward Foreign Direct Investment Boost the Productivity of 
Domestic Firms?'' CEPR Discussion Paper No. 3384, May 2002. Available 
at SSRN: http://ssrn.com/abstract=317681.
---------------------------------------------------------------------------
    As a result of these trends, the sourcing of domestic consumption 
in the United States has shifted away from high-cost goods made at home 
to cheaper and increasingly high-quality products produced by low-cost 
developing economies. In one sense, these impacts are temporary--they 
reflect globalization-driven impacts on the U.S. economy that have 
taken it from one state of ``openness'' to another. Consequently, as 
import penetration eventually levels out, the impacts of imported 
disinflation could ebb. At the same time, should forces come into play 
that arrest globalization--namely an outbreak of trade protectionism--
there could well be a reversal of the external pressures of 
disinflation, thereby boosting overall inflation.
    Unfortunately, that is precisely the risk today. As you in 
Washington now move to contemplate policies that could lead to trade 
frictions and protectionism, America's global sources of disinflation 
would be very much at risk. Tariffs and non-tariff duties are the 
functional equivalent of a tax on low-cost imports. Depending on 
pricing leverage, such taxes could be directly passed through to 
American consumers. At a minimum, they would boost cost pressures on 
U.S. multinationals, with the potential to interrupt the shifting of 
high-cost domestic production to cheaper offshore locations. Moreover, 
such frictions might also diminish the productivity dividend offered by 
global supply chains. This latter possibility could well be reinforced 
by ongoing efforts of the U.S. Congress to tighten up the so-called 
CFIUS (Committee on Foreign Investment in the United States) approval 
process for foreign direct investment into the United States--a 
development that has gathered considerable momentum in the aftermath of 
the aborted 2006 acquisition of U.S. port facilities by Dubai Ports 
World.
    Nor is the cyclical timing of all these developments exactly ideal. 
The imposition of trade and investment barriers could lead to the 
return of the closed-economy inflation dynamic at just the time when 
slack has diminished in America's labor and product markets. And, of 
course, the dreaded dollar-crisis scenario--hardly a trivial 
consideration in a protectionist climate--could lead to a much sharper 
spike in import prices than has been evident in a long time. All in 
all, such an unfortunate confluence of circumstances could exacerbate 
domestically driven inflationary pressures at precisely the wrong point 
in the business cycle--in sharp contrast to a globalization that has 
acted increasingly to offset such cyclical pressures over the past 15 
years.
    There is great irony to Congressional attempts to ``fix'' 
globalization: The odds are that the most extensive damage will be 
inflicted on the very constituency in the U.S. economy that the 
politicians are trying to assist--America's middle-class. One of the 
most important lessons of the 1970s is that inflation is the cruelest 
tax of all. And yet that lesson now seems all but lost on Capitol Hill 
today. There is no refuting the reality of pressures already bearing 
down on American labor. In the current economic upturn, Morgan Stanley 
calculations suggest that the cumulative gains in private sector worker 
compensation remain about $430 billion (in real terms) below the 
trajectory of the typical expansion. Moreover, according to the U.S. 
Bureau of Labor Statistics, the median wage--inflation-adjusted weekly 
pay for the worker in the middle of the wage distribution--has risen a 
cumulative total of just 0.9% over the seven years ending in the first 
quarter of 2007; that's an especially disturbing development in a 
period of accelerating productivity growth--very much at odds with the 
long-standing conclusions of economic theory and experience. As an 
outgrowth of these developments, the labor share of America's national 
income has fallen sharply in recent years and remains near its post-
1970 low of 56%. Sadly, Congress now appears to be contemplating a 
response to these pressures that would impose the functional equivalent 
of an inflation tax on U.S. workers at precisely the time when they can 
least afford it.
    America's beleaguered middle class deserves better. Due to under-
investment in education and human capital over the past 25 years, 
American labor is lacking in many of the skills required to face the 
new competitive challenges of an IT-enabled globalization that is 
bearing down on white- and blue-collar workers, alike.\6\ Moreover, by 
failing to save and to embrace pro-saving policies, the U.S. has set 
itself up for chronic current-account and trade deficits. This is a 
lethal political and economic combination that has injected a new sense 
of urgency into the globalization debate. And Washington politicians, 
rather than taking a hard look in the mirror, have embarked on a 
dangerous course of ``scapegoatism''--blaming China for all that ails 
the American worker. That has taken the Congress to the brink of moving 
beyond the rhetorical bluster of the past few years and enacting 
legislation that would impose severe trade sanctions on China.
---------------------------------------------------------------------------
    \6\ See Stephen S. Roach, ``Unprepared for Globalization,'' Morgan 
Stanley Investment Perspectives, February 3, 2007.
---------------------------------------------------------------------------
    In looking back over the past quarter century, few accomplishments 
in the economics sphere match the successes of the battle against 
inflation. Globalization and trade liberalization have become important 
in insuring the post-inflation peace. Yes, for many, this has been a 
mixed blessing. There is no question that workers in the developed 
world have borne a disproportionate share of the cross-border arbitrage 
that lies at the heart of globalization. At the same time, I have 
little doubt that the ensuing disinflation has been key in fostering 
improvements in purchasing power that boost living standards of the 
same hard-pressed workers. Protectionism raises the risk of squandering 
this critically important disinflationary dividend--thereby eroding 
inflation-adjusted purchasing power. That is the very last thing 
America's middle class needs.
Losing Asia?
    There are also important geopolitical consequences of the recent 
shift in U.S. trade policies. The more America resists the rise of 
Asia--precisely the risk in light of mounting protectionist pressures 
in Washington--the greater the chances the region will go its own way. 
Signs of such a development are already apparent--especially in the 
form of a new rapprochement between Asia's two economic powerhouses, 
Japan and China. That raises the worrisome possibility of disengagement 
between the U.S. and the world's most rapidly growing region. If that 
turns out to be the case, America will have squandered one of the 
greatest opportunities of globalization.
    The emergence of a China-centric Asian supply chain has been a 
major feature of the region's recovery from the wrenching financial 
crisis of 1997-98. Up until recently, Japan has been on the outside 
looking in. That is now changing. Japan's overall trade volume with 
China has doubled during the last five years, with shipments from the 
PRC and Hong Kong, combined, having surged from 5% of total Japanese 
imports in the early 1990s to close to 21% today.
    These trends may well be an important precursor of a new stage of 
pan-Asian economic integration--growing linkages between China and 
Japan. Collectively, these two nations--the world's second and fourth 
largest economies--account for 82% of pan-Asian GDP as measured by the 
IMF's purchasing-power-parity metrics. If they come together, the 
implications for Asia--as well as for the rest of the world--would be 
enormous.
    The possibility of such a new thrust to pan-Asian economic 
integration is more than just idle curiosity. China's Premier Wen 
Jiabao just completed the first mission of a senior Chinese official to 
Tokyo in over six years. That followed shortly on the heels of last 
October's trip to China by Prime Minister Shinzo Abe--the first foreign 
excursion of the then newly elected head of the Japanese government. 
Both leaders appear to be putting great personal stake in forging a new 
future for one of history's more volatile relationships. Premier Wen's 
speech to the Diet--the first time a Chinese leader has ever addressed 
the Japanese legislature--put the economic relationship between the two 
nations in an important context: By stressing complementarity and 
interdependence, Wen spoke of a China that appears willing to embrace 
Japan as a strategic economic partner rather than as an adversary.
    Japan has certainly come a long way in the past five years in 
rethinking its approach toward China. As recently as 2002, leading 
Japanese government officials were still casting China in the role of a 
major source of Asian instability--accusing the PRC of not only 
exporting deflation but also being responsible for a ``hollowing out'' 
of Corporate Japan.\7\ The Koizumi government subsequently turned that 
attitude around--pushing proactive strategies of corporate 
restructuring that welcomed offshore efficiency solutions for high-cost 
Japanese manufacturers. China is now a prime beneficiary of this 
approach, as Japanese multinationals turn aggressive in pursuing 
offshore options. Japan's foreign direct investment into China hit 
U.S.$6.5 billion in 2005--greater than China-bound flows from all of 
Europe ($5.6 billion) and more than double those of the United States 
($3.1 billion).
---------------------------------------------------------------------------
    \7\ See Haruhiko Kuroda and Masahiro Kawai, ``Time for a Switch to 
Global Reflation,'' a December 12, 2002 op-ed piece in the Financial 
Times. Note: Kuroda was then Japan's Vice Minister for International 
Affairs at the Ministry of Finance and Kawai was his deputy.
---------------------------------------------------------------------------
    The significance of further momentum to economic cooperation 
between Japan and China cannot be minimized. These two economies--one a 
surplus-labor behemoth and the other a labor-short island--are a 
formidable combination. As China now faces the imperatives of migrating 
from a long-standing fixation on the quantity of growth to a newfound 
focus on the quality of growth, what better partner could it ask for 
than Japan to provide technological assistance for energy conservation 
and pollution abatement? And as a rapidly aging, high-cost Japanese 
economy faces increasingly intensive competitive pressures, who better 
could it turn to than China to offer offshore options with both the 
scale and the quality control its production model needs? China needs 
Japan just as much as Japan needs China--precisely the complementarity 
that Wen Jiabao alluded to in his recent address to the Japanese Diet. 
Yet that same complementarity raises important questions for the rest 
of the world--especially for a U.S. economy that may find itself 
increasingly marginalized by a new strain of pan-Asian integration.
Globalization at Risk
    By embracing protectionist remedies and going after China, Congress 
is reacting to symptoms of much deeper problems--especially skillset 
disadvantages of American workers and an extraordinary shortfall of 
domestic saving. Absolutely nothing is gained on either front by 
blaming China for problems such as these that originate at home. To the 
contrary, much could be lost--in the U.S., the global economy, and 
world financial markets--if Congress makes a major blunder on U.S. 
trade policy. Wrong-footed macro analysis is a clear risk in this 
regard--especially holding a bilateral deficit with China accountable 
for what is truly a multilateral manifestation of America's chronic 
saving problem. At the same time, unwinding the disinflationary 
benefits of globalization would borrow a painfully familiar page from 
the stagflationary script of the 1970s. And the consequences of pushing 
Asia away from the U.S. sphere of influence cannot be minimized. All in 
all, the outcome of a protectionist tilt to U.S.-China trade policy 
could be treacherous--both for financial markets and the U.S. economy.
    None of this is to say that there shouldn't be active and direct 
negotiations with the Chinese on more legitimate conflicts over trade 
policy--especially those issues that bear directly on broad 
constituencies of the U.S. workforce. The area of intellectual property 
rights is especially important in that regard, particularly since it 
directly affects the core competencies of America's vast legions of 
knowledge workers--the professionals, managers, executives, sales 
workers, and office support staffs who, by our calculations, 
collectively account for 61% of total U.S. employment. The U.S. Trade 
Representative's recent decision to initiate IPR complaints against 
China with the WTO is a far more appropriate course of action than 
misdirected congressional scapegoating over the currency and bilateral 
trade deficit issues. Unfortunately, you in Washington are having a 
hard time making this critical distinction.
    Globalization isn't easy. It puts pressure on developing and 
developed countries, alike. As the world's leading economic power, it 
falls to the United States to assume the special role as a steward of 
globalization. China bashing is tantamount to an abdication of that 
responsibility. It is not in America's best interest, and it could 
quickly take the world down a very slippery slope. Globalization, 
itself, may have an exceedingly difficult time recovering. You in the 
Congress must heed these risks--before it is too late.

                                 

    Chairman LEVIN. Thank you.
    Dr. Bergsten.

STATEMENT OF C. FRED BERGSTEN, DIRECTOR, PETERSON INSTITUTE FOR 
                    INTERNATIONAL ECONOMICS

    Mr. BERGSTEN. Mr. Chairman, my congratulations on the 
hearings. I am delighted to be invited.
    I am clearly in the camp that agrees there is a very large 
problem here, and it requires new policy steps. Steve Roach has 
quite rightly pointed to some risks of action. The risks of 
inaction are much greater. If we fail to address the panoply of 
issues surrounding our international imbalances, we are 
imperiling our own economy, and our ability to maintain an open 
trade policy, and therefore we need to act decisively, 
forcefully and much more aggressively than we have to date.
    The U.S. global current account deficit is twice as great 
as it ever was before and continues to rise. To finance its 
deficit and its own capital outflows, the U.S. economy needs $8 
billion of foreign capital every working day, or else exchange 
rates will crash, interest rates will soar, inflation will rise 
and the economy would be at real peril. We are running an 
economy based on credit card finance, which as long as it 
continues is great, but it is inherently unsustainable over any 
prolonged period of time, and puts the nation at huge jeopardy 
and therefore requires action.
    Steve Roach is right. The central part of the corrective 
action rests on us. We are the deficit country. We need to take 
action. We need to raise our National saving rate and the best 
way to do that is for Congress to move the budget back into the 
modest surpluses that we were running six or seven years ago. 
That would increase the national saving rate three or 4 
percentage points, reduce our need to attract so much foreign 
capital, reduce our excess spending over domestic output and 
begin to correct the problem. So, we need to act first.
    However, you can correct deficits only if you can correct 
the counterpart surpluses. It takes two to tango. You can't get 
a deficit down unless the counterpart surpluses come down. The 
problem we're facing today is that one important group of 
surplus actors, namely the Asian countries led by China and 
Japan but going beyond them, have blocked any correction from 
the surplus country side.
    It is sometimes ignored that there has been a lot of 
correction. The dollar exchange rate has come down by an 
average of 15 to 20 percent, depending on which index you use, 
over the last 5 years. This decline has been wholly against the 
currencies of Europe, Canada, and Australia. Their currencies 
have gone up 30 to 40 percent and they've been hurting to some 
extent as a result.
    But the Asians have blocked any meaningful participation in 
the adjustment process.
    China and Japan are the two big players but they're 
different. China has overtly blocked any rise in the value of 
its currency, which needs to go up 30 or 40 percent like the 
euro and other European currencies. The Chinese have blocked it 
by overt, blatant, massive prolonged intervention in the 
currency market. There is no way one can deny that. Indeed, in 
the first quarter of this year, the amount of their currency 
intervention doubled to almost $50 billion per month. It is 
clearly manipulation by any standard and needs to be called 
that and acted upon.
    Japan is different. It has not intervened for over 3 years. 
It is not manipulating, as Secretary Evans said. However, by 
any standard, its currency is also substantially undervalued 
because of low interest rates, huge outflow of capital, the so-
called carry trade. The fact that it's not manipulating does 
not take it off the hook for needing to participate in the 
adjustment process and accept a substantial rise in the value 
of its currency.
    If China and Japan permit their currencies to go up, it 
will pull the rest of the Asian currencies up. The effect would 
be a substantial adjustment of our own imbalance.
    Our estimate is that if all Asian currencies go up even 20 
percent, it takes $150 billion to $200 billion per year off the 
U.S. current account deficit. That, I would submit, is getting 
us at least half of the correction we need. We should push for 
that as quickly as we can.
    I offer a five-point proposal for changing policy. First, 
Treasury needs to tell the Chinese that if they don't stop 
intervening so massively, if they don't let the currency go up 
at least 10 percent a year, then they are going to be labeled 
as a manipulator in the next Treasury report. I would say it to 
them privately. I would give them warning. I would give them an 
opportunity to act on their own so as not to appear to be under 
foreign pressure. If they don't do it, we should then clearly 
label them.
    Second, the administration, in addition to telling the 
Chinese, should tell the G7 and the IMF that it is about to 
label China as a manipulator absent action. That's an effort to 
get support from the rest of the world to multilateralize the 
process, which is of course the preferred way to go about it.
    Third, the administration should add a trade dimension to 
the strategy by again telling the Chinese and then acting in 
the absence of action on their part that we will bring a WTO 
case against the Chinese currency practices as either an export 
subsidy or a frustration of trade liberalization outcome under 
Article XV. These are plausible, legitimate cases to bring 
through the multilateral process.
    Fourth, if the preferred multilateral approach fails, we 
have to go at it bilaterally. The problem is that serious. With 
Japan, it's actually easy; we can buy yen in the currency 
markets. Indeed, if we told the Japanese we were going to do 
it, I suspect they would intervene directly, and get an 
appreciation of the yen. Most people in Japan would accept at 
least 10 percent or more. That's fairly easy.
    China is harder, because it's currency is inconvertible. We 
would have to find market proxies. But again, Treasury 
intervention directly in the currency markets could work.
    Finally, the administration should tell the Chinese that if 
all of the above fails, it will simply have to stop protecting 
them against the Congress and work with the Congress to put 
into place responsible new legislation that would impose 
effective sanctions against continued currency violation in a 
way that is compatible with the global multilateral trading 
system.
    A couple of the bills that are now in the hopper try to do 
that. They can be improved and fine tuned. But I think that 
objective can be achieved. If at the end of the road that is 
the only course available, I think you should take it. The risk 
of inaction is much greater than the risk of taking decisive 
progressive action.
    Thank you.
    [The prepared statement of Mr. Bergsten follows:]

      Prepared Statement of C. Fred Bergsten\1\, Ph.D., Director,
             Peterson Institute for International Economics
    The U.S. global merchandise trade and current account deficits rose 
to $857 billion in 2006. This amounted to 6.5 per cent of our GDP, 
twice the previous record of the middle 1980s.\2\ The deficits have 
risen by an annual average of $100 billion over the past four years.
---------------------------------------------------------------------------
    \1\ Dr. Bergsten has been Director of the Peterson Institute for 
International Economics since its creation in 1981. He was previously 
Assistant Secretary of the Treasury for International Affairs (1977-81) 
and Assistant for International Economic Affairs to the National 
Security Council (1969-71). The latest of his 37 books is as co-author 
of China: The Balance Sheet: What the World Needs to Know Now About the 
Emerging Superpower, prepared jointly by the Center for Strategic and 
International Studies and the Institute for International Economics and 
published by Public Affairs Press in March 2006.
    \2\ I note with immodesty but pride that, based on the work of my 
colleague Catherine L. Mann, I predicted precisely such an outcome for 
2006 in the third paragraph of my testimony before the Senate Committee 
on Banking, Housing and Urban Affairs on May 1, 2002.
---------------------------------------------------------------------------
    These global imbalances are unsustainable for both international 
financial and U.S. domestic political reasons. On the international 
side, the United States must now attract about $8 billion of capital 
from the rest of the world every working day to finance our current 
account deficit and our own foreign investment outflows. Even a modest 
reduction of this inflow, let alone its cessation or a sell-off from 
the $14 trillion of dollar claims on the United States now held around 
the world, could initiate a precipitous decline in the dollar. 
Especially under the present circumstances of nearly full employment 
and full capacity utilization in the United States, this could in turn 
sharply increase U.S. inflation and interest rates, severely affecting 
the equity and housing markets and potentially triggering a recession. 
The global imbalances probably represent the single largest current 
threat to the continued growth and stability of the U.S. and world 
economies.
    The domestic political unsustainability derives from the historical 
reality that substantial dollar overvaluation, and the large and rising 
trade deficits that it produces, are the most accurate leading 
indicators of resistance to open trade policies in the United States. 
Such overvaluation and deficits alter the domestic politics of U.S. 
trade policy, adding to the number of industries seeking relief from 
imports and dampening the ability of exporters to mount effective 
countervailing pressures. Acute pressures of this type, threatening the 
basic thrust of U.S. trade policy and thus the openness of the global 
trading system, prompted drastic policy reversals by the Reagan 
Administration, to drive the dollar down by more than 30 percent via 
the Plaza Agreement in the middle 1980s, and by the Nixon 
Administration, to impose an import surcharge and take the dollar off 
gold to achieve a cumulative devaluation of more than 20 percent in the 
early 1970s.
    The escalation of trade pressures against China at present, despite 
the strength of the U.S. economy and the low level of unemployment, is 
the latest evidence of this relationship between currency values and 
trade policies. With deep-seated anxieties over globalization already 
prevalent in our body politic, and the failure of the Doha Round to 
maintain the momentum of trade liberalization around the world, 
continued failure to correct the currency misalignments could have a 
devastating impact on the global trading system.
The Role of China\3\
    China's global current account surplus soared to about $250 billion 
in 2006, about 9 per cent of its GDP. Its trade surplus has doubled 
again in the first quarter of 2007. China has become by far the largest 
surplus country in the world, recently passing Japan and far ahead of 
all others. Its foreign exchange reserves have also passed Japan's to 
become the largest in the world and now substantially exceed $1 
trillion, an enormous waste of resources for a country where most of 
the huge population remains very poor.
---------------------------------------------------------------------------
    \3\ A superb and comprehensive analysis of this issue can be found 
in Morris Goldstein, ``A (Lack of) Progress Report on China's Exchange 
Rate Policies,'' in The China Balance Sheet in 2007 and Beyond, 
Washington: Center for Strategic and International Studies and Peterson 
Institute for International Economics, May 2007.
---------------------------------------------------------------------------
    A substantial increase in the value of the Chinese currency is an 
essential component of reducing the imbalances. A recent joint study of 
the imbalances by leading think tanks in Asia and Europe, along with 
our Peterson Institute for International Economics, concludes that the 
RMB needs to appreciate by at least 35 per cent against the dollar.\4\
---------------------------------------------------------------------------
    \4\ Alan Ahearne, William R. Cline, Kyung Tae Lee, Yung Chul Park, 
Jean Pisani-Ferry and John Williamson, Global Imbalances: Time for 
Action, Washington: Peterson Institute for International Economics, 
March 2007.
---------------------------------------------------------------------------
    However, China has blocked any significant rise in the RMB by 
intervening massively in the foreign exchange markets, buying $15-20 
billion per month for several years to hold its currency down. The 
level of Chinese intervention has almost doubled in the first quarter 
of this year, to about $45 billion per month. China has recently let 
the RMB rise marginally against the dollar but, since it continues to 
link its exchange rate to the dollar and the dollar has fallen against 
virtually all other currencies, the average exchange rate of the RMB is 
weaker now than in 2001 when China's current account surplus accounted 
for a modest 1.3 per cent of its GDP. The world's most competitive 
economy has become even more competitive through a deliberate policy of 
currency undervaluation.
    About one quarter of all of China's economic growth in the past two 
years has stemmed from the continued sharp increase in its trade 
surplus. China is thus overtly exporting unemployment to other 
countries and apparently sees its currency undervaluation as an off-
budget export and job subsidy that, at least to date, has avoided 
effective international sanction.
    By keeping its own currency undervalued, China has also deterred a 
number of other Asian countries from letting their currencies rise very 
much against the dollar for fear of losing competitive position against 
China. Hence China's currency policy has taken much of Asia out of the 
international adjustment process. This is critical because Asia 
accounts for about half the global surpluses that are the counterparts 
of the U.S. current account deficit, has accumulated the great bulk of 
the increase in global reserves in recent years, and is essential to 
the needed correction of the exchange rate of the dollar because it 
makes up about 40 per cent of the dollar's trade-weighted index. The 
most obvious Asian candidates for sizable currency appreciation in 
addition to China are Japan, Taiwan, Singapore and Malaysia.
The Role of Japan
    Japan is the world's second largest surplus country, with a current 
account imbalance of $167 billion in 2006, and holder of foreign 
exchange reserves. Japan must play an important role in correction of 
the global imbalances.
    There are two important differences between Japan and China on 
these issues. On the one hand, Japan is by far the world's largest 
creditor country as a result of the cumulation of huge surpluses that 
it has run for most of the past thirty years. Its surpluses have been 
much more persistent than those of China, which have mushroomed to 
substantial magnitude only over the past decade.
    On the other hand, Japan has not intervened in the currency markets 
for over three years. It too intervened heavily back in 2003-early 
2004, even more than China during some periods, to keep the yen from 
rising. However, it has not done so since that time. The yen remains 
weak primarily because of Japan's very low interest rates, which have 
approximated zero for over five years, which induces investors from 
around the world to borrow yen and invest them in higher-yielding 
assets in other countries (the ``carry trade''). Hence Japan cannot be 
accused of ``manipulation'' at this time.
    The same new international study referenced above, however, 
concluded that the yen was also substantially undervalued. The group's 
judgment was that it needed to rise by about 25 per cent against the 
dollar, to around 90:1 from its current level of close to 120:1, as 
part of a new global equilibrium.\5\
---------------------------------------------------------------------------
    \5\ It should be noted that the suggested increases in the value of 
the RMB and yen against the dollar would represent much smaller rises 
in the trade-weighted average exchange rates of those currencies, which 
should make them much more acceptable to the countries involved. If all 
major currencies rise against the dollar, as they must to achieve a 
substantial reduction in the U.S. external deficit and as the rest of 
the truly floating currencies (euro, pound, Swiss franc, Canadian 
dollar, etc.) have already done, then the average rise for each of them 
is of course much less. The real increase in the RMB and yen, for 
example, would be only about half their rise against the dollar.
---------------------------------------------------------------------------
The Policy Implications
    It is essential to reduce the U.S. external deficit, and the 
counterpart surpluses especially in China and Japan, by substantial 
amounts in as orderly a manner as possible. The goal of U.S. adjustment 
should be to cut our global current account deficit to 3-3\1/2\ percent 
of GDP, about half its present level, at which point the ratio of U.S. 
foreign debt to GDP would eventually stabilize and should be 
sustainable. China's goal, already accepted in principle by its 
political leadership but without much policy follow-up, should be to 
totally eliminate its global current account surplus and stop the 
buildup of foreign exchange reserves. Japan should pare its surplus to 
perhaps 1 per cent of its GDP.
    The United States should take the lead in addressing the imbalances 
by developing a credible program to convert its present, and especially 
foreseeable, budget deficits into modest surpluses like those that were 
achieved in 1998-2001. Such a shift, of perhaps 3-4 percent of our GDP, 
would reduce the excess of our domestic spending relative to domestic 
output and thus cut demand for imports. It would pare the shortfall of 
our domestic savings relative to domestic investment and thus reduce 
our need for foreign capital inflows, which push the dollar to levels 
that are overvalued in trade terms. Fiscal tightening is the only 
available policy instrument that will produce such adjustments. Hence I 
strongly recommend that the new Congress take effective and immediate 
steps in that direction.\6\
---------------------------------------------------------------------------
    \6\ See my testimonies on that topic to the House Budget Committee 
on January 23 and the Senate Budget Committee on February 1. I suggest 
there that the external imbalances are in fact the most likely source 
of a crisis that could force the United States at some point into 
precipitous and thus unpalatable budget adjustments if preemptive 
action is not taken.
---------------------------------------------------------------------------
    China needs to adopt policies to promote an opposite adjustment, 
reducing its uniquely high national saving rate by increasing domestic 
consumption. China can do so most easily through higher government 
spending on health care, pensions and education. Such new government 
programs are needed for purely internal reasons anyway because of the 
political unrest in China that has resulted from the demise of state-
owned enterprises that provided these benefits in previous times. They 
would reduce the precautionary motive for household saving in China and 
boost private as well as government demand, contributing importantly to 
the needed international adjustment. A number of important Chinese 
domestic goals, such as increasing employment and reducing energy 
consumption, also call for such shifts in the composition of China's 
growth strategy.\7\
---------------------------------------------------------------------------
    \7\ See Chapter 2 of China: The Balance Sheet and Nicholas Lardy, 
``China: Toward a Consumption-Driven Growth Path,'' Washington: 
Institute for International Economics, October 2006.
---------------------------------------------------------------------------
    Large changes in exchange rates will also have to be a major 
component of this adjustment process. The dollar will need to fall, 
hopefully in a gradual and orderly manner over the next two or three 
years, by a trade-weighted average of about 20 per cent. A change in 
China's currency policy, in both the short and longer runs, must be a 
major component of this adjustment and is in fact by far the single 
most important issue in U.S.-China economic relations. The short-term 
success of the new Strategic Economic Dialogue must be judged largely 
by whether it achieves effective resolution of this problem.\8\
---------------------------------------------------------------------------
    \8\ The Strategic Economic Dialogue also has the long-term 
potential to foster a more constructive relationship between the two 
countries that will inevitably lead the world economy over the coming 
years and perhaps decades. It thus begins to implement the ``G-2'' 
concept proposed in my ``A New Foreign Economic Policy for the United 
States'' in C. Fred Bergsten and the Institute for International 
Economics, The United States and the World Economy: Foreign Economic 
Policy for the Next Decade, Washington: Institute for International 
Economics, 2005, pp. 53-4.
---------------------------------------------------------------------------
    An increase of at least 15 percent in the average value of the RMB 
against all other currencies, which would imply an appreciation of 
about 35 percent against the dollar, and sizable appreciations against 
the dollar of other key Asian currencies, will be required to achieve 
an orderly correction of the global imbalances.\9\ Such a change could 
be phased in over several years to ease the transitional impact on 
China. It could be accomplished either by a series of step-level 
revaluations, like the 2.1 percent change of July 2005 against the 
dollar but of much larger magnitudes and with a substantial initial 
``down payment'' of at least 10-15 percent, or by a much more rapid 
upward managed float of the RMB than is underway at present. Such an 
increase in the RMB and other Asian currencies against the dollar would 
reduce the U.S. global current account deficit by about $150 billion 
per year, more than one third of the total adjustment that is 
required.\10\
---------------------------------------------------------------------------
    \9\ See William R. Cline, The United States as a Debtor Nation, 
Washington: Institute for International Economics, 2005, especially 
Table 6.2 on page 242.
    \10\ I have studiously refrained from mentioning the very large 
Chinese bilateral trade surplus with the United States, which should 
not be a primary focus of policy because of the multilateral nature of 
international trade and payments. At present, however, the bilateral 
imbalance is a fairly accurate reflection of the global imbalances and 
thus is more relevant than usual.
---------------------------------------------------------------------------
    Over the longer run, China should adopt a more flexible exchange 
rate that will respond primarily to market forces. These forces would 
clearly have pushed the RMB to much higher levels by now in the absence 
of China's official intervention. There is some justification, however, 
for China's fears that an abrupt move to a freely floating exchange 
rate now, particularly if accompanied by abolition of its controls on 
financial outflows, could trigger capital flight and jeopardize its 
economy in view of the fragility of its banking system. Full-scale 
reform of China's exchange rate system will have to await completion of 
the reform of its banking system, which will take at least several more 
years. Hence the adoption of a flexible exchange rate regime in China, 
which is essential to avoid re-creation of the present imbalances in 
the future, can be only a second stage in the resolution of the 
currency problem and the immediate need is for a substantial increase 
in the price of the RMB (especially against the dollar).\11\
---------------------------------------------------------------------------
    \11\ This two-step approach was initially proposed by my colleagues 
Morris Goldstein and Nicholas Lardy, Two-Stage Currency Reform for 
China, Financial Times, September 12, 2003.
---------------------------------------------------------------------------
A New U.S. Currency Strategy
    It is obvious that China is extremely reluctant to make the needed 
changes in its currency policy. It is equally obvious that U.S. efforts 
on the issue over the past four years, whether the earlier ``quiet 
diplomacy'' of the Administration or the threats of Congressional 
action or the new Strategic Economic Dialogue, have borne little fruit 
to date. A new U.S. policy is clearly needed.
    One cardinal requirement is for the Administration and Congress to 
adopt a unified, or at least consistent, position. To date, there has 
been something of ``good cop (Administration)--``bad cop'' (Congress, 
e.g., the threat of the Schumer-Graham import surcharge legislation) 
bifurcation between the two branches. China has exploited these 
differences, essentially counting on the Administration to protect it 
from the Congress--a bet that, to date, has paid off.
    I would therefore suggest a new five-part strategy for U.S. policy 
on the currency issue.
    First, it is clear that China has aggressively blocked appreciation 
of the RMB through its massive intervention in the currency markets and 
that the Treasury Department has severely jeopardized its credibility 
on the issue by failing to carry out the requirements of current law to 
label China a ``currency manipulator.'' The Treasury report of May 2005 
indicated that ``. . . if current trends continue without substantial 
alteration (italics added), China's policies will likely meet the 
statute's technical requirements for designation.'' The report of May 
2006 sharply criticized China for its currency policies, clearly 
suggesting that there has been no ``substantial alteration'' in those 
practices, but inexplicably failed to draw the obvious conclusion of 
its own analysis.\12\ The latest report, submitted in December 2006, 
was much milder. Treasury has thus been reducing its criticism of 
China's currency practices even as the RMB has become increasingly 
undervalued and China's external surpluses have soared.
---------------------------------------------------------------------------
    \12\ Treasury and the IMF have justified their inaction on the 
grounds that there is insufficient evidence that China is manipulating 
its exchange rate with the ``intent'' of frustrating effective current 
account adjustment. This is of course ludicrous because it is highly 
unlikely that China (or any country) would admit such a motive and it 
is impossible to discern any other purpose for the policy.
---------------------------------------------------------------------------
    The Treasury policy needs to be changed sharply and quickly. The 
Administration should notify the Chinese that, if China fails to make a 
significant ``down payment'' appreciation of at least 10 percent prior 
to the release of Treasury's next semi-annual report, it will be 
labeled a ``manipulator. '' This would trigger an explicit U.S. 
negotiation with China on the currency issue.
    Second, the Administration should notify its G-7 partners and the 
IMF that it plans to make such a designation, in the absence of major 
preventive action by China, with the goal of galvanizing a multilateral 
effort on the issue and reducing its confrontational bilateral 
character. The objective of that international effort, hopefully 
spearheaded by the IMF, could be a ``Plaza II'' or ``Asian Plaza'' 
agreement that would work out the needed appreciation of the major 
Asian currencies through which the impact on the individual countries 
involved (including China) would be tempered because they would not be 
moving very much vis-a-vis each other.\13\ The Europeans have an 
especially large incentive to join the United States in such an 
initiative because their own currencies will rise much more sharply 
when the dollar experiences its next large decline if China and the 
other Asians continue to block their own adjustment (and perhaps to 
head off the incipient United States-China ``G-2'' implied by the 
Strategic Economic Dialogue).
---------------------------------------------------------------------------
    \13\ See William R. Cline's ``The Case for a New Plaza Agreement,'' 
Washington: Institute for International Economics, December 2005.
---------------------------------------------------------------------------
    Third, the Administration (with as many other countries as it can 
mobilize) should also take a new multilateral initiative on the trade 
side by filing a WTO case against China's currency intervention as a 
``frustration of trade commitments'' or as an export subsidy. As 
Chairman Ben Bernanke indicated in his highly publicized speech in 
Beijing last December, in connection with the first Strategic Economic 
Dialogue, China's exchange rate intervention clearly represents an 
effective subsidy (to exports, as well as an import barrier) in 
economic terms. It should be addressed as such.\14\
---------------------------------------------------------------------------
    \14\ These ideas are analyzed in Gary Clyde Hufbauer, Yee Wong and 
Ketki Sheth, U.S.-China Trade Disputes: Rising Tide, Rising Stakes, 
Washington: Institute for International Economics, August 2006, pp. 16-
26.
---------------------------------------------------------------------------
    Fourth, if the multilateral efforts fail, the United States will 
have to address the China currency issue unilaterally. Treasury can 
pursue the most effective unilateral approach by entering the currency 
markets itself. It is impossible to buy RMB directly, because of its 
continued inconvertibility, so Treasury would have to select the best 
available proxies in the financial markets. The message of U.S. policy 
intent would be clear, however, and at a minimum there would be a 
further sharp increase in speculative inflows into the RMB that would 
make it even more difficult for the Chinese authorities to resist their 
inflationary consequences and thus the resultant pressures to let the 
exchange rate appreciate.
    Direct intervention could be much more effective in promoting the 
needed appreciation of the yen, since that currency is traded freely in 
global markets. Japan could of course undertake such intervention 
itself by selling (probably modest amounts of) dollars from its huge 
foreign exchange reserves.\15\
---------------------------------------------------------------------------
    \15\ Another option is for China to pursue the desired 
diversification of its dollar reserves by selling some of them for yen. 
See my ``The Yen Beckons China's Dollars,'' Financial Times, March 12, 
2007.
---------------------------------------------------------------------------
    The United States has conducted such currency intervention on many 
occasions in the past, most dramatically via the Plaza Agreement in 
1985 and most recently when it bought yen to counter the excessive 
weakness of that currency in 1998 (when it approached 150:1)--a similar 
step to what could be undertaken now, with the yen as weak (adjusted 
for inflation differentials since 1998) as it was then. All those 
actions have been taken with the agreement of the counterpart currency 
country, however, and usually in cooperation with that country. This 
would be the essence of the proposed ``Plaza II'' or ``Asian Plaza'' 
agreement, as suggested above, and the multilateral approach would be 
preferable now as always and should be pursued vigorously by the 
Administration. Failing such agreement, however, the unilateral option 
is available and might have to be adopted.
    Fifth, the Administration should quietly notify the Chinese that it 
will be unable to continue opposing responsible Congressional 
initiatives to address the issue if they fail to act responsibly on 
their own. Congress should then proceed, hopefully in cooperation with 
the Administration, to craft legislation that would effectively 
sanction the Chinese (and perhaps some other Asians) for their failure 
to observe their international currency obligations--making sure that 
any proposed trade policy remedies are compatible with the multilateral 
rules of the World Trade Organization.
    Such unilateral steps by the United States, although decidedly 
inferior to the multilateral alternatives proposed above, could hardly 
be labeled as ``protectionist'' since they are designed to counter a 
massive distortion in the market (China's intervention) and indeed 
promote a market-oriented outcome. Nor could they be viewed as 
excessively intrusive in China's internal affairs, since they would be 
no more aggressive than current U.S. efforts on intellectual property 
rights and other trade policy issues (including the filing of subsidy 
and other cases on such issues with the WTO). Such steps should 
therefore be considered seriously if China continues to refuse to 
contribute constructively to the needed global adjustments.

                                 

    Chairman LEVIN. Dr. Mohatarem.

STATEMENT OF MUSTAFA MOHATAREM, CHIEF ECONOMIST, GENERAL MOTORS 
                    CORP., DETROIT, MICHIGAN

    Mr. MOHATAREM. Thank you, Chairman, and Members of these 
Subcommittees for holding these hearings to bring much needed 
attention to an issue that is causing serious and lasting 
damage to American business and workers.
    Today, the yen is trading around 120 yen to the dollar, and 
experts around the world believe that a more appropriate value 
would be in the 90 to 95 range.
    Over the past several years, the government of Japan has 
engaged in at least four strategies to keep the yen weak and 
thus to provide an enormous subsidy to Japan's vehicle and auto 
parts exporters.
    First, in the period immediately following 9/11, Japan 
engaged in massive intervention in the currency markets, to the 
tune of almost $500 billion over a three-year period. This 
intervention was followed by jawboning a constant warning to 
currency traders that the yen would not be allowed to 
appreciate. To back the jawboning up, it was prominently 
announced that the Japanese legislature had approved close to a 
trillion dollars for additional intervention, should that prove 
necessary.
    Now, when a country has spent $500 billion and announces 
that it has another trillion dollars to invest, that sends a 
message to markets that the yen will not be allowed to 
appreciate. That creates a one-way street. Given the difference 
in interest rates between Japan and the rest of the world, 
where Japanese interest rates at that point were close to zero, 
that Japanese investors were free to invest abroad, the so-
called currency trade, and I should say Japanese and foreign 
investors. Essentially, the government of Japan has created a 
one-way market for the yen. It can only go down not up.
    These policies provide substantial subsidies for each and 
every one of the 2.2 million vehicles that the Japanese export 
to the U.S. We estimate these subsidies range from $2,000 on a 
subcompact car to $14,000 on a full-size utility. Translated, 
when you look at the millions of units the Japanese export to 
the U.S., that's about a $13-and-a-half billion subsidy for 
Japanese auto manufacturers.
    This subsidy has been a major factor in the success of 
Japanese auto companies in the U.S. and it has contributed 
significantly to the loss of hundreds of thousands of U.S. jobs 
in the auto and supplier industries. It is a major source of 
the nation's nearly $90 billion deficit with Japan and it has 
contributed to severe economic decline in my home state of 
Michigan and in many other communities in America.
    Increasing vehicle and component imports from Japan have 
forced U.S. auto companies and parts to suppliers to shut our 
plants in the U.S. and to reduce employment by hundreds of 
thousands. Ironically, and this is during a period of fairly 
strong vehicle demand in the U.S. Ironically, when demand for 
vehicles in Japan is declining, Japanese manufacturers are 
adding production capacity, they are reactivating assembly 
lines, adding workers in Japan, and postponing planned factory 
closures as they move to export an ever greater number of 
vehicles.
    It is time for our government to demand that Japan allow 
the yen to appreciate. Every major commentator, including our 
own Federal Reserve bank, the European central bank, and even 
the U.S. Treasury now acknowledge that Bank of Japan has 
intervened in foreign currency markets and that this 
intervention has harmed American manufacturers and American 
workers.
    Congress has the right to insist that the U.S. Treasury 
Department stop avoiding its responsibility to report when 
countries are manipulating their currencies to gain a trade 
advantage against U.S. producers and U.S. workers. It has the 
right to insist that the U.S. join European countries who are 
deeply concerned about an undervalued yen and raise this issue 
at the next G7 meeting.
    Before concluding my remarks, let me briefly mention 
China's currency policies. China's economic growth over the 
last 30 years has been not short of miraculous. Many American 
companies, including General Motors, have benefited from this 
growth, as have U.S. employees who build vehicles, components 
and machinery for export to China. Indeed, China is now our 
second largest vehicle market, with GM's sales in China 
approaching the one million mark.
    The economic stability provided by the fixed exchange rate 
between the RMB and the dollar was a key contributor to this 
growth. But you can have too much of a good thing.
    Rapid productivity growth in China has resulted in an 
undervaluation of the RMB relative to the dollar. The People's 
Bank of China is now required to purchase increasing amounts of 
dollars to keep the RMB from appreciating more rapidly. These 
purchases are now only costly to China, they risk stoking 
inflation and substantially distorting investment decisions in 
China.
    China recognizes these changed circumstances and is 
allowing the RMB to appreciate at a much faster rate than the 
yen, I might add. While the RMB clearly needs to appreciate 
further, it is appropriate to ensure that too rapid 
appreciation does not create economic instability. That would 
not be in China's interests or in the interests of the United 
States. Thank you for your time and attention. We appreciate 
your consideration.
    [The prepared statement of Mr. Mohatarem follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Chairman LEVIN. Thank you very much.
    Thea Lee, welcome.

       STATEMENT OF THEA M. LEE, POLICY DIRECTOR, AFL-CIO

    Ms. LEE. Thank you very much, Mr. Chairman, Members of all 
three Subcommittees, for the opportunity to testify today on 
behalf of the 10 million working men and women of the AFL-CIO. 
We would like to congratulate and thank all three Subcommittees 
for your foresight in bringing together the three important 
Subcommittees with jurisdiction over this issue and for 
bringing together such a diverse group of perspectives on this 
important issue today.
    As everybody knows, the labor movement has been very 
involved in the trade debate and we fight hard for rules that 
we think are going to be fair to working men and women both 
here in the United States and around the world in the context 
of bilateral trade agreements and trade negotiations. But it 
has become increasingly apparent to us over the years that if 
we put all of our focus on tariff reduction and subsidy 
discipline but we don't pay any attention to currency movement 
and manipulation, that we are missing an enormous piece of the 
picture, that this has a huge economic impact on our members 
and on the businesses that we work with, and that we can do a 
lot of work in the trade negotiations to agree on tariff 
reductions and rules on subsidies, but we have an enormous 
gaping hole that we have not addressed, and that is the 
currency manipulation.
    It is our view that both our own trade rules and the 
international institutions have not caught up to the current 
reality, the post-Bretton Woods world, where we have a mixture 
of fixed and floating exchange rates and various levels of 
intervention by different governments.
    One of the key points I would like to make today is this is 
not a self-correcting problem. This is not something that the 
market can fix, because the market is being thwarted by 
government actions. The governments that are taking those 
actions see it as in their interest to intervene in the markets 
in the way that they are doing so, and that is their privilege, 
of course. But it is also true that it is our own government's 
responsibility to take action if those other government actions 
are hurting our workers and our businesses.
    I think one of the things that we have seen from our own 
government is that there has been an attempt to convince the 
Chinese government or the Japanese government that it is not in 
their interests to manipulate their currency.
    One of the things about currency manipulation is that it is 
a two-edged sword. I think we all recognize that, and that is 
one of the things that you hear from the different members of 
the panel here, that there is a different view for workers and 
for multinational businesses, there is a different view for 
consumers and workers, there is a different view for companies 
that import and companies that export, companies that 
outsource.
    But that at the end of the day, if we have a market 
disequilibrium in the exchange rates, the market is sending the 
wrong signals. The goods that are produced in countries that 
keep their currency artificially low are too cheap and our 
goods are too expensive in global markets, and so we put 
ourselves at an enormous competitive disadvantage before we 
even get out of the starting gate.
    That is where we would like to ask our own government to 
act much more effectively than they have done to date. It is 
where I think there is an important role for the U.S. Congress 
to act, if the administration simply refuses even to recognize 
that the problem exists. Certainly, as many people have 
mentioned today, the Treasury Department cannot even take that 
initial first step of defining the governments of China and 
Japan as currency manipulators.
    I wanted to make clear that this is not an academic 
exercise for the people that we represent. The difference 
between currency manipulation and a market equilibrium exchange 
rate is the difference between having a job and watching the 
factory close. It's the difference between having health 
insurance for your kids or not. For our country, it may be the 
difference between having a healthy middle class or sitting 
back and watching as the economic divisions tear us apart.
    Currency manipulation is, of course, not the only issue in 
the trading realm. It is one of many issues that we face. 
Certainly with respect to China, one of many unfair trading 
practices that American workers and businesses face. We have 
violations of workers rights, asymmetrical tax policies, 
illegal subsidies, lax environmental and resource regulation 
and, of course, in our own country, a dysfunctional health care 
and pension system that disadvantages our own manufacturers.
    But we need to take action on all those fronts. But I think 
if we leave the currency piece out of it, we are taking an 
enormous chunk of the economic disadvantage that American 
producers face and failing to address it.
    So, in terms of the action plan, let me just skip to the 
chase and say that the time for more dialog and bilateral 
consultation is over. That hasn't worked. We haven't succeeded 
in convincing those other governments to change their actions. 
So, we need to start by using the annual Treasury Department 
report to be honest and to brand countries as manipulators when 
they have been.
    Second, to indicate--for the administration to indicate its 
willingness to use WTO dispute resolution measures to address 
currency manipulation as an illegal subsidy. We would like to 
support and join our other friends and colleagues on the China 
Currency Coalition in supporting H.R. 782, the Fair Currency 
Act of 2007, which would clarify the definition of currency 
manipulation, identify currency manipulation as an illegal 
subsidy and ensure that countervailing duty laws can be applied 
to nonmarket economies. This would apply not just to China but 
to any country that is manipulating its currency. We think that 
would be a crucial first step in addressing this very important 
problem that's having such a negative impact on the members and 
on the businesses that we work with.
    Thank you very much for your time. I look forward to your 
questions.
    [The prepared statement of Ms. Lee follows:]

          Prepared Statement of Thea M. Lee, Policy Director,
 American Federation of Labor and Congress of Industrial Organizations
    Chairman Levin, Chairman Gutierrez, Chairman Rush, Members and 
Ranking Members of all three Subcommittees, I am delighted to have the 
opportunity to testify today on behalf of the ten million working men 
and women of the AFL-CIO. My remarks on currency manipulation are also 
offered on behalf of the China Currency Coalition, of which the AFL-CIO 
is a founding member.
    Currency manipulation is an urgent economic issue for American 
workers and businesses. We all live and work and compete in the global 
economy--but in order to succeed in the global economy, we need our own 
government to ensure that the terms of competition are fair. Defining--
and adequately addressing--currency manipulation is an essential 
element of ensuring fair global competition, but the institutions of 
the global economy and our own government have so far failed to rise to 
this challenge.
    The AFL-CIO is working closely with our allies in the domestic 
manufacturing sector, as well as with many American farmers and 
ranchers, to draw attention to the job, wage, and community impacts of 
currency misalignments and to urge effective solutions.
    Unfortunately, it often appears that this Administration does not 
share our sense of urgency. We hope that Congress will step into the 
void left by the Administration's failure to act, and we welcome this 
hearing as a crucial step in that direction.
The Economic Importance of Addressing Currency Manipulation
    The economic impact of currency manipulation is equivalent to a 
country's raising tariffs on imports or subsidizing its exports. 
Currency manipulation shifts the relative prices of imports and exports 
through deliberate government action, creating a competitive advantage 
for the country that keeps its currency undervalued.
    As a nation, we put tremendous energy into negotiating 
international trade rules to expand reciprocal market access at the 
World Trade Organization and through bilateral and regional trade 
agreements. Yet, small tariff changes can--and have been--swamped by 
unanticipated currency movements that effectively nullify negotiated 
changes in tariffs and disciplines on export subsidies.
    In principle, rules are in place at both the World Trade 
Organization (WTO) and the International Monetary Fund (IMF) to prevent 
countries from gaining an unfair competitive advantage through exchange 
rate action. Yet neither the WTO nor the IMF, nor our own government, 
appears willing or able to implement these provisions.
    Our government needs to realign its priorities and reevaluate its 
policy tools to recognize and address this problem.
Defining the Problem
    This Administration has failed even to correctly identify currency 
manipulation as a problem and has failed to hold governments 
accountable for their actions.
    In December, the Treasury Department issued its 2006 Report to 
Congress, in which it found that ``no major trading partner of the 
United States met the technical requirements for designation [as a 
currency manipulator] under the terms of Section 3004 of the [Omnibus 
Trade and Competitiveness] Act [of 1988] during the period under 
consideration.'' The 2007 Report, which was due on April 15th, has not 
yet been submitted to Congress.
    The relevant portion of the 1988 Act states that: ``The Secretary 
of the Treasury shall analyze on an annual basis the exchange rate 
policies of foreign countries, in consultation with the International 
Monetary Fund, and consider whether countries manipulate the rate of 
exchange between their currency and the United States dollar for 
purposes of preventing effective balance of payments adjustments or 
gaining unfair competitive advantage in international trade.''
    The 2006 Treasury report finds that China's current account surplus 
rose to ``around 8 percent of GDP'' in the first half of 2006, up more 
than fivefold from 2001. It also notes that China's foreign exchange 
reserves ``reached $1 trillion in October,'' adding around $200 billion 
in reserves just in the last twelve months.
    The Chinese government has intervened massively in foreign exchange 
markets in order to prevent the RMB from appreciating. According to 
Fred Bergsten's January 31, 2007 testimony to the Senate Banking 
Committee, the Chinese government has bought $15-20 billion worth of 
foreign exchange every month for several years in order to keep the 
value of its currency down.
    The U.S. trade deficit with China hit $232.5 billion in 2006, up 
about 15 percent since last year. This is 28% of our total goods 
deficit, but a startling 43% of our non-petroleum goods deficit. The 
Economic Policy Institute has estimated that the growing bilateral 
deficit with China has displaced 1.8 million jobs since China joined 
the WTO in 2001.\1\ Jobs were displaced in every state and the District 
of Columbia.
---------------------------------------------------------------------------
    \1\ Robert E. Scott, ``Costly Trade with China: Millions of U.S. 
Jobs Displaced with Net Job Loss in Every State,'' Economic Policy 
Institute Briefing Paper #188, May 2, 2007.
---------------------------------------------------------------------------
    Japan has also intervened extensively in currency markets--spending 
more than $400 billion between 2000 and 2004 to push down the value of 
the yen against the dollar. In 2006, Japan ran an $88 billion surplus 
with the United States in 2006--$56 billion of that total accounted for 
by automobiles and parts. The U.S. Automotive Trade Policy Council 
estimates that the yen is undervalued by at least 20 to 25 percent 
against the dollar, giving every imported Japanese car a $4000 cost 
advantage over U.S.-made cars.
    Either there is something wrong with the criteria Treasury is using 
to determine currency manipulation, or there is something wrong with 
the Treasury Department's math.
    In a recent Policy Memorandum, economists Josh Bivens and Rob Scott 
of the Economic Policy Institute laid out three clear criteria for 
determining whether or not a country is manipulating its currency: 
``First, does it have a high and rising bilateral trade surplus with 
the United States? Second, is its global current account surplus (the 
broadest measure of its trade and income flows) high and rising? Third, 
does it possess a high and rising accumulation of international 
reserves?'' \2\ Certainly, both China and Japan meet all these 
criteria.
---------------------------------------------------------------------------
    \2\ L. Josh Bivens and Robert E. Scott, ``China Manipulates Its 
Currency--A Response is Needed.'' Economic Policy Institute Policy 
Memorandum #116, September 25, 2006.
---------------------------------------------------------------------------
    Table 1 below (reprinted from EPI) compares China's current 
position to nine past instances when the Treasury Department found that 
nations were manipulating the value of their currency vis-a-vis the 
dollar for competitive gain. ``On each front,'' write Bivens and Scott, 
``the current position of China well exceeds the previous threshold 
that led to a finding of manipulation.''
    Many respected academic experts have also weighed in on this issue. 
The bipartisan, Congressionally appointed U.S.-China Economic and 
Security Review Commission (USCC), in its 2006 report, found that 
China's currency manipulation ``harms American competitiveness and is 
also a factor encouraging the relocation of U.S. manufacturing overseas 
while discouraging investments in U.S. exporting industries.'' The 
Commission also found that the currency manipulation ``distorts the 
trading relationship between the United States and China. . . . 
American small and medium-size enterprises are particularly 
disadvantaged by having to compete for U.S. market share with Chinese 
exporters who enjoy the subsidy of an artificially undervalued 
renminbi.'' \3\
---------------------------------------------------------------------------
    \3\ U.S.-China Economic and Security Review Commission, ``2006 
Report to Congress,'' November 2006, pp. 6, 53. Report is available at: 
http://www.uscc.gov/annual_report/2006/06_annual_report.php.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Ben Bernanke, Chairman of the Federal Reserve Board, in his 
prepared remarks to the Chinese Academy of Social Sciences, dated 
December 15, 2006, wrote that China's undervalued currency provides an 
``effective subsidy . . . for Chinese firms that focus on exporting 
rather than producing for the domestic market.'' He outlined some of 
the advantages for China of allowing the RMB to appreciate, including 
encouraging a shift toward domestic consumption and social services, as 
well as improving long-term financial stability.
    China's currency manipulation also impacts other trading partners, 
who feel pressured to keep their currencies competitive with the RMB in 
order to avoid a competitive disadvantage in the U.S. market. Bivens 
and Scott write, ``There is a cost to developing nations from the 
Chinese currency peg. By pursuing mercantilist exchange rate policies, 
China has robbed market share from smaller developing countries and 
forced many into managing their own exchange rates with the goal of 
matching China's competitive position. Many of them would prefer a more 
flexible currency regime but cannot allow themselves to get priced out 
of competitiveness in the U.S. market through China's manipulation.'' 
\4\
---------------------------------------------------------------------------
    \4\ L. Josh Bivens and Robert E. Scott, ``China Manipulates Its 
Currency--A Response is Needed.'' Economic Policy Institute Policy 
Memorandum #116, September 25, 2006.
---------------------------------------------------------------------------
    Exactly what would it take for Treasury to find that a country had 
in fact manipulated its currency, and--perhaps more important--what it 
would take to move beyond yet another round of endless diplomacy and 
strategic dialog to concrete action and results?
    This is not an academic exercise for the union members we 
represent. The difference between currency manipulation and a market-
equilibrium exchange rate is the difference between having a job and 
watching your factory shut its gates. It is the difference between 
having health insurance for your kids--or not. And, for our country, it 
may be the difference between having a healthy middle class--or sitting 
back and watching as economic divisions tear us apart.
    And, tearing us apart they are. The fact is domestic manufacturers 
and their workers are forced to compete at an enormous competitive 
disadvantage from manipulated currency rates--even before taking into 
account all the other issues we face: violations of workers' rights, 
asymmetrical tax policies, illegal subsidies, lax environmental and 
resource regulations, and a dysfunctional health care and pension 
system that disadvantages our manufacturers.
Failure to Act
    In June 2005, then-Secretary Snow testified to the Senate Finance 
Committee that ``if current trends continue without substantial 
alteration, China's policies will likely meet the technical 
requirements of the statute for designation. . . . Concerns of 
competitiveness with China also constrain neighboring economies in 
their adoption of more flexible exchange policies. China's rigid 
currency regime has become highly distortionary.''
    Given the raw economic data on trade imbalances and reserve 
accumulation, it certainly appears that current trends have not only 
``continued without substantial alteration,'' they have accelerated.
    Therefore, we were bitterly disappointed that Treasury found no 
manipulation again this year, and we were underwhelmed by the 
announcement of the ``Strategic Economic Dialogue'' (SED) as a response 
to the ``global imbalances'' that the report did concede.
    On paper, the SED promises a ``forum for addressing critical 
economic issues and planning for long-term cooperation.'' Issues to be 
addressed include developing efficient innovative service sectors, 
health care, cooperation on transparency issues, and a joint economic 
study on energy and environment, among other things.
    This SED offers too little, too late. The proposed forum, dialog, 
and cooperation are grossly inadequate, given the magnitude of the 
economic problems we face with respect to China. Beyond its limitations 
with respect to currency manipulation, the SED does not even begin to 
address a separate and equally serious economic concern: the egregious 
and widespread repression of workers' rights in China. The breadth of 
the SED needs to be expanded, as does its core content.
Neglect of Workers' Rights
    We continue to be frustrated that this Administration fails to 
raise the issue of workers' rights violations with the Chinese 
government in any effective or high-level forum. None of the highest-
level economic dialogs with the Chinese government include workers' 
rights as part of their public agenda (neither the Joint Commission on 
Commerce and Trade, nor the SED, address the issue publicly).
    Violation of workers' rights is just as much an economic issue as 
currency manipulation, violation of intellectual property rights, or 
illegal subsidies. We estimate that hundreds of thousands of U.S. jobs 
are lost because the Chinese government brutally suppresses the rights 
of Chinese workers to form independent unions and bargain collectively 
for their fair share of the wealth they create.\5\
---------------------------------------------------------------------------
    \5\ See the Section 301 petition filed by the AFL-CIO in June 2006: 
http://www.aflcio.org/issues/jobseconomy/globaleconomy/
chinapetition.cfm.
---------------------------------------------------------------------------
    Promoters of permanent normal trade relations (PNTR) and China's 
accession to the WTO argued that unfettered trade and investment would 
be the best way to raise living standards and promote human rights in 
China.
    Unfortunately, the five years since China's accession to the WTO 
have not borne out this prediction. Instead, increased trade and 
investment have coincided with continued harsh violations of workers' 
rights, rising worker unrest, and a ``strike hard'' campaign against 
dissent by the Chinese government. Far from ``exporting American 
values'' to China, American companies have been complicit in this abuse 
and have profited from it.
    Legal protections for wages, benefits, and hours are routinely 
violated in the private sector, and shoddy enforcement of health and 
safety standards costs workers' lives in China's export industries.
    Faced with growing worker unrest, the Chinese government continues 
to choose violence and repression as tools of control, and has made 
only cosmetic gestures towards legal reform. Proposed reforms to 
China's trade union law in 2001, while ostensibly designed to protect 
union organizing in the growing private sector and strengthen workers' 
rights, maintain the single government-controlled labor organization's 
strict legal monopoly over all trade union activity in China. Yet 
American business interests resisted even those modest reforms, 
weighing in against measures that might strengthen workers' rights at 
the margin. (See the excellent report by Global Labor Strategies, 
``Undue Influence: Corporations Gain Ground in Battle Over China's New 
Labor Law,'' available at www.laborstrategies.org.)
    We are baffled and frustrated at our own government's failure to 
insist that the Chinese government honor its international obligations 
as a member of the International Labor Organization and the United 
Nations. The Congress has given the executive branch numerous tools to 
provide leverage in this area, including Section 301, which explicitly 
defines egregious violation of workers' rights as an unfair trade 
practice. Yet the Administration refuses to apply these tools.
Time for Action
    In 2004, the AFL-CIO, along with a group representing several dozen 
U.S. industrial, service, agricultural, and labor organizations, formed 
the China Currency Coalition. On September 9, 2004, the Coalition filed 
a Section 301 petition alleging that China's currency manipulation was 
an unfair trade practice under U.S. trade law.
    The petition laid out China's international obligations under World 
Trade Organization (WTO) and International Monetary Fund (IMF) rules 
and documented the extent of the manipulation, as well as its impact on 
American workers and businesses. Finally, the petition asked the Bush 
Administration to ``seek authorization in the WTO through expedited 
dispute settlement'' to offset the subsidy and take measures to offset 
the disadvantage caused by the currency manipulation for U.S. exports 
to China.
    The Bush Administration summarily rejected the petition within a 
few hours of its filing--apparently without taking the time to read the 
several hundred pages of analysis, documentation, statistics, and 
tables. (I commend the full petition to you: it can be downloaded, 
along with its supporting materials, at: http://
www.chinacurrencycoalition.org/petition.html.)
    A bipartisan group of 35 U.S. Senators and Representatives refiled 
the petition on April 20, 2005, only to have it rejected again.
    The Bush Administration never challenged the factual findings of 
the petition, only claimed that dialog and engagement with China would 
be more effective than accepting the petition.
    Then-Treasury Secretary John Snow said in a press conference held 
earlier in the year: ``China acknowledges [that it is best for the 
global system, for the United States, and for China to move to a 
flexible exchange regime] and is making progress toward this goal.'' He 
boasted of the ``extensive'' talks under way: ``I have held extensive 
meetings and consultations with the Chinese economic team both here in 
Washington and in Beijing.'' And he touted the progress being achieved: 
``With steady progress clearly being made, the most effective way at 
this time to achieve the goal of a flexible, market-based exchange rate 
in China is to maintain the persistent engagement we have established 
rather than through a trade petition'' (emphasis added).
    Then-USTR Robert Zoellick promised strategic leverage would be used 
to pressure China: ``America's policy of leveraged engagement gives us 
constructive new ways to press for real results in China. . . . Under 
U.S. law, the first two criteria that China must meet to be considered 
as a `market economy' are: the extent to which the currency of China is 
convertible; and the extent to which wage rates in the foreign country 
are determined by free bargaining between labor and management. . . . 
These statutory criteria, together with China's strong interest in 
being recognized as a market economy under U.S. laws, provide us with 
significant leverage on labor, currency, subsidy and other issues, and 
we plan to use it'' (emphasis added).
    John B. Taylor, at the time Under Secretary for International 
Affairs at Treasury, quoted President Bush in a speech on October 21, 
2004: ``As President Bush recently said, . . . ``So I'm saying to 
places like China, you treat us the way we treat you. You open up your 
markets just like we open up our markets. And I say that with 
confidence because we can compete with anybody, any time, anywhere so 
long as the rules are fair.''
So many promises, so few results.
    The Bush administration has refused to hold the Chinese government 
to its international obligations on trade, currency manipulation and 
human rights, and has denied American businesses import relief they are 
entitled to under the law. The administration has actively encouraged 
the Japanese government, as the yen has remained seriously undervalued.
    The AFL-CIO believes that the Bush Administration needs to move 
beyond ``bilateral consultation'' and continued dialog to address the 
urgent problems in the U.S.-China and U.S.-Japan trade and economic 
relationships.
    First, the Administration should use the annual Treasury Department 
exercise to send a clear and consistent message to the governments of 
both China and Japan that they have been identified as currency 
manipulators and that concrete actions will follow if needed 
adjustments are not made in a timely fashion.
    Second, the Administration should signal that it will initiate WTO 
dispute resolution with respect to ongoing currency manipulation.
    But Congress cannot wait for this Administration to act.
    We urge Congress to give immediate consideration to the Fair 
Currency Act of 2007, H.R. 782.
    This bill clarifies the definition of currency manipulation, 
identifies currency manipulation as an illegal subsidy, and ensures 
that countervailing duty laws can be applied to non-market economies. 
It applies to any country that is manipulating its currency. It is a 
crucial first step in addressing the urgent economic problems we face 
today.
    I thank the three Subcommittees for the invitation to appear here 
today, and I look forward to your questions.

                                 

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

 STATEMENT OF WILLIAM HICKEY, LAPHAM-HICKEY STEEL CORPORATION, 
                       CHICAGO, ILLINOIS

    Mr. HICKEY. I want to thank Congressman Rush for the 
welcome. It's very nice of you, Congressman.
    I am Bill Hickey. I am president of Lapham-Hickey Steel 
Corporation, which is a steel service center based in Chicago, 
Illinois, founded in 1926. We have plants in Illinois, Ohio, 
Wisconsin, Minnesota and Connecticut and we currently have 
about 450 employees.
    I'm also a sitting member of the ITAC-12 which advises the 
Department of Commerce and the USTR on trade policy.
    I am a past chairman of the Metal Service Center Institute, 
which is a leading member of the Chinese Currency Coalition, 
which we are representing here today.
    My wakeup call to this subject occurred in the summer of 
2001 when one of our long-term customers asked for a meeting to 
talk about their business. He told me that they were no longer 
going to purchase steel products from our corporation but would 
purchase the parts they had produced before from China and 
assemble these parts in their plant. The finished machine parts 
delivered from China would cost less than the raw steel product 
that we sold to the customer.
    So, our customer reduced their staff of high-skilled and 
high-income employees and retained a few low-skilled and low-
income employees to assemble and ship their product. This visit 
started my research into how this economic event could take 
place.
    How can China deliver finished machine products into the 
United States at less than the cost of the raw steel?
    This was during this time the industrial economy of the 
United States was in recession. Tens of thousands of 
manufacturing jobs were disappearing every month. As these jobs 
vanished, our trade deficit with China exploded. But the value 
of the Chinese currency did not move. This is when I realized 
that what China had done in the mid-1990s was to devalue their 
currency by more than 50 percent against the U.S. dollar and 
then freeze the value of the exchange rates by intervening 
massively in the currency markets.
    This guaranteed that Chinese manufacturers could ship 
massive amounts of products to the United States at the China 
price. Japan, South Korea also engage in these similar tactics 
for their manufacturers.
    All the economic theory about free and fair trade that you 
learned goes out the window. As I realized that domestic 
manufacturing companies cannot compete with Asian governments, 
I began to witness the structural decline in the U.S. 
manufacturing sector.
    Many of the other speakers today talked about all these 
macro events. I go to places like Rockville, Illinois. I see 
Congressman Manzullo is here. Rockford, Illinois, has been 
destroyed. The manufacturing base in Chicago has been 
destroyed. It is true in South Bend, it is true across the 
country.
    Accordingly, I turned to public advocacy to get our 
government to level the playing field with our Asian 
competitors. I started by congressman at the time, William 
Lipinski, who was very supportive in our efforts. We engaged 
the Metal Service Center Institute to use their chapter 
structure to hold town hall meetings across the country and 
inform the people of the manufacturing sector of this country 
that we are not incompetent; we are at a competitive 
disadvantage that our government allows to continue today.
    Along with many of the others in this room, including some 
members here, I know Mr. Levin, we tried to get this 
administration to recognize that misaligned RMB was destroying 
tens of thousands of manufacturing businesses and millions of 
jobs. Every time this administration was pressed for some 
action on the currency, those pushing for action were either 
insulted or ignored.
    In early 2005, I had a chance to visit with Representative 
Tim Ryan of Ohio. We explained the problems of manufacturing 
companies in his district and we discussed how much of this 
economic distress was caused by currency manipulation. A match 
made in heaven.
    Representative Ryan combined with Chairman Duncan Hunter to 
sponsor House Resolution 1498 in the last Congress. It ended 
with 178 bipartisan cosponsors but was ignored by this 
administration.
    Now that the control of Congress has changed parties, we 
have a Treasury Secretary calling for much faster appreciation 
of the Chinese currency. Now that the control of Congress has 
changed parties, we have a Department of Commerce that has 
conceded that nonmarket economies employ massive domestic and 
export subsidies. Now that the control of Congress has changed 
parties, we have a USTR that starts trade cases in the WTO 
against China.
    If control of this body had not changed, does anyone in 
this room believe that the administration would have taken any 
of these recent actions? This is the case for why we need House 
Resolution 782. We must get this enacted into law as soon as 
possible. The bill makes currency misalignment by protected 
government intervention a subsidy under U.S. countervailing 
duty law. The Fair Currency Act has five important virtues. For 
the first time, injured industries and their workers would have 
an effective remedy under U.S. trade law against undervalued 
currencies. For the first time, the Treasury Secretary with the 
leverage of his diplomatic campaign to stimulate U.S. export.
    It is consistent with our WTO obligations on subsidy rules. 
It avoids this fantasy of any reliance on the International 
Monetary Fund to do anything. This bill addresses the problem 
of currency manipulation, per se, by any country at a time.
    It has been six years since I discovered the China price. 
Since then, there has been no effective action taken by this 
government. We as a country need laws that ensure our companies 
and employees are not going to be destroyed by a policy of 
neglect by any administration at any time.
    Thank you all.
    [The prepared statement of Mr. Hickey follows:]

            Prepared Statement of William Hickey, President,
              Lapham-Hickey Steel Corporation, Chicago, IL
    I am Bill Hickey, President of Lapham-Hickey Steel Corp. Lapham-
Hickey Steel Corp. is a metal service center founded in 1926 with 
headquarters in Chicago and plants in Illinois, Ohio, Wisconsin, 
Minnesota and Connecticut. Currently we have approximately 450 
employees and customers of all sizes.
    I also am a sitting member of the Industry Trade Advisory Committee 
(ITAC-12) which advises the Department of Commerce and USTR on trade 
policy. I am a past chairman of the Metals Service Center Institute 
(MSCI), who is a leader of the China Currency Coalition, whom I 
represent as well as the employees of our company. The China Currency 
Coalition mostly consists of supply-chain industries such as primary 
metals, fabricated metals, plastics, electronics, textiles, small- and 
medium-sized manufacturers and labor organizations.
    I want to thank these three Subcommittees for their unprecedented 
cooperation and holding this hearing on currency manipulation and its 
effect on our manufacturing companies and their employees.
    My wake-up call on this subject occurred in the summer of 2001 when 
one of our long-term customers asked for a meeting to talk about their 
business. He told me they were no longer going to purchase steel 
products from our company, but would purchase the parts that they had 
produced from China and assemble these parts in their plant. The 
finished machined parts delivered from China would cost less than the 
raw steel product that we sold to the customer.
    So our customer reduced their staff of higher skilled and income 
employees and retained a few lower skilled and income employees to 
assemble and ship their product.
    This visit started my research into how this economic event could 
take place; how can China deliver finished, machined products to the 
United States at less than the cost of the raw steel?
My First Experience With ``The China Price'' and Its Effect On U.S. 
        Manufacturing
    During this time the industrial economy in the United States was in 
recession. Tens of thousands of manufacturing jobs were disappearing 
each month. As these jobs vanished, our trade deficit with China 
exploded, but the value of the Chinese currency did not move. This is 
when I realized that what China had done in the mid-1990s was to 
devalue their currency by about 50% against the U.S. dollar, and freeze 
the value at that exchange rate by intervening in the exchange markets. 
This guaranteed that the Chinese manufacturers could ship massive 
amounts of products to the United States at ``The China Price.'' Japan, 
which engaged in similar tactics, was not far behind.
    All the economic theory about free and fair trade I had learned was 
thrown out the window.
    As I realized that the domestic manufacturing companies could not 
compete with Asian governments, I began to witness a structural decline 
of the U.S. manufacturing sector, and I was not alone.
    The decline of manufacturing is not just a series of anecdotes. 
What I saw was captured by the import penetration rate for tradable 
manufacturing industries, as reported by the U.S. Census Bureau. In 
1997, imports totaled 22.6% of the tradable U.S. industrial market; in 
2004, imports totaled 31.8%. That nine percentage point increase 
amounts to a 41% increase in the U.S. import penetration rate for 
tradable industries.
    Of the 473 manufacturing job classifications under the North 
American Industrial Classification System (NAICS), 37 sub-industries 
(8%) increased their market share, with one category suppressed for 
national intelligence reasons. 85 sub-industries (18%) are deemed 
untradable by the Commerce Department, which does not provide import 
and export data. Accordingly, 351 of the 473 industrial sub-
classifications (or 74%) lost market share from 1997-2004, explaining 
the 41% increase in the U.S. import penetration rate.
    In the fabricated metals sector, which I am most closely tied to, 
30 out of 43 sub-industries were tradable. Only one industry gained 
U.S. market share, a mere 0.9 percentage point growth. Specifically, 
imports in ``other metal container manufacturing'' fell from 13.15% of 
the market in 1997 to 12.24% in 2004.
    Surely, other competitive factors include high corporate tax rates, 
health and pension benefits, tort costs, natural gas and pollution 
abatement. The Manufacturers Alliance and the National Association of 
Manufacturers (NAM) estimate these non-wage structural factors add 31.7 
percent in production costs to U.S. manufacturers compared to our major 
trading partners. We also face strains in our education system and 
major challenges producing skilled workers.
    These issues are all very important to me. However, today I believe 
the most pressing problems facing all U.S. domestic producers are 
effectively macroeconomic trade problems. 143 of our trading partners 
have consumption taxes averaging 17-18 percent, where they tax our 
exports at the border and do not tax their exports to the United 
States. As a result, all imports come into this country free of tax 
while those we offer for export to almost any destination in the world 
carry the burden of double taxation.
    If you add an undervalued currency in China at 40 percent or more, 
and a significant but slightly smaller regional undervaluation in Japan 
and the rest of Asia, the trade magnitude effectively doubles the other 
non-wage structural disadvantages. As a pragmatic businessman, when 
faced with numerous difficult problems, I feel I must identify the 
largest source of competitive disadvantage and eliminate it first, 
otherwise there is not enough time to deal with the full range of 
competitive problems.
My Advocacy From 2001-Present
    Accordingly, I turned to public advocacy to get our Government to 
level the playing field with our Asian competitors.
    In early 2003, I started by visiting my Congressman at the time, 
Representative William Lipinski, who was very supportive in our efforts 
and referred me to his friend, Congressman Luis Gutierrez of the 
Financial Services Committee. We engaged the Metals Service Center 
Institute (MSCI) to use their chapter structure to hold town hall 
meetings across the United States to inform the people in the 
manufacturing sector that we were not incompetent--we were and still 
are at a competitive disadvantage that our government allows to 
continue.
    I, along with many others, including many Members of Congress, have 
tried to get this Administration to recognize that the misaligned 
Renminbi was destroying thousands of manufacturing businesses and 
millions of jobs.
    Every time this Administration was pressed for some action on the 
currency, those pushing for action were either insulted or ignored. The 
action by Congress has been only marginally more responsive.
    In the last two Congresses, under the Chairmanship of 
Representative Bill Thomas, The House Ways & Means Committee refused to 
even hold a hearing.
    On October 1st 2003, Chairman Peter King of New York agreed to hold 
a hearing with the Financial Services Committee Subcommittee on 
International Monetary Policy, which many of you participated in. 
During that hearing, the Undersecretary of Commerce, Grant Aldonas, 
refused to acknowledge that currency misalignment by China was costing 
jobs. Treasury Undersecretary John Taylor was asked directly by 
Congressman Manzullo what plans the administration has to stop overt 
currency manipulation by Japan. Mr. Taylor failed to disclose he was 
consenting to what turned out to be massive Japanese intervention in a 
follied attempt to combat deflation, as revealed in his recent book 
Global Financial Warriors.
    In 2004, the China Currency Coalition filed a Section 301 case 
against China's currency manipulation, which would have required the 
administration to begin negotiations if accepted. The 200+ page 
petition was rejected two hours after it was submitted in September 
2004.
    In 2005 and 2006, the National Association of Manufacturers staff 
told their members pushing for an association endorsement that the 
administration opposed the legislative solution.
    In early 2005 I had a chance to visit with Representative Tim Ryan 
of Ohio. He explained the problems of the manufacturing companies in 
his district and we discussed how much of this economic distress was 
caused by currency manipulation.
    A match made in heaven!
    Representative Ryan combined with Chairman Duncan Hunter of the 
Armed Services Committee to sponsor H.R. 1498 in the last Congress that 
ended with 178 bipartisan co-sponsors, but was ignored by Chairman 
Thomas.
    Now that the control of Congress has changed parties, we have a 
Treasury Secretary calling for much faster appreciation by China on 
their currency. Unfortunately, he still lacks any leverage to 
accomplish these objectives.
    Now that the control of Congress has changed parties, we have a 
Department of Commerce that has conceded that non-market economies 
employ massive domestic and export subsidies. Unfortunately, this issue 
may end up in the U.S. courts without Congressional intent being 
crystal clear.
    Now that the control of Congress has changed parties, we now have a 
USTR that starts trade cases at the WTO against China. Unfortunately, 
this is a slow, cumbersome and unpredictable process.
    If control of Congress had not changed, does anybody believe that 
the Administration would have taken these recent actions?
The Case For H.R. 782
    This is why we need H.R. 782 enacted into law as soon as possible. 
This bill makes currency misalignment by protracted government 
intervention a subsidy under the U.S. countervailing duty law. I have 
submitted for the record a detailed set of questions and answers 
prepared by the China Currency Coalition about the legislation.
    In summary, The Fair Currency Act of 2007 has five important 
virtues.
    1) For the first time, injured industries and their workers would 
have an effective remedy under U.S. trade law against undervalued 
currencies.
    2) For the first time, the Treasury Secretary would have leverage 
for his diplomatic campaign to stimulate U.S. exports.
    3) It is consistent with our obligations under the WTO subsidy 
rules.
    4) It avoids any reliance on the International Monetary Fund. IMF 
Article IV urges all members to avoid using exchange rates to prevent 
the adjustment of imbalances in trade flows. In practice, it is an 
outmoded carry-over from the Bretton Woods era, contains no definitive 
legal obligation and is inherently unenforceable. In fact, IMF Director 
General Rodrigo de Rato said publicly the IMF should play no role in 
disputes over currency values. Fundamental reform of the IMF is a 
worthy long term goal; reliance on a new IMF in the short-run assures 
an unbearable status quo.
    5) This bill addresses the problem of currency manipulation per se 
by any country at any time. In my remarks, I focus on China and the 
Renminbi. Let me assure you that this is a much bigger problem. Japan, 
South Korea, India and others are using mercantilist currency policies 
to engineer an artificial advantage in both their own and the U.S. 
market.
    The China Currency Coalition has consistently sought an immediate 
substantial revaluation of the Renminbi to reflect economic realities. 
We recognize that a more flexible currency regime requires time and 
institutional reform. Moreover, we note that Japan has a flexible 
managed float regime that has produced an undervalued Yen. That is not 
what we want for the Yen, the Renminbi or any currency.
    It has been six years since I lost my first customer. Since then, 
there has been no effective action taken by the government.
    We, as a country, need laws that ensure our companies and employees 
are not going to be destroyed by a policy of neglect by any 
Administration at any time. In December of last year to China's Academy 
of Social Sciences, Fed Chairman Ben Bernanke called China's currency 
policies an ``effective subsidy.'' The momentum continues; in the last 
two weeks alone, two major publications have vindicated the arguments 
the United States domestic manufacturing sector has been making for 
years. Steve Pearlstein of the Washington Post stated on April 25th: 
``Contrary to what you hear from editorial writers and other free-trade 
ideologues, it is not `protectionist' for the United States to impose 
countervailing duties on imports from a country that subsidizes exports 
and keeps its currency pegged to the dollar.''
    In the May 14th issue of Newsweek, Robert J. Samuelson, writes: 
``It is not ``protectionist'' (I am a longstanding free trader) to 
complain about policies that are predatory; China's are just that.''
    Thank you.

                                 

    Chairman LEVIN. Thank you very, very much.
    This has been sterling. Now what we are going to do, each 
of the Committees will call on Members. I think we are first.
    I am just going to say something preliminarily and then 
call on the first person who is here. I think, Mr. Tanner, I 
will call on you next.
    I just wanted to say as I listened to the testimony that I 
think there is movement here. I think there is a growing 
awareness that the status quo won't work. There is this shift. 
If you read, for example, The Economist, and I say this to you, 
Secretary Evans, in response to your--you know, The Economist 
is a very mainline, traditional, conventional, one might call 
it.
    This is a quote: Japan's abnormally low rates could be 
viewed as a form of intervention to hold down the yen. Since 
Japan still holds another 900 billion of foreign exchange 
reserves accumulated a few years ago when it was intervening, 
it is hard to claim that the currency is truly market 
determined.
    I was just reading a column today by another very 
traditional economist, Robert Samuelson, talking about China's 
time bomb and that it is meaning for the world economy and for 
the American economy. How it is a time bomb and we are just, I 
think, in danger of more inaction.
    So I am not going to use my 5 minutes. I think everybody 
else who needs to listen to Mr. Hickey and listen to the people 
that I have talked with from businesses throughout this country 
who cite the currency valuation problem as destroying their 
livelihoods, their businesses, that it is a tilted field that 
they can't play on effectively.
    So I do think that there is a shift here. There has been a 
failure of the administration to recognize it and to recognize 
the impact on the lives of people.
    One of you talked about, I guess it was one of my 
colleagues, Mr. Herger, about Smoot-Hawley. We are decades away 
and that isn't the issue. The issue is what do we do about a 
globalizing economy which is much more complicated but where 
more players are essentially rigging the terms of competition. 
Whether our belief is that those who rig only hurt themselves, 
and that eventually rigging will be undone on its own, or 
whether there is a need for us to wrestle with the problems of 
globalization in this country much more effectively.
    When it comes to currency, I think the answer has to be 
that we have been essentially standing by the ropes instead of 
in there wrestling. It is not easy to wrestle. But we have been 
more bystanders than we have been activists.
    Mr. Tanner, you are next. Then I will turn to Mr. Gutierrez 
and then Mr. Rush.
    Mr. TANNER. Thank you, Mr. Chairman. I will try to be brief 
as well.
    I want to thank all the panelists for being here this 
morning on this important matter. It is complicated. It is one 
that is hard to get one's arms around, because of the various 
nuances, may I say, if you put a peg in here, what happens here 
and so forth. So I am going to try to limit my question just to 
one aspect of all of this.
    As all of you know, the United States has borrowed over 
$1.6 trillion in hard money in the last 60 months. What bothers 
me about that is, more than 75 percent of it has come from 
overseas sources, which means that out of the tax base that all 
of us paid April 15th, from the summer of 2002 to this summer, 
we will have $80 billion unavailable to address the problems in 
this country because it is going to pay interest. This 
continued degradation of the tax base, I think, poses a whole 
other set of problems. But that is, from a business standpoint, 
how I look at it.
    The other thing, the reason I want to ask you what happens, 
Japan and China own over $1 trillion of our paper. China, 
particularly, has increased--almost two. China has increased 
their holdings dramatically in the last five years as many of 
you know, something over 400 billion.
    What happens to the interest rates that we pay as Americans 
on this foreign held debt when we have a meaningful correction 
in the valuation of the currency?
    Mr. BERGSTEN. I could take a crack at that and Steve, too, 
could talk about it. On your first point, you are exactly right 
to worry about that. We published a book about 18 months ago 
entitled, ``The United States as a Debtor Nation.'' It runs 
through that analysis in depth.
    Mr. STEARNS. I read it.
    Mr. BERGSTEN. Well, then you know the answer to your 
question. But you are absolutely right and that is why I set a 
goal for U.S. policy, not to eliminate our external deficit but 
to cut it in half. At that level, about 3 percent of GDP, the 
ratio of our foreign debt to GDP would at least level off and 
not get worse. I am looking to cut $400 billion to $500 billion 
per year off the current imbalance. That is why I say it is 
going to take a dollar to climb 20 percent because we get about 
$20 billion to $25 billion of current account improvement per 
percentage point of dollar decline.
    Second, on your point about inflation and interest rates. 
The rule of thumb that most economists in this business use is 
that every decline of 10 percent in the exchange rate of the 
dollar on average will lead to an increase of 1 percent in the 
inflation rate. If we believe that nominal interest rates 
pretty much track inflation, then the nominal interest rate 
would also go up 1 percent. So, if you think the dollar is 
still overvalued on average by about 20 percent, which is our 
calculation and what I just reported, unless all the laws of 
economics are repealed, the dollar will come down by 20 percent 
over the next few years and everything else equal, that would 
push inflation and interest rates up by about 2 percentage 
points. Hopefully this phases in a gradual and orderly way over 
three or 4 years, and not all of a sudden. The dollar has in 
fact come down 15 to 20 percent over the last five years. The 
decline has been gradual and orderly, not a hard landing, but 
it still will push inflation and interest rates up, it will 
magnify that cost you mentioned, and it will increase our costs 
at home.
    In essence, we have been getting a subsidy from the rest of 
the world, keeping our inflation and interest rates down 
because of all the capital inflow we have gotten to finance the 
big current account deficits. So, even as job-holders in Revere 
or in Steel have been hurt, U.S. homeowners have benefitted 
from this big international imbalance because of the buildup of 
foreign dollar balances, lower interest rates, et cetera, but 
that is living on borrowed time. We are going to pay that piper 
and there is going to be an offsetting increase in inflation 
and interest rates as the correction takes place and it will 
certainly add to the problem that you have highlighted.
    Mr. ROACH. Can I just add one thing to that, Mr. Chairman? 
Fred has described sort of the gradual adjustment as it has 
been occurring. What you asked, Mr. Tanner, is what would 
happen to the Chinese appetite for dollar-based assets should 
we take action against them. I think that that would accelerate 
the process dramatically that Fred just described. If we tax 
one of our major lenders, they are going to want to buy other 
assets other than dollar-based assets. They are not going to be 
as cooperative in the way of providing capital for a savings-
short U.S. economy as has been the case. I am not saying that 
they are going to sell their existing holdings, I am saying 
something very different. They are accumulating foreign 
exchange--new foreign exchange reserves to the tune of at least 
$250 billion per year. Fred indicated in the first quarter of 
this year their accumulation was well in excess of that. They 
are currently investing somewhere in the order of about 60 
percent, maybe more than that, of this new foreign exchange 
reserve accumulation in our capital markets and dollar-based 
assets. They will lower that asset allocation. That will have 
consequences for the currency and for real interest rates that 
a weakened U.S. economy will have a hard time taking. This is a 
big risk and unfortunately this is what we ask for when we do 
not save and we are so dependent on the kindness of strangers 
to finance a savings-short U.S. economy.
    Chairman LEVIN. All right.
    Mr. MOHATAREM. Mr. Levin, can I take a different view on 
this? I think the assumption is that somehow the U.S. is doing 
something wrong and that we are at the mercy of Japan and 
China. No, as Ben Bernanke, the Fed Chairman has said, there is 
a glut of savings, that the strategy of export-based growth 
produces the excess savings which are being invested in the 
U.S. at very low rates. One of the challenges people face when 
they say it is a U.S. problem because we have to borrow is why 
are interest rates so low, in fact why are foreigners earning a 
much lower rate of return of their investments in the U.S. than 
Americans earn abroad? The answer is that the driver of the 
Japanese, Chinese, and other Asian investment in the U.S. is 
not a desire to earn a higher rate of return, it is to support 
their exports. So, a change in policy necessarily will mean a 
change in their export-based growth strategies. It is not 
necessarily our problem. It will cause some changes in the U.S. 
but let's face it we are just letting foreign countries distort 
our economy.
    Chairman LEVIN. All right, it is so interesting, it is hard 
to stop, but the other Committees are going to choose and we 
are alternating Republicans and Democrats. Chairman Gutierrez, 
your Committee next and then Rush. The next person on Ways and 
Means will be Mr. Herger.
    Chairman GUTIERREZ. Thank you. It is a great and very 
interesting discussion. The first thing that comes to mind is 
the dichotomy between Dr. Roach and Wall Street and Morgan 
Stanley and Main Street, Hickey and Mr. O'Shaughnessy. You all 
represent the business community here but some people employ 
people each and every day and manufacture goods and others 
finance it, but that kind of dichotomy I have not seen before 
so it is interesting. I think we are going to have to make a 
decision of who we are going to listen to: Wall Street or Main 
Street, those that actually develop jobs and produce jobs for 
people.
    I would like to ask Mr. O'Shaughnessy, in your testimony 
you state that Congress should pass the Ryan Hunter bill, my 
friend Mr. Ryan from Ohio is here with us today. Since that was 
the reason that led me--this hearing is not about any 
particular bill but since that is particularly what led me to 
call Mr. Levin and enthusiastically join him, tell me how would 
you see Congressman Ryan's bill helping your industry? I am 
going to follow up with Mr. Hickey on the same question?
    Mr. O'SHAUGHNESSY. Well, Congressman Ryan's bill has teeth 
in it. Nothing the administration has done to date has teeth. 
Many of those who want for China to continue its manipulative 
practices, its protectionist behavior support all kinds of 
efforts and bills that have no teeth, that would create new 
jobs, new Committees. By ``new jobs,'' I mean an assistant 
secretary of the Treasury for example. Congressman Ryan's bill 
would allow Revere and our trade associations, the Copper and 
Brass Fabricator's Council, to file for countervailing duties 
against Chinese imports of copper and brass products because 
those copper and brass products are subsidized by currency 
manipulation. The bill directly links currency and defines 
currency manipulation as an illegal subsidy. That is why I 
support him.
    Chairman GUTIERREZ. Let me ask Mr. Hickey is there anything 
you would like to add on the proposal by Mr. Ryan?
    Mr. HICKEY. Mr. Gutierrez, I support the Ryan Hunter bill 
because of the frustration I have in the efforts I have taken. 
In 2004, I with Mr. Trumpka, who is another member, one of the 
heads of the AFL-CIO, filed a 301 against China. Mr. Levin and 
some congressional Democrats followed that up several months 
later. Before I got on the plane back to Chicago, the Secretary 
of Commerce, the Secretary of the Treasury, the Secretary of 
Labor, and the USTR all denied the petition. That petition was 
200 some odd pages long and within an hour they digested it and 
said it is protectionism. Again, if you cannot talk about the 
problem, it is protectionism. You look at the 421's, the 421's 
were specific legislation put into the China ascension to the 
WTO so that industries that were hurt by China could take a 
petition to the government. We have had four or five 421's, 
every one has been denied by the Bush administration and every 
letter of denial reads the same thing. It basically says this 
industry would go out of business anyhow if it wasn't the 
Chinese cutting the price. This is insanity. We have no way of 
protecting these industries.
    Chairman GUTIERREZ. Thank you.
    Chairman LEVIN. All right, can I call Mr. Rush?
    Chairman GUTIERREZ. Sure.
    Chairman RUSH. Thank you, Mr. Chairman. I also agree this 
has been an extraordinary hearing so far and the testimony has 
really been quite interesting. I want to again thank the 
witnesses for their participation. My time is limited so I am 
going to ask a question, and I would like for responses from 
each and every one of you. Dr. Mohatarem makes what is an 
interesting point in his testimony, he mentioned that as the 
U.S. trade deficit has grown, other freely traded currencies, 
such as the Euro and the Canadian dollar, have appreciated 
considerably against the dollar. Why in your opinion has the 
yen not done so as well? Could each of you except for Dr. 
Mohatarem respond briefly to this question?
    Mr. EVANS. Well, as I said in my testimony, it is my belief 
that the yen has not appreciated in value because Japan 
continues to go through this recovery of the debt devastating 
period of the 1990s, a period when that economy basically just 
collapsed or had flat growth for over 10 years. As they 
continue through that recovery, part of it is low interest 
rates and so you have low interest rates, that tends to leave 
your currency in a relatively low level. So, I think my point 
with respect to the yen is it does not appear that Japan has 
been intervening in the market in any material way in the last 
three years and so to encourage them to intervene I think would 
be foolhardy.
    Mr. O'SHAUGHNESSY. I think that Japan's policy is much more 
sophisticated. I think that they are intervening but they are 
intervening in a way that is not as direct as the Chinese are. 
I would agree with that portion of the testimony indicated 
earlier by the General Motors Corporation representative, I 
will not attempt to pronounce your name, mine O'Shaughnessy is 
bad enough. But Japan has created a one-way market for the yen 
and all you have to do is look at the fact that they have $1 
trillion U.S. dollars, so they are doing it. Then you just have 
to figure out how they are doing it, and I think he summed that 
up pretty well.
    Mr. ROACH. I would just agree with Secretary Evans, Japan 
has gone through a very difficult 15 years, it is apples to 
oranges in comparing Japan with the state of other developed 
economies. With respect to China, keep in mind that 30 years 
ago, the Chinese economy was on the brink of collapse. Yes, 
they have used exports as a means to drive their economy. They 
have used investment as well dramatically. They are now at a 
critical point--and no one is giving the Chinese any credit in 
this hearing today whatsoever--a critical point in 
transitioning to more of a consumer-led economy and that will 
be a very natural way to deal with their role that they need to 
play in dealing with these imbalances. So, yes, Europe has 
borne the brunt of the dollar's decline thus far but I think 
for good reason.
    Mr. BERGSTEN. The answer is two part. In the earlier part 
of this decade, Japan did intervene massively, more than China, 
but that process ceased three years ago. There are lots of 
allegations about indirect and covert and subtle and nuanced 
intervention now, but I do not find it. I actually discovered 
their doing that back when I was the under secretary of the 
Treasury. I caught them intervening, told them to stop it and 
they did, but I do not think it is happening now. The 
explanation now is the very low interest rates that discourage 
the Japanese and others from investing in yen assets. To me, 
however, as I said in my statement, just because there is no 
manipulation does not excuse the Japanese. There is clear 
under-valuation, and that has to be addressed, whether or not 
there is manipulation, in the interest of a better 
international balance.
    Ms. LEE. I do not have a strong opinion about the mechanism 
of intervention but I would agree with what both Fred Bergsten 
and Mustafa Mohatarem said that the yen is under-valued and has 
an enormous economic impact on American workers, on the auto 
industry in particular, and so this is an issue that we think 
is very urgent. I think the mechanisms may be different, very 
different from how the Chinese government engages in currency 
manipulation but the outcome is the same and the urgency for 
effective action by our government is the same.
    Mr. HICKEY. Mr. Rush, back in 2003/2004, the Central Bank 
of Japan went out and made sure that the yen would not go below 
$1.10. Alan Greenspan of Japan was publicly saying, he said 
they spent 10 percent of their GDP. That would be like the 
Federal Reserve in the U.S. going out and buying $1 trillion 
worth of yen so that the yen would not appreciate against the 
dollar. Look at Korea, Korea now has more foreign reserves with 
40 million people than the EU with 400 million people. The 
Koreans now have over $350 million in foreign reserves. They 
are doing the same thing the Japanese did, they are doing the 
same thing the Chinese do, they all went to the same 
conferences.
    Chairman LEVIN. All right, I think next is Mr. Herger and 
then Mr. Pal, Dr. Paul, and then Mr. Stearns.
    Mr. HERGER. Thank you, Mr. Chairman. Dr. Roach, people are 
rightfully concerned about the trade imbalance with China. I 
believe that RMB is under-valued and the administration should 
continue to press China to appreciate the RMB relative to the 
dollar, however, I am not convinced that we need to impose 
across-the-board retaliatory tariffs on all Chinese goods while 
China makes its way toward a fully convertible currency or 
apply countervailing duties under the theory that the exchange 
rate is a subsidy. Instead, I would like to see the United 
States work with China to reduce their savings and increase 
their spending, which would pave the way for more U.S. exports 
to China. Would not this be a more direct way to address the 
trade imbalance?
    Mr. ROACH. I think the Chinese government in their latest 
five year plan have put their cards on the table, they know 
they have to do this, they want to do it. But in a once 
centrally-planned socialist economy, you do not just push the 
button on the consumer culture overnight. There is a lot of 
precautionary saving by Chinese households who are scared about 
future prospects for jobs and income. They have no national 
social security, no pension system, no unemployment insurance, 
no re-training programs. The government is now focusing very 
much on doing that, it is going to take a lot of time. They can 
definitely use our help in that regard. I do think that would 
be a very productive endeavor for us to be much more actively 
involved in rather than beating them over the head with a club 
and demanding that they do something solely to help us as a 
nation who actually spends too much. They could learn some 
things from us in terms of spending, and we could probably 
learn some things from them in terms of saving.
    Chairman RUSH. Thank you. Secretary Evans, do you have any 
comment?
    Mr. EVANS. Yes, I totally agree--first, let me respond to 
what Chairman Levin said earlier, I also believe there is 
movement and I think it is good movement. I think it is headed 
in the right direction, particularly with respect to China, and 
I will address that maybe further later. But with respect to 
your comments, I think putting an emphasis on helping China 
turn into a consuming economy is critical for them and for us. 
I think we need to put great emphasis on them opening up their 
financial services industry to give them the kind of tools and 
the kind of products that their people need to become 
consumers, like credit cards for instance. In China, there are 
one million credit cardholders in China. There are 500,000,000 
Chinese that own a cell phone. So, you have got to get some 
basic fundamental systems in place over there. Dr. Roach talked 
about some of the other products that they need like pension 
products and retirement savings products and homeowner mortgage 
products and auto insurance products. There are all these kinds 
of products that they need in that economy that we have and 
take for granted every day in order to give them the security 
that they must have to begin to be consumers instead of savers. 
So I think that is one area we should put a lot of emphasis in 
every way that we can, open up your markets to our financial 
products so we can help you turn your economy into a consuming 
economy and turn those 1.3 billion consumers loose and get them 
to begin to not only consume their own products in their 
country but products and services from American companies and 
businesses.
    Chairman RUSH. Good point. Anyone else like to comment? 
Yes?
    Mr. O'SHAUGHNESSY. I do not feel that there is anything 
theoretical about under-valuing currency to subsidize 
manufacturing, I think that is what nations do in order to gain 
a competitive edge, to employ their people, to build up that 
kind of a manufacturing infrastructure, that base, that 
strength, that national security, that is what you do to do it. 
In my dealings in international business, any time I was 
involved with a customer or a competitor and their nation's 
currency was valued lower, they were really excited. 
Manufacturing companies in countries that have that happen get 
really excited because they know it gives them a competitive 
edge.
    Mr. BERGSTEN. I totally agree with the strategy you were 
suggesting. I do not think it is either/or vis-a-vis trade 
measures. I would like to add one point. The strategy you 
suggest is intimately related to the currency issue. When the 
currency is as under-valued as it is now, it gives the wrong 
price signals to the economy. It keeps resources going into 
investment in heavy industry for export. It discourages 
domestic consumption because it prices imports way too high. It 
even discourages the government from moving in the direction 
that Steve rightly suggested they should do. So, it is not one 
or the other. What China needs is to alter the composition of 
its growth strategy away from relying on heavy industry and 
capital-intensive spending, which is export-oriented, and in 
the direction of expanding consumer demand, including through 
government spending for social infrastructure programs. A big 
change in the exchange rate would be part and parcel of that 
strategy and would promote it.
    Incidentally, that change in strategy would have lots of 
other advantages for China. It would sharply reduce its growth 
in energy demand and in environmental pollution, and it would 
improve the job pay-off from its investment. We document all 
that in our studies. It is of overwhelming interest to China 
itself to move in the direction you suggest, and I believe one 
reason they do not move in that direction is the wrong 
allocation signals that come from the hugely mispriced currency 
relationship. We know that from other countries' experience and 
so you need to put all these together in a cohesive package.
    Chairman LEVIN. I think we better go on.
    Chairman RUSH. Thank you.
    Ms. LEE. Can I just say one quick thing? It is important.
    Chairman LEVIN. Okay.
    Ms. LEE. It is relevant to this question about if you want 
China to consume more and the U.S. to consume less, I totally 
agree with what Fred Bergsten said in terms of the relative 
price signals that are distorted, but I think the other point 
is that Chinese workers need to have their basic rights 
protected, that in order to build a middle class and a stronger 
democracy in China, the key way to do that is to protect the 
rights of Chinese workers to stand up for their own rights on 
the job. They do not have the right today to form an 
independent union, even to ask for their back wages to be paid 
or to have Chinese labor laws respected with respect to minimum 
wage or maximum hours. That is a crucial piece if we are going 
to build a strong middle class and a consuming middle class in 
China, it has to be done by empowering Chinese workers to 
respect their rights.
    Thank you.
    Chairman LEVIN. Thank you. Dr. Paul?
    Mr. PAUL. Thank you, Mr. Chairman. This is a question for 
Dr. Roach and anybody else who wants to comment. I want to 
follow-up on your strong emphasis on our lack of savings, and I 
would suggest that the fact that we tax savings would be a 
disincentive to save. I would also suggest that the fact that 
our dollar is constantly being depreciated, our government tell 
us it is about 2.5 to 3 percent, a lot of individuals believe 
we are losing purchasing power much faster, that would be a 
disincentive to save. We also have a better-to-borrow-than-save 
psychology because people feel so rich when the Nasdaq is at 
5,000 or the housing prices are soaring, they feel rich and why 
save, we can just borrow at good rates? But I find a difficulty 
in our economy mainly because of the distortion of the interest 
rates. I maintain that our interest rates really are not market 
determined in that they are artificially low. If savings rates 
are real low, interest rates should go up, but we have the 
opposite, we have essentially no savings and very, very low 
interest rates where people want to borrow and they do not want 
to save and then they are taxed on top of this. I cannot see 
how we can deal with this problem without dealing with Federal 
Reserve policy because the Federal Reserve is the one that 
manipulates the interest rates and deceives the public and the 
very important information that we need is true interest rates, 
just like we need true prices in a market economy. Socialism 
fails because it has no market pricing. I think we have 
socialism in our monetary policy in that interest rates are 
distorted and we do the wrong things and it leads to, and has a 
large contributing factor to these imbalances on our trade. Do 
you care to comment?
    Mr. ROACH. Absolutely, I really think you have your finger 
on a very important issue but it does not get into this debate 
because everybody wants to bash China here. The Federal 
Reserve, under the former Chairman Mr. Greenspan, came up with 
the brilliant, or maybe not so brilliant idea, that we did not 
need to save the old-fashioned way out of our paychecks, we 
could save out of assets. So we have a bunch of asset bubbles 
in the last seven or eight years, equities, more recently 
property. If you can save out of these assets, why save out of 
your paycheck? What supports the asset-based saving model is 
unusually low real interest rates, that is what people brought 
to financial markets. I think this is the wrong way to run the 
world's greatest economy is to encourage individuals in 
particular to save out of assets through artificially low 
interest rates. So, I think that is entirely correct.
    You tap on to some very important issues though of 
fundamental tax reform that always get talked about but have 
become politically very difficult for the Congress to move 
ahead on. Do we need some type of a consumption tax for a U.S. 
economy whose consumption share of our GDP today is at a world 
record high of 71 percent. There has never been an example of a 
major economy that has consumed more of its national output 
than we are doing in the United States right now. So, to say 
that this is an idea of, as Mr. Gutierrez said, of Wall Street 
versus Main Street misses the basic point. This economy is 
enjoying a consumption excess, the likes of which we have never 
had. We do not save. Then we are demanding that others who 
provide us with the savings play by our rules, something is 
wrong with this movie.
    Mr. O'SHAUGHNESSY. Yes, I am not sure how many people 
understand the relationship between taxes, international trade, 
health care, and the impact on domestic manufacturing. We are 
the only major trading nation in the world that does not employ 
a VAT tax. Now when I say ``VAT tax,'' it could be a border-
adjustable tax. But we are the only, only one, isn't that 
amazing? We have a deficit in almost every class of goods with 
almost every trading nation in the world. If we change to a 
consumption tax rather than tax saving and investment, we would 
be much better off and our manufacturing base would be much 
better off. I also believe that it is our tax structure, so 
unique in the world, causing us to lose market share to for 
example European countries or even any other country that 
causes them to increase market share against us and they are 
not quite as concerned as they would otherwise be on what is 
happening with China. They are not a big ally on Chinese 
currency manipulation. You do not hear the Europeans--you hear 
them a little bit but like us no strong really actions and that 
is why, it is because of our tax system and their advantage 
over our tax system. That has to change.
    Mr. MOHATAREM. Mr. Paul?
    Mr. PAUL. All right.
    Mr. MOHATAREM. Can I add just very quickly I think we are 
again missing the point here. The current intervention by 
Japan, China, you name it, an Asian country, essentially 
provides savings to the U.S. at very low subsidized interest 
rates. That in turn distorts our economy, it lowers the price 
of critical goods in the U.S. economy, it increases the price 
of non-critical goods like housing. So, yes, you are right, 
they are related. The question is where is the driver, and I 
would argue the driver is attempts by countries to manipulate 
their currencies by intervening in currency markets where they 
proceed to subsequently invest it in very low yielding U.S. 
assets. It is not surprising when you force down the rate of 
return in U.S. investments and U.S. savings that people save 
less. So, the problem really again comes in that governments 
are trying to manipulate and in a sense distort our economy.
    Chairman LEVIN. I just went down the roster of those of who 
are here now, and I thought we might set a procedure if anybody 
comes back, they be at the end of the line, okay? So, I thought 
next we would go Mr. Stearns and then try to alternate 
Democrats, Republicans, okay? Then next we would go Mr. 
Pascrell, I hope I have this right, Mr. Castle next, going 
somewhat by seniority and alternating, and then on the 
Democratic side, Ms. Moore. Then perhaps we could take Mr. 
Whitfield and Mr. Brady together, is that okay? Yes?
    Chairman RUSH. I have Judge Gonzalez.
    Chairman LEVIN. Oh, Judge Gonzalez, okay, I was getting to 
him. No, no, I was getting to him. Then after that, Mr. 
Gonzalez and then Mr. Manzullo and then Mr. Matheson and Mr. 
Roskam. Mr. Lucas, you are going to join us. We will play this 
by ear somewhat. Can we do that, is that somewhat fair?
    Mr. STEARNS. That is good.
    Chairman LEVIN. Okay, so, Mr. Stearns, you are next.
    Mr. STEARNS. All right, thank you, Mr. Chairman. Mr. 
Bergsten, you had mentioned five things that we have to do, you 
mentioned that we need to label them as manipulators, whether 
it is Japan or China; the second you mentioned get the support 
of other countries, particularly dealing in Europe; the third 
thing you mentioned is work up a WTO case against them on their 
Article 15; fourth, go after bilateral intervention; and, 
fifth, if nothing else works, then to look at Congress to solve 
the problem. I guess in that case you were talking about H.R. 
782. The question I have for you and also for Mr. Mohatarem, 
and Mr. Mohatarem mentioned this, I am trying to quantify that 
if you would, let's assume that we are able to get Japan and 
China to stop manipulating their currency and let's say it was 
successful over four or five years, give me the quantitative 
impact it is going to have in the United States. You tried to 
mention that, Mr. Mohatarem, when you mentioned that the SUVs 
or the luxury vehicles would be $14,000 difference between a 
General Motors and perhaps two different cars. But I will start 
with you, Mr. Bergsten, assuming everything works out, what 
would the American economy look like today with Japan and China 
not manipulating their currencies and if you can do it in a 
quantitative and maybe if you could do it in a short amount of 
time?
    Mr. BERGSTEN. Just to be clear on the premise, I suggested 
China should be designated a manipulator.
    Mr. STEARNS. Right, right.
    Mr. BERGSTEN. I did not say Japan should be designated as a 
manipulator.
    Mr. STEARNS. Yes, your five points were with China.
    Mr. BERGSTEN. That is right, though I believe the yen is 
under-valued and should be addressed separately. We have tried 
at my institute to do very careful analysis----
    Mr. STEARNS. If you could really refer us to a website or a 
position paper or a white paper, I would just like to see 
somebody that has done this analysis in which Congress and the 
Administration and everybody--I want to see what the impact is 
so when I go back and talk to my constituents I could say this 
is important to you and talk in quantitative terms.
    Mr. BERGSTEN. The website is www.iie.com. We published a 
new paper on it last week as part of our big China conference. 
It quantifies exactly what you ask for. The conclusion is 
roughly as follows: If the Chinese, Japanese, and other Asian 
currencies, which I think would follow, all went up by a mere 
20 percent, this would reduce the U.S. global current account 
deficit by about $150 billion per year after a 2-year phase-in 
period.
    Mr. STEARNS. You mentioned that but what would that mean to 
the economy? Everybody understands--everybody says, okay, you 
have got a trade deficit but no one really knows what that 
means, how would that affect the economy, the everyday 
American?
    Mr. BERGSTEN. You have to start from the fact----
    Mr. STEARNS. So, for $150 billion less trade, what does 
that mean for the average American?
    Mr. BERGSTEN. One hundred and fifty billion less trade 
deficit.
    Mr. STEARNS. Deficit, right.
    Mr. BERGSTEN. So, now we have got more exports.
    Mr. STEARNS. Right.
    Mr. BERGSTEN. Fewer imports.
    Mr. STEARNS. Right. Does that mean more jobs to the United 
States?
    Mr. BERGSTEN. Well, I am going to get to that. Remember, 
the U.S. economy is right now at full employment, a critical 
starting point. So, if we were to get a lot more jobs and have 
a lot lower unemployment rate, we probably would also have 
higher inflation and higher interest rates, things we would not 
be so happy about. So, the main conclusion is that we would 
have a different distribution of jobs in the economy. Export 
jobs would be promoted, which is a good thing. Export jobs pay 
15 to 20 percent on average higher than average manufacturing 
jobs. Likewise, we would have more import competing jobs 
because imports would now cost more, and there would be less 
demand for imports.
    Mr. STEARNS. Let's take a family in Michigan, in and around 
Detroit, what would that mean to Detroit?
    Mr. BERGSTEN. I do not have the job composition of Detroit 
right on my fingertips, but since autos is a big import 
competing sector, what I am talking about would create more 
jobs in the U.S. auto industry.
    Mr. STEARNS. Okay, I am just trying to understand should we 
be careful what we ask for here?
    Mr. BERGSTEN. Well, let me make one other point. Remember 
that we get that deduction in the current account deficit by a 
lower exchange rate for the dollar.
    Mr. STEARNS. Right.
    Mr. BERGSTEN. As I mentioned in response to the earlier 
question, that implies, everything else equal, a little higher 
rate of inflation, a little higher interest rate--there is no 
free lunch.
    Mr. STEARNS. No free lunch.
    Mr. BERGSTEN. It is a good thing.
    Mr. STEARNS. So, you are saying we would have higher 
interest rates and higher inflation.
    Mr. BERGSTEN. So, you come back to what Dr. Mohatarem just 
said, we would have more jobs in the tradeable goods sector, 
more exports, and more import competing jobs. We would have 
fewer jobs in the non-tradeable sector, like housing, because 
inflation and interest rates would be a little higher. There 
would be a change in the composition of employment, which on 
the whole would be good for the country.
    Mr. STEARNS. Mr. Chairman, I would just ask that one of his 
other panelists give his point of view too if you do not mind.
    Chairman LEVIN. Sure.
    Mr. STEARNS. Even though my time has gone out.
    Mr. MOHATAREM. Very quickly, over the last ten years, as 
the Japanese have succeeded in depreciating the yen from about 
95 it was prevailing and 97 to where it is now imports in Japan 
have gone up by about one million units. If you reverse the 
million units and assume that those would be domestically 
produced if the yen went back to 90, which is where we think 
they would be, that is roughly a $25 billion swing. Each 
billion dollars of imports or auto production is roughly 20,000 
jobs through the economy. So, take 20,000 by 25 and you are 
talking about roughly 500,000 jobs, not all of these would be 
in manufacturing, a lot of these would be in services because 
we use a lot of services as we produce cars as we ship them to 
our dealers and as our dealers sell them. So, you are talking 
about essentially reversing the damage that has been done to 
the economies in Michigan, Ohio, and other major auto producing 
states.
    Mr. STEARNS. Thank you.
    Chairman LEVIN. No, and I appreciate your pursuing it. Mr. 
Pascrell?
    Mr. PASCRELL. Thank you, Mr. Chairman. Mr. Chairman, I 
think it is a fair conclusion listening to the panelists and 
listening to the questions from the Committees that the 
Treasury Department of the United States has repeatedly, I say 
repeatedly, declined to find that either China or Japan 
manipulates their rate of exchange for purposes of gaining 
unfair competitive advantage in international trade. As Ms. Lee 
pointed out very succinctly, this is not a self-correcting 
problem. We are not going to get into today the difference of 
losing manufacturing jobs and gaining service jobs. I certainly 
do not want to get an advantage in the debate, I am looking for 
the truth.
    Ms. Lee, I have a question for you. Do you believe that 
H.R. 782, the Fair Currency Act, is WTO legal? and, if so, I 
want you to explain why.
    Ms. LEE. Thank you very much, Mr. Pascrell, for the 
question. I do absolutely believe in the lawyers that have 
worked with us in the China Currency Coalition who have issued 
a lengthy legal opinion as to the WTO legality of H.R. 782. A 
key point I think is that WTO rules and IMF rules supposedly 
address currency manipulation and rule it out but the key point 
is that neither the WTO nor the IMF seem to understand how to 
define currency manipulation and they seem completely unwilling 
to take any action. So, the idea of H.R. 782 is simply to 
clarify the definition and to give the administration new and 
stronger and better tools and prod the administration to use 
those tools and to use them in a way which is consistent with 
our international trading systems. So, I thank you for the 
question, and I do not know if one of my colleagues wants to 
add something to that.
    Mr. HICKEY. I agree 100 percent with Ms. Lee. I think the 
time we spent on making sure that it was WTO consistent on this 
legislation really is proof in the pudding.
    Mr. PASCRELL. Mr. Chairman, this is like a tennis match, it 
is like a tennis match, currency, manipulation of currency, 
advantage, China; subsidization of trade, advantage China. When 
do we get an advantage or when do we play on a level field? Mr. 
Evans, Mr. Secretary, I have a question for you. Even if the 
Chinese allow the currency to float tomorrow morning, we would 
still have a balance of trade problem I think. What should 
America do, what should we do to address some structural 
problems that exist at our end? I was specifically thinking 
about the 1 percent of savings of Americans compared to the 
savings in other countries. One could say, ``Thank God, the 
Chinese save so we can borrow,'' but the fact of the matter is 
that is a tremendous disadvantage in our country in terms of 
the very topics we have been talking about today. What should 
we do about that structural situation?
    Mr. EVANS. You are talking about the structural situation 
that we are not saving and the rest of the world is?
    Mr. PASCRELL. Well, that is a simplification of it, yes.
    Mr. EVANS. First of all, I would say--I would point to our 
economy today is in very good shape.
    Mr. PASCRELL. Well, that is your opinion, Mr. Secretary, I 
want an answer to the question.
    Mr. EVANS. In terms of the trade deficit, I would say we 
need to continue to have focus on opening up markets around the 
world for the goods and services of American workers. I think 
there needs to be ongoing emphasis on that. That means more 
free trade agreements with the rest of the world. I would 
encourage the passage and the signing of the Free Trade 
Agreement with Panama and Colombia, and I would continue to 
push for our trade promotion authority for the President. I 
think that we must understand how this world has changed and 
that we are just 5 percent of the people here in America and 95 
percent of the people live outside the borders of our country. 
So it seems to me that where our emphasis should continue to be 
is on opening up markets around the world, pushing China real 
hard to open up their markets for the financial service 
industry, et cetera. Dr. Roach I can see is wanting to respond.
    Mr. PASCRELL. Go ahead, Dr. Roach.
    Mr. ROACH. Can I just say in answer to your question what 
must we do to save? Five things, the first three are fix the 
budget deficit, the second two are----
    Mr. PASCRELL. How would you do that, Dr. Roach?
    Chairman LEVIN. Wait, Mr. Pascrell, the time is out and a 
question how do we fix the budget deficit I do not think can be 
answered in a few seconds.
    Mr. PASCRELL. Well, can he finish what he was going to say 
then?
    Chairman LEVIN. Just quickly because we have six or seven 
others.
    Mr. ROACH [continuing]. The second two is tax reform, some 
type of a consumption tax.
    Chairman LEVIN. Okay, Mr. Castle? Thank you so much for 
your patience and everybody else's but this is I think is a 
scintillating discussion, I know you will make it more so.
    Mr. CASTLE. Thank you, Mr. Chairman. I cannot believe he 
could not answer the question on how to fix the budget in a few 
seconds or even minutes for all it matters, I would love to 
hear that answer. Actually I am going to ask some questions 
along that line, but I want to go to Dr. Bergsten. I need some 
help with this perhaps Economics 101, and I am not asking you 
how to fix the budget although I would love to know how to do 
that, the deficit issues. We referred to our deficit and all of 
you basically in your comments referred to the ownership of 
American debt as being a problem here so I can see that as 
underlying problem in terms of our deficit. But I would like to 
know how--to have an economic explanation of the whole 
interplay of the deficit of the United States of America on 
this particular trade problem. You mentioned it in your written 
testimony, I am sorry I was not here for your oral testimony, 
in discussing it and how we have to address it immediately and 
that would help greatly with the trade issue. This is the kind 
of the thing that most of us who run for Congress run on, but I 
am not sure we totally understand it. I would be interested in 
connecting all the dots with respect to that if you could help.
    Mr. BERGSTEN. We used to hear the term ``twin deficits,'' 
referring to the budget deficit and the trade deficit. They are 
not twins. They do not always move precisely together, but a 
bigger budget deficit clearly promotes a bigger trade deficit 
for two reasons: When government net spending goes up, unless 
there is some corresponding increase in domestic output, we 
import the difference. So, it adds to total domestic spending, 
unless something on the output side miraculously occurs 
simultaneously, we are buying more than we produce at home, we 
import the difference, and the trade deficit goes up.
    That is one mechanism. The other mechanism is that when the 
budget deficit goes up, the government's borrowing from the 
capital markets puts more pressure on those capital markets, 
and drives interest rates up. Those interest rates attract 
foreign investment, which drives up the exchange rate of the 
dollar. That reduces the price competitiveness of our products 
and the trade deficit goes up. So, you have got two channels 
running from higher budget deficit to higher trade deficit and 
that is a very well-established proposition. There is a learned 
debate as to what the ratio is, is it 0.5 to one, is it 0.3 to 
one? I think 0.5 is probably about right. So, roughly for every 
dollar the budget deficit goes up, you could expect about a 50 
cent increase in the external deficit. If we want to get the 
external deficit down, the best and only way we know to do it, 
is to get the budget deficit down. I would say convert it to a 
small surplus, which would mean less pressure on capital 
markets and on attracting imports to meet our total national 
spending requirements.
    Mr. CASTLE. Let me just sort of ask a follow-up question 
along the same lines as being educated. China is apparently 
acquiring a lot of the debt of America, taking our notes, 
bonds, et cetera. Can you tell us exactly how that affects the 
value of the currency, the RMB, by the fact that they hold 
that?
    Mr. BERGSTEN. If the Chinese currency were floating in the 
exchange markets, like the dollar, euro and many other 
currencies do, then the proceeds of the Chinese trade surplus 
and of all the foreign investment coming into China would 
amount to dollar in-flow buying Chinese currency and the price 
of the Chinese currency would go up. The Chinese abort that 
process by having their central bank buy those dollars at a 
fixed price so they do not affect the market price of the 
currency. There is no market price for the currency, which is 
why it is called a ``fixed'' exchange rate. It is an anomaly in 
today's world but they do it. That is the source of this huge 
buildup in their foreign exchange holdings. When the Central 
Bank of China buys those dollars for RMB to keep the price of 
RMB from going up, it has a big buildup of dollars. What do 
they do with those dollars? They turn around and buy U.S. 
Treasury bills or agency securities. That money then increases 
our money supply, which holds down our interest rates, thus 
supporting our housing. That is the source of the problem.
    Mr. ROACH. But there is a corollary to that, Mr. Castle, 
and that is if the Chinese elect or are forced to raise their 
currency, that means that they will be buying less in the way 
of dollar-based assets. The question we must then address is 
who is going to fund us at current levels of the currency, the 
dollar and real interest rates. The odds are that that does 
imply some fairly sharp adjustments in the prices of our 
assets.
    Mr. BERGSTEN. Let me just respond with one actual----
    Mr. HICKEY. Can I just make a comment on what Fred said? 
For the last 10 years, we have had increasing changes in the 
government fiscal policy in the United States, we have had 
surplus and we have had deficits. Every year the deficit with 
China gets worse, so the theory is great but the theory does 
not work when the other countries intervene. Last year, the 
Federal budget deficit went down. We had a 15-percent increase 
in the trade deficit with China. The Chinese economy grows at 
10 percent a year, our trade deficit grows at 15 percent a 
year. We are now importing what, 8 or 9 percent of Chinese GDP? 
This is rigged game. Anybody who does not understand this has 
to have their head examined. Fred has got great theory but the 
reality is that we have had major changes in Federal surpluses 
and deficits over the last 10 years and our trade deficit keeps 
going up.
    Chairman LEVIN. Fred, 5 seconds.
    Mr. BERGSTEN. The theory is right but he is also right that 
the distribution of our imbalance goes to those surplus 
countries. I made the point that the Europeans let their 
exchange rate go up. As a result, our trade deficit with Europe 
has gone down, but he is right because the Asians are running 
the big surpluses. That is why they have got to be the central 
players in Act Two of the correction of the imbalances.
    Mr. CASTLE. Thank you, Mr. Chairman.
    Chairman LEVIN. Fred cleared the way for your question.
    Ms. MOORE. Absolutely, that was a dynamic exchange, thank 
you very much. I have listened very carefully to you all, and I 
realize that I know less than I thought I knew before I got 
here. I guess I want to start by asking Dr. Bergsten to 
elaborate on his observation that historically the U.S. dollar 
has been over-valued. We have talked a lot about the under-
valuation of the Asian currency and you seem to suggest that we 
have contributed a great deal to our trade deficit, our 
inflation, and our own situation by over-valuing the dollar. In 
a sort of a devil's advocacy role, I would like to say are we 
now saying, well, gee, we have gotten ourselves into this 
situation and so the solution should be now we are going to 
force others to inflate the value of their currency. Then I 
might follow-up with a question that perhaps Dr. Roach would 
like to jump in to try to--I am concerned as a Member--I am 
here as a Member of the Financial Services Subcommittee on 
Domestic and International Monetary Policy, and I am curious 
and suspicious that some of the debtor nations that we have 
tried to help have in fact seen their economies fail because we 
have in fact tried to force some conditionality on them and 
force them into a rapid rise in their currency to meet our 
expectations and investors' expectations.
    Mr. BERGSTEN. U.S. history is actually rather depressing 
because we do not seem to learn from that history. We have now 
gone through four major cycles in the last 30 or 40 years, all 
of which started with low saving and a big increase in 
consumption--whether it was the Reagan tax cuts in the 1980s or 
low interest rates now--which has led us to overspend in terms 
of our domestic production possibilities. Our trade deficits 
keep going up; and foreigners keep building up dollar balances. 
This happened in the early 1970s, the mid-1980s, it happened in 
the mid-1990s. At some point about once a decade we suddenly 
get alarmed and decide we do not like that, and are running too 
big a risk. So, then we act to drive down the exchange rate of 
the dollar. President Nixon devalued twice in the early 1970s. 
Jim Baker did the Plaza Agreement in 1985, drove the dollar 
down by 50 percent over the next 2 years because he realized 
that we had to make major changes to avert the risk of a total 
dollar collapse and I might say a huge outbreak of 
protectionism here in the Congress. So, we have gone through 
these cycles where we permit our external balances to grow and 
then they hit a point where either the foreigners stop 
financing us or more likely we realize there is too big a risk 
thereof and decide to drive the dollar down and take corrective 
actions ourselves. All this has been severely and sharply 
abetted by a major structural fact, which is now changing and I 
should emphasize to the Committee that we have been able to do 
that in part because the dollar has been the world currency for 
a century. Other countries and private investors around the 
world have been happy to buy dollar assets because the dollar 
is the world currency. That fact has certainly made it easier 
for us to finance these imbalances, lull ourselves to sleep, 
and let these things build up.
    Ms. MOORE. So we have manipulated our currency?
    Mr. BERGSTEN. It was not overt manipulation but it was 
certainly acceptance of an over-valued currency because, as I 
said before, in the short run it is great to live on your 
credit card.
    Ms. MOORE. So I am running out of time so I want to get to 
Dr. Roach because here we are, had Japan and China been smart--
--
    Mr. BERGSTEN. Now comes the euro, a currency based on an 
economy as big or bigger than ours. The U.S. dollar is no 
longer the sole world currency, and that is going to make it 
much harder for us to do in the future what we have done in the 
past.
    Ms. MOORE. Thank you.
    Mr. ROACH. Just in answer to your question, go back 20 
years ago, the same room, the discussions were all about Japan, 
and we gave Japan very strong advice that it needed to engineer 
policies that would lead to a sharp appreciation of the yen. 
The Japanese look back on that as a huge mistake. They had 15 
years of rolling recessions and deflation. The Chinese are very 
mindful of that experience and very wary of taking bad advice 
from us again. I think that is a very important context to 
think about. I would also--there is a huge difference with the 
Chinese and the Japanese, the Chinese have very undeveloped 
capital markets and I think are much less able to deal with the 
types of sharp currency adjustments as a result that are being 
recommended by many of my co-panelists today. So, I think this 
could prove to be a much more serious and difficult issue for 
them to adapt to than we are allowing for.
    Chairman LEVIN. All right. Here is the roster, Mr. 
Whitfield and Mr. Brady and Mr. Gonzalez, Mr. Ryan has been 
here, I think, Mr. Roskam, if it is okay you will go last. So, 
does that cover everybody? I think so. All right, thank you 
very much for your patience. Mr. Whitfield and then Mr. Brady?
    Mr. WHITFIELD. Thank you, Mr. Chairman. I also want to 
thank the panel for being with us today and spending this time. 
There is a tendency in Congress to look for silver bullets, and 
we always are enthusiastic about legislation that would help 
protect manufacturing jobs in the U.S. and help us create more 
jobs and so forth. We have heard some discussion today about 
Mr. Ryan's bill with Mr. Hunter, and I know, Mr. O'Shaughnessy, 
you support that and Mr. Hickey and I think Ms. Lee and others. 
But on a scale of one to 10, how far would Ryan-Hunter go in 
really addressing this issue that we are dealing with today? Do 
any of you have any thoughts on that? Yes, Mr. Roach?
    Mr. ROACH. I think on a scale of one to ten, I would 
qualify it as a three and that is because by fixing the Chinese 
bilateral trade deficit, the question is what about the other 
$500 billion of trade deficits that America runs with the rest 
of the world. We cannot delude ourselves into thinking that we 
can have a bilateral fix from a multi-lateral problem. This is 
flawed macro-economics.
    Mr. WHITFIELD. Okay.
    Mr. ROACH. It is a point that I stressed repeatedly in my 
opening remarks and it is one that just seems to be ringing on 
deaf ears.
    Mr. WHITFIELD. Dr. Bergsten?
    Mr. BERGSTEN. No, Steve is right about that but Ryan-Hunter 
applies to all currencies. A focal point is China but the 
principles and rules that are put in place, as I read them, 
would apply to all currencies. Now, if we got the renminbi up 
substantially, 20 or 30 percent, it would pull the other 
currencies up through the market repercussion, but the bill 
would permit going after others, not only for manipulation but 
for fundamental misalignment, which would then apply to my 
concept of Japan and some others in the region even though they 
are not ``manipulated.'' So, I give Ryan-Hunter a higher grade, 
but I am not sure if it is a five or six. The bill does not 
solve the whole problem, but it goes a good distance and is a 
lot better than what we have now.
    Mr. WHITFIELD. Okay. Mr. O'Shaughnessy?
    Mr. O'SHAUGHNESSY. As to currency manipulation, I would 
give it about an eight.
    Mr. WHITFIELD. Okay.
    Mr. O'SHAUGHNESSY. I think that if you understand though 
that once currencies are all market-oriented, market-changed, 
then what is going to happen is our currency is still going to 
depreciate.
    Mr. WHITFIELD. Right.
    Mr. O'SHAUGHNESSY. That gets to, that is why on a scale of 
all of the things we need to do, it is just one of three or 
four things.
    Mr. WHITFIELD. Right. Mr. Hickey?
    Mr. HICKEY. Mr. Whitfield, this is a nine or a ten compared 
to what we have today.
    Mr. WHITFIELD. Okay.
    Mr. HICKEY. We have no effective policy tools today.
    Mr. WHITFIELD. Okay. Are trade deficit inherently bad?
    Mr. BERGSTEN. Trade deficits, like almost any economic 
phenomenon, have costs and benefits.
    Mr. WHITFIELD. Right.
    Mr. BERGSTEN. Trade deficit means we are importing more 
stuff, which holds prices down; it creates jobs in the 
importing sectors, retailers, et cetera. To me it is not 
whether it is a good or bad thing, it is what magnitude is 
sustainable. On my judgment, about half where we are now. We do 
not have to get rid of the whole $800 billion deficit, Steve 
kind of mis-spoke there. I think you have to cut it roughly in 
half, which would be an optimal level. There is no reason any 
country should run a zero trade balance.
    Mr. WHITFIELD. I notice in Germany, for example, they have 
a $200 million-plus trade surplus and yet they have an 
unemployment rate of around 10 percent or so.
    Ms. LEE. Yes, if I could also, I think the point is not 
that a trade deficit in itself is separate from other things in 
the economy, but I think the point is in the United States what 
we have done with our trade policy is to put in place a set of 
policies, including currency tax and trade rules, that actually 
encourage companies to move jobs offshore. Very few other 
countries in the world do that. Most countries are trying to 
figure out how to keep good jobs at home.
    Mr. WHITFIELD. Right.
    Ms. LEE. We have had a policy which is upside down, and I 
think one of the key things about the currency issue is what I 
said earlier, that it is a double-edged sword, that there are 
beneficiaries to an over-valued dollar.
    Mr. WHITFIELD. Right.
    Ms. LEE. The beneficiaries to that dollar, to the over-
valued dollar, are companies that are producing offshore for 
selling in the United States that are retailers or importers or 
outsourcers and for those companies, that can be a very good 
policy. For those of us here in the United States, American 
workers, we cannot outsource ourselves, we live here. We need 
to be able to find good jobs here in the United States. You 
look at the long downward slide in real wages in this country, 
the stagnation of wages for the majority of American workers, 
and I think you have to say that our trade policies have 
undermined our ability to get good jobs here in the United 
States.
    Mr. WHITFIELD. I see my time has expired.
    Chairman LEVIN. Your time is up. Okay, Mr. Brady you join 
and maybe you would yield a second, you are twins today.
    Mr. BRADY. That is the first time I have been called that. 
Thanks, Chairman, great panel today. A couple of thoughts, 
first, just for the record, we happen to address some of 
China's disputes with this filing and wining cases on 
semiconductors, the settling in our favor of Kraft fiber board. 
We filed cases against China in auto parts, nine different 
illegal import and export subsidies and two separate 
intellectual property cases. We have also done a number of U.S. 
trade remedy laws, tariffs on steel, bedroom furniture, brake 
rotors, and textile surges, all as a result of bilateral and 
other agreements we have had. We can say we are not doing 
enough and be accurate. It is inaccurate to say we have done 
nothing on China in trade enforcement issues. There is no 
question the currency needs to float at market rates, the 
question is how fast and what real impact it has on us. Like 
Mr. Whitfield, I do not think this is the magic potion that 
everyone in Congress makes it out to be, a good example is 
Revere Copper. Here is a company, a highly respected, 
historical company but like others have faced a number of 
issues, closing plants in Detroit in the 1980s, long before 
China currency was an issue, having serious labor disputes, 
including strikes, accusations of bribery at the Hanibel 
smelter, and accusations of off-shoring and Hb1 abuses. In 
manufacturing news, Mr. O'Shaughnessy, as he just mentioned a 
few minutes ago, blames our high tax rate and method of 
taxation in making him non-competitive on a world-wide basis, 
and now it is China. I am not criticizing Revere Copper, just 
the opposite. I think in today's competitive world it is a 
combination of labor, taxation, health care, and open markets 
that all make it very difficult to compete in the world market 
today. It is more complex than people say.
    The solutions we are looking at today, Mr. Chairman, I 
worry tend to focus on punishing one group, U.S. consumers. A 
higher yuan means higher prices for U.S. consumers. Higher 
tariffs is higher prices for U.S. consumers. A stronger dollar 
is higher prices, higher inflation, higher interest rates, all 
on U.S. consumers. I think we ought to be focusing on solutions 
that have been proposed today not just in savings, and it was 
interesting to hear Dr. Bergsten's point about assets-based 
savings versus capital and cash-based savings--or Dr. Roach's, 
very interesting. It is an area where Republican and Democrats 
ought to be working together. But we have not talked much about 
overall increasing these markets overseas in a significant way. 
We have seen recently in the last few months the lines cross. 
The growth in our sales overseas is now growing faster than the 
growth of what we are buying, not in numbers but the increased 
percentages, including in China. Our exports and sales to them 
grew by a third last year. We bought 18 percent more. Those 
numbers have crossed in the right trend. We ought to be, again 
Congress, ought to be looking at ways to accelerate that trend 
of sales of overseas.
    We also, and I am curious, Dr. Bergsten, I think you are 
right about one of the ways we address China's export surges 
really is to curb their investment in industry and export type 
industry. Can we not address that not simply through the 
currency but since they have a banking system with an estimated 
40 to 50 percent non-performing loans, much of that capital 
going to those industry export-oriented enterprises throughout 
their country, what steps can we take to force them to address 
their capital system, which is I think contributing just as 
much as the currency to their export mentality?
    Mr. BERGSTEN. Well, I am with you on the analysis, and 
Secretary Evans stressed that earlier too, but I am not sure we 
can do much to force them to improve their financial system. 
They want to do it for their own reasons--and I give Secretary 
Paulson great credit--I think that has been at the top of his 
priority list as he worked with the Chinese in the Strategic 
Economic Dialogue and elsewhere. But again I will come back to 
the point I made in one of the earlier discussions: huge price 
distortions in your economy, like a grossly under-valued 
exchange rate, give all the wrong signals to the banks. The 
banks in China continue to lend to the inefficient state-owned 
enterprises which are enjoying a 40 percent export subsidy. 
Over time these state-owned enterprises are going to fail, 
creating more non-performing loans. Under current pricing 
signals and the current structure of China's growth, it is not 
irrational for the banks to make loans to these companies. 
Maybe everything reminds me of the exchange rate, but to the 
extent we can get them to move that variable, it will help 
resolve the problem you quite rightly emphasize.
    Mr. BRADY. I think perhaps the worry I have is that rather 
than punish U.S. consumers as the solution for this trade 
deficit and China's issues, why do we not put the onus back on 
China and provide a little pain over there because it just 
seems to me that this is such a complex issue that we ought not 
to be standing up in townhall meetings bashing China but 
looking at the very people who will end up paying the price for 
some of these solutions?
    Chairman LEVIN. Let me suggest this, I think that you have 
opened up a number of issues and others want to participate, so 
let's leave it at that. We will have that debate about the 
progress that has been made----
    Mr. BRADY. Well, Chairman, one point----
    Chairman LEVIN [continuing]. Or lack of it.
    Mr. BRADY [continuing]. That echoes you is that I think the 
solution here is less a sledge hammer and more a surgical knife 
if we are going to do this right.
    Chairman LEVIN. Okay, I think there are differences of 
opinions as to that description. But I think Mr. Gonzalez was 
next, Mr. Manzullo, and then Mr. Roskam. Thank you again for 
your patience.
    Mr. GONZALEZ. Thank you, Mr. Chairman. I would request 
unanimous consent at this time to submit for the record a CRS 
report that is entitled, ``Japan's Currency Intervention Policy 
Issues, Updated April 12, 2007,'' from which I will actually be 
citing.
    Chairman LEVIN. Without objection.
    [The provided material follows: PENDING]
    Mr. GONZALEZ. Thank you very much. The first question would 
go to, is it Dr. Mohatarem? That is as close as I am going to 
get. But I know your testimony has focused more on Japan than 
China and obviously we are consumed with China but nevertheless 
let me go ahead and cite from the summary of this particular 
report and see if you agree with this.
    ``Japan intervened, bought dollars and sold yen extensively 
to counter the yen's appreciation in 1976, 1978, 1985, 1988, 
1992, 1996, and 1998 to 2004. Since March 2004, the Japanese 
government has not intervened significantly, although some 
claim that Tokyo continues to talk down the value of the yen. 
This heavy buying of dollars has resulted in accumulation of 
official foreign exchange reserves that exceeded a record of 
$888 billion as of March 2007 by Japan.
    The intervention, however, seems to have had little effect. 
It may only have slowed the rise in value of the yen since the 
yen rose from 296 yen per dollar in 1996 to 103 yen per dollar 
at the end of 2004. In the spring of 2006, the exchange value 
of the yen had depreciated to about 119 yen per dollar. Japan's 
intervention, therefore, amounted to what is called `leaning 
against the wind' or intervening in smooth, short-term trends 
rather than to reverse the direction of change.''
    How do you interpret that particular finding in their 
summary? Again if you could be brief because I am going to have 
time probably for one more question.
    Mr. MOHATAREM. As I mentioned before, when you make it a 
one-way bet, every time the yen is appreciating, you are going 
to intervene very heavily, and when the yen weakens for 
whatever reason, you leave it alone. Currency traders assume 
that the normal behavior where if you expect the currency to 
appreciate, you begin to buy that currency, that corrective 
mechanism will not be allowed to work, you do not have to 
intervene as much because you have already made your point that 
you are going to be intervening if it goes in the other 
direction and by such massive amounts that you are going to be 
able to overcome any of the market pressure.
    The second point I would make is somebody needs to teach 
CRS economics. They are looking at nominal exchange rates, not 
real exchange rates, inflation adjusted. Because Japan has had 
deflation or very low inflation, the real value of the yen has 
been dropping. In fact, as the Bank of Japan itself notes and 
as Morgan Stanley's estimates show, the real value of the yen 
right now is weaker than it has been in 20 years. So, yes, they 
are correct that if you just looked at the nominal rates, 
unadjusted for inflation differentials, it looks like the yen 
has appreciated. But in fact because Japan has had deflation, a 
rate of inflation, the real value of the yen now is cheaper 
than it has been in the last 25 years.
    Mr. GONZALEZ. I appreciate your view on that particular 
finding. I also want to point out it is so important to look at 
the distinct differences of the relationship of the United 
States economy with Japan as opposed to China in its present 
situation and then looking forward.
    Dr. Roach, quickly, a couple of things that you said that 
somewhat concern me, Robert Samuelson's article today in the 
Post, most of you probably already have read it, is discussing 
the Chinese as an emerging market as someone that could 
basically represent a huge consumer base for us.
    ``Even Chinese officials favor higher local demand but 
either they cannot or will not stimulate it. Personal 
consumption spending is a meager 38 percent of GDP. That is 
half of the United States rate of 70 percent. The Chinese say 
that astonishingly high levels, partly because they are scared 
of emergencies, the social safety net is skimpy, health 
insurance is modest, out-of-pocket spending covers half of 
medical costs reports economist Nicholas Lardy of the Peterson 
Institute. There is no universal social security and only 17 
percent of workers have pensions, a mere 14 percent are covered 
by unemployment insurance.''
    I know that you have vast quantity of individuals there 
with limited capacity and so on, maybe that will offset it 
somewhat. I am going to ask for your own interpretation of this 
particular article.
    Secondly, though he seemed to indicate that right now what 
is being set up as far as the United States' foreign investment 
in business, and by the way, while we wait for that society to 
catch up, Mr. O'Shaughnessy and Mr. Hickey will be out of 
business. Number two, he seemed to say that what we are setting 
up in China is basically assembly but let's take Intel. If 
Intel sets up shop there, do you not believe that it is much 
more than just cheap labor, it is our technology that will be 
subsumed and assumed by what probably will be our greatest 
competitor. I guess really what we have in stock is really 
technology. But are those concerns that we should be addressing 
presently as China evolves?
    Mr. ROACH. You ask an awful lot of very important 
questions. Let me just answer one of them if I could.
    Mr. GONZALEZ. Please.
    Mr. ROACH. China, a year ago enacted a new five year plan, 
very, very focused on dealing with a number of the impediments 
to a consumer-led society, all of which you address which were 
written about by Bob Samuelson today. It is not going to happen 
overnight. They are definitely focused on social security, 
pensions, unemployment insurance, and worker training to deal 
with the huge degree of income and job insecurity that is out 
there. When they get there in the next three to five years, 
that will be an extremely important opportunity for still 
competitive U.S. companies to take advantage of what will be 
the world's greatest consumer market. That is an important 
point. What is missing here in this discussion is 30 years ago 
China was on the brink of collapse. They have used deliberately 
an export-led growth strategy to come back out of that and now 
they want to migrate to more of a balanced consumer-led growth 
strategy. What is wrong with that if it improves this economy 
as being an increasingly solid participant in the broader 
global economy with opportunities for all of us?
    Chairman LEVIN. All right, I think we will have to leave it 
at that.
    Mr. GONZALEZ. Thank you very much, Mr. Chairman.
    Chairman LEVIN. Thank you. Mr. Manzullo, you are next.
    Mr. MANZULLO. First of all, I am a 100 percent free trader. 
I have one of the finest free trade voting records in Congress 
and am in the process of helping re-write the Export 
Administration Act, yet I am still a cosponsor of Ryan-Hunter. 
So, being a free trader is not inconsistent with supporting 
that bill. Second of all, here is a quote of Madam Wu Lee, vice 
premier, on April 22, 2004 before the U.S.-China Business 
Council, I was there, ``China has a market-based managed 
unitary floating exchange rate.'' That is where we start. That 
is the definition of what to do with their currency, out of 
their own words.
    Second of all, with regard to Dr. Roach, I with all 
respect, questioning a country's monetary policy is not bashing 
that country any more than questioning the United States' 
approach to China and what we think may be a mistake or 
improper is not bashing the United States. We represent 
millions of people, thousands in my congressional district who 
have lost high-paying manufacturing jobs, I do not bash any 
country, I am in pursuit of truth. Dr. Roach, again, I think 
that you should remove from your remarks the fact that you 
accuse us of bashing China, that is not correct. We are just 
trying to seek the truth and do the best for the people that we 
represent.
    Secretary Evans, page three of your statement, I agree with 
almost everything in there but when you say that China's 
economy is so under-developed that its immediate shift in the 
market because of the lack of derivatives, stock market, et 
cetera, will really create havoc, I think when you say that you 
encourage the Chinese to do absolutely nothing, not you, but 
the statement encourages them to do nothing and not to grow up. 
I have met a lot of Chinese and they are graduates of the same 
colleges you guys went to, they know the system better than we 
do. In fact, they are investing in our markets and making more 
money than we are. They understand the system. But at the same 
time, they cannot say that their economy is under-developed and 
yet they can develop a sophisticated rocket so precise that it 
can knock a satellite out of the sky. So we have to realize 
that we are actually dealing with a very sophisticated country.
    Dr. Mohatarem, you work at General Motors and you criticize 
the Japanese for manipulating the market, yet I saw an official 
memo from GE--General Motors, to one of your fastener suppliers 
demanding that a portion of the fasteners from China come from 
China, which I find interesting because at the same time GM is 
screaming about Japan and unfairness, in the actual price of 
your cars, you are forcing American manufactures to outsource 
from China on fasteners which are not covered by the Fastener 
Quality Act of which I personally re-wrote in this Congress 14 
years ago.
    Fred Bergsten, you made a statement with which everybody 
agrees and that is the currency manipulation has created a 
false economy and that is what we are dealing with here. It is 
an economy that is false. That is what Bill Hickey is talking 
about over there when we work with unfair currency and the same 
Mr. O'Shaughnessy, when we help file a short supply petition 
against China for cornering copper scrap. Remember what 
happened, Bill? The day we filed the petition, they backed off 
on it. So, I just wanted to bring all this together here 
because we must start with the assumption of Wu Lee, that we 
are in a false economy. There are 44,000 U.S. manufacturers 
manufacturing in China, sending goods back to the United 
States, do you really think they want to see the RMB at its 
true value and see the cost of labor go up in China? But what 
has happened is because the United States had done nothing, 
essentially we have encouraged the American manufacturers to go 
overseas to get involved in a false economy and if something 
happens to make right, to do the right thing, to make sure that 
the currencies float, to let the market economy itself govern 
the impact of fairness in currency, we come here now and have 
all these discussions about the dramatic impact that could 
have. If anybody wants to respond, that is fine.
    Mr. O'SHAUGHNESSY. Yes, I would please, Congressman.
    Chairman LEVIN. Very, very briefly if you would.
    Mr. O'SHAUGHNESSY. Okay. First of all, I think when Steve 
Roach talked about China migrating to a consumer economy, the 
word ``migrate'' was a very good one, I am thinking in terms of 
how people migrate over centuries and here is how their 
migration has gone, when they changed their currency to this 
market basket, they have migrated at the rate of 3.5 percent a 
year while the underlying rate of appreciation is probably 5 
percent and they have made things worse. To put things in 
perspective, how important currency is, let's prioritize and 
quantify, currency to Revere is worth 40 percent of our costs. 
VAT taxes or a consumption type tax and health care costs are 
worth 20 percent. So, right there is 60 percent, so clearly 
currency is number one.
    Chairman LEVIN. The bell is ringing. Mr. Roskam, you are 
going to have your minutes and then it is set up rather well, 
Mr. Ryan, you are going to have a few minutes to conclude the 
hearing since your bill has been mentioned [continuing]. Thank 
you for your patience.
    Being a freshman has marvelous attributes, except one.
    [Laughter.]
    Mr. ROSKAM. Thanks, Mr. Chairman, very much. Thank you all. 
You know, it is, all kidding aside, it is really helpful to sit 
and listen to you all. You come to this with good faith and a 
very high view of the process, and it's really encouraging to 
someone like me.
    In the interest of full disclosure, I represent the West 
and Northwestern suburbs of Chicago. Within that area, 
depending on who you're talking to, feels pretty conflicted 
about this issue. I've got Mr. Hickey's counterparts, who are a 
little bit further west than him, manufacturers, tool-and-die 
folks. I've got thousands of Motorola employees, Tel Labs 
employees and so forth that are involved in very robust trade 
with China.
    So, I find it interesting. Unlike Mr. Manzullo, I don't 
have a history with any of you, so you're all a clean slate as 
far as I'm concerned. What I've heard basically today if you 
distill it down--what I've heard--you may not have said this, 
but what I heard was sort of two versions of the same theme. 
One was stay the course, and I understand the rationale behind 
that. The other is pull the trigger in terms of the Ryan-Hunter 
bill.
    What it strikes me is when you distill this all down, it is 
what is your tolerance for pain? How much water are you willing 
to take on? How far will go into the wind in order to get to a 
point where you're dealing robustly with a billion consumers 
potentially?
    Mr. Evans, I understand the nature of wanting to wait it 
out in terms of the financial services sector developing so 
that China has the tools in order to do that. Meanwhile, the 
Mr. Hickeys of the world are struggling in terms of real 
lifestyle change possibly, certainly if not for him, then for 
his children and the workers around him.
    I'm wondering, you know, there's value to this conversation 
because the negotiators then can go back and say, look, you 
know, these guys in Congress, they're serious. They're not 
kidding. It does drive the discussion. So, I think that that's 
helpful in terms of putting pressure on China. But I'm not sure 
that either of the two alternatives that we've heard today are 
really the best alternatives; stay the course or pull the 
trigger.
    Is there a third way? Is there a neutral--not a neutral, 
but is there something that moves the ball? Maybe, Mr. 
Secretary, you could address that.
    Mr. EVANS. Well, look, I just want to be clear. China is 
not moving fast enough on currency exchange. They need to pick 
up the pace. Now what--how much pick up the pace, I don't know. 
I can't define that precisely for you. But I think this is a 
very important discussion that we're having right here. Because 
I think it will create the environment for them to pick up the 
pace.
    They'll learn that Congress is serious about this. I 
encourage all Congress men and women to go over there and spend 
time in China and get to know the leaders over there and 
understand where they're coming from. But it is important for 
Congress to send signals to them, like it's important--you 
know, I commend Secretary Paulson, as was said earlier, for the 
strategic economic dialog that's underway. We've got active 
dialog with them all the time there, and I guarantee you, every 
time they're talking, you've got to pick up the pace in moving 
toward market-based currencies.
    But, you know, they do have the problem of developing the 
markets for futures and forward trading and swaps and 
derivatives and everything else so that they don't run a risk 
of their economy having some kind of hard landing or soft 
landing like so many economists were worried about just four or 
5 years ago. Four or 5 years ago when I went over there, 
economists were saying they're going to have a hard landing or 
a soft landing. Nobody seemed to know.
    But I want to be clear that I'm not to stay the course, you 
know, everything's okay. I think we need to keep the pressure 
on them to pick up the pace.
    Mr. ROSKAM. Thank you. Yes, sir?
    Mr. BERGSTEN. With due respect to Secretary Evans, the 
weakness of China's financial markets is not a deterrent to the 
kind of currency adjustment I'm talking about. I am not calling 
for China to freely float its exchange rate. That is not 
necessary. They can do one-shot revaluations. They can manage 
their float upward like they've managed it to stay flat. None 
of that will worsen their financial markets.
    Over time, they need better financial markets to have a 
truly floating rate. But they do not need that in the short 
run. In my statement, I tried to offer a middle course between 
``stay the course'' or ``pull the trigger.'' We have 
multilateral institutions and rules. We have not tried to use 
them very much. Treasury has gone to the IMF, but not really 
very hard. We have not brought a case to the WTO--some 
colleagues on the panel tried to do it, but were rejected by 
the administration, as was testified.
    We could take China to the WTO under existing rules of the 
game, which, on our analysis, is not a slam-dunk, to use the 
current terminology, but it would have a significant chance of 
both bringing some justice to the outcome and putting more 
multilateral pressure on the Chinese to move their own 
policies. So, in my preferred solution in my statement, that's 
what I was offering. If it doesn't work, they have to pull the 
trigger. But I think we should go those multilateral, middle-
course routes first.
    Chairman LEVIN. Talking about legislation, I'd like to have 
Mr. Ryan take a few minutes, and then we're going to adjourn*.
    Mr. RYAN. Thank you, Mr. Chairman, thank you for having 
this hearing, trilateral, and thank you for allowing me to be 
in this beautiful room. I thought I was important as an 
appropriator until I got into this room this morning.
    I appreciate everyone's testimony and comments, some more 
than others, of course. Mr. O'Shaughnessy and Mr. Hickey's 
grade curve, I appreciate much better than Dr. Roach's for the 
Ryan-Hunter bill.
    A couple of points I want to make, just what Mr. Manzullo 
said. You know, this is not about China bashing. We have 
constituents in our district who are losing their jobs, and 
Wheatland Tube, which is a business in my district, they have 
tubing coming over from China. The end price for the tube 
coming over from China is the same cost as the raw materials 
for Wheatland Tube. So, there's a significant advantage here 
that we just want to say, level the playing field off.
    So, I do have a couple of questions. Dr. Roach, one of the 
questions I have, if the RMB was valued where it should be, 
what would that mean for investment in the United States?
    Mr. ROACH. I think--first of all, I'm not sure, just 
clarify. Where do you think it should be?
    Mr. RYAN. Well, if it was, you know, valued more than it 
was today by a percent or two or three----
    Mr. ROACH. Well, that's not going to make any difference by 
1 or 2 percent. If the RMB were raised by a large magnitude, I 
think, as I indicated in my statement, that would have very 
serious implications for the currency and the real interest 
rates in the U.S. It would weaken the U.S. economy and would 
have the counterproductive impact of really lowering investment 
near term.
    Over a long period of time, if the dollar were to move 
lower in a more gradual basis, that could begin to restore some 
investment back into the United States. That would take a very, 
very long period of time, along the lines of the migration 
point that was just made by Mr. O'Shaughnessy.
    Mr. RYAN. Ms. Lee?
    Ms. LEE. If I could, I mean, I think the point is that 
the--if the RMB were appreciated by 20 to 40 percent, which is 
what we would estimate would be needed, it has offsetting 
impacts, and I think it would be very healthy in terms of the 
long-term ability, the productivity of the United States 
economy, the ability to compete.
    Right now our trade deficit is undermining our GDP growth. 
It's cutting away at that, and we are, as everybody has said, 
we are consuming 6 to 7 percent more than we produce every 
year, and that's not good for us. We're borrowing from the rest 
of the world in order to fund consumption that we can't afford.
    So, you know, an adjustment of relative prices where we 
make--we make the price of Chinese goods more expensive, but we 
also enhance the ability the American companies to produce on 
American soil, it's the offsetting thing. We heard before talk 
about, you know, the punishment of consumers. Well, consumers 
are workers. We see the declining real wage, median real wage 
in this country.
    What we're saying is that even with all the cheap imports, 
American workers aren't doing well. They're not coming out 
even. They're not getting their fair share of what's there.
    I think it's because of stories like Mr. Hickey's and Mr. 
O'Shaughnessy's that well-meaning American companies that are 
doing everything they can to compete on American soil are 
having the rug pulled out from underneath them by our own 
government. So I--you have to look at both sides of it, not 
just at the investor side or the Wall Street side of that 
equation.
    Chairman LEVIN: I think we're going to have to finish 
because we have votes.
    Mr. RYAN. Can I ask just one quick question?
    Chairman LEVIN: Quick.
    Mr. RYAN. If Secretary Evans and Dr. Roach could answer. 
I'm sorry. I don't know if you've read the Fair Currency Act or 
not. Do you believe it to be WTO-compliant? Dr. Roach?
    Mr. ROACH. I'm afraid I do not. There is nothing in the WTO 
as it's written that really deals directly with treating 
currencies as an unfair subsidy. I think you'd have to go back 
and have the WTO provisions themselves redrafted to allow for 
that.
    Mr. RYAN. Dr. Bergsten?
    Mr. BERGSTEN. No. I don't think that's right. We've looked 
very carefully at the compatibility of the law and the whole 
idea. In fact some of my colleagues at the Institute and I 
wrote the subsidy code when we were at the Treasury 30 years 
ago. We know it fairly well.
    We think the cases that would be brought under Ryan-Hunter 
would certainly be plausible, arguable cases to bring to the 
WTO. We're not sure they would win, because the issue is 
unprecedented. It's never been addressed. You'd have to get an 
IMF finding that there was currency misalignment or 
manipulation. Then the WTO would have to apply it to its rules.
    You could pursue at least two channels that are certainly 
plausible and arguable, and on the face of it, there's no 
incompatibility between the law and the existing rules.
    Chairman LEVIN: Good I'm glad you had a chance to ask that 
question. So, we're going to adjourn to two o'clock. My own 
feeling about this excellent hearing is, I hope it sends a 
clear message. I also think this testimony is going to 
accelerate the consideration of legislation.
    Thank you very much. We stand in recess until two o'clock.
    [Recess until 2:08 p.m.]

AFTERNOON SESSION

    Chairman LEVIN: Thank you very much. I think we'll begin. 
So, this is the recess edition. We heard this morning from a 
distinguished panel, and I have a hunch that your staffs gave 
you some indication of the testimony. I hope so. Indeed, that 
was the purpose of structuring it this way so that we could 
have a rather full panoply of opinions, of approaches, of 
attitudes regarding the currency issues, and for the 
administration to come to give your perspective and any 
responses that you have.
    We thought it might make most sense to start with the Hon. 
Mark Sobel, who is the Deputy Assistant Secretary for 
International Monetary and Financial Policy at Treasury, and 
then the Hon. Stephen Claeys, who is the Deputy Assistant 
Secretary for Antidumping and Countervailing Duty Operations, 
Department of Commerce, and then the Hon. Daniel Brinza, who is 
Assistant USTR for Monitoring and Enforcement.
    That seemed to be the proper approach, because perhaps this 
is in part a question of the jurisdiction of each of the three 
of you, but in two of your cases, the testimony doesn't relate 
very much to the issue of currency that's before us, while the 
testimony of the Treasury obviously very much refers to it 
since there's no question about your jurisdiction, although I 
think there is a relevant role for the other two agencies.
    So, in view of that, why don't we start with you, Secretary 
Sobel, and then we'll go to the next two. Thank you again for 
coming. It's a mic. You have to push a button.

    STATEMENT OF THE HONORABLE MARK SOBEL, DEPUTY ASSISTANT 
SECRETARY FOR INTERNATIONAL MONETARY AND FINANCIAL POLICY, U.S. 
                     DEPARTMENT OF TREASURY

    Mr. SOBEL. Thank you, Mr. Chairman. Twice each year, 
Treasury issues a report to Congress on international economic 
and exchange rate polices as required by the 1988 Trade Act. 
This Act requires the Secretary to consider whether countries 
manipulate the rate of exchange between their currency and the 
U.S. dollar for purposes of preventing effective balance of 
payments adjustments or gaining unfair competitive advantage in 
international trade.
    Treasury takes the preparation of this report very 
seriously. We know that it is read closely by Congress, the 
financial community, the general public and foreign 
governments. We make every effort to ensure that we produce a 
comprehensive report that reflects the realities of today's 
international monetary and financial systems. Treasury has 
improved the coverage and analytic rigor of the report in 
recent years. Reflecting the significant changes in the world 
economy since 1998, we have strengthened our coverage of global 
economic development, the evolution of global imbalances and 
international capital flows. We have discussed the share 
international strategy for adjustment of external imbalances, 
and we have begun adding special appendices.
    Among the special appendices, one examines the role of 
various indicators important in addressing currency 
manipulation questions, provides illustrative scenarios on this 
question, and notes the wide array of countries that have large 
external surpluses for differing reasons.
    Another focused on methodological issues relating to 
evaluating whether an exchange rate is misaligned, noting that 
the range of estimates can vary widely, but certain inferences 
can be drawn about misalignment, provided the results are taken 
from a variety of models, and the results are largely similar 
in magnitude and direction. However, these results must be 
supplemented with assessments of other reasons why exchange 
rates might deviate from perceived equilibrium values.
    Treasury previously reported to Congress in March 2005 on 
the inherent difficulties in making designations pursuant to 
the Act. That report also made clear that in assessing exchange 
rate manipulation, standard analysis needed to be supplemented 
with other indicators, and there is no mechanistic of formulaic 
approach in determining exchange rate manipulation.
    The report also noted the role of intent in rendering 
judgments about designations pursuant to the Act. Intent is an 
important consideration because it is inherent to the language 
in the Act that currency manipulation be undertaken for the 
purposes of preventing effective balance of payments 
adjustments or gaining unfair competitive advantage in 
international trade.
    The GAO reviewed the methodology Treasury uses in examining 
foreign exchange policies in April 2005. The GAO report 
concluded that Treasury has complied with the requirements in 
the 1988 Act. The GAO report made no recommendations but did 
note that current manipulation is a complex issue that involves 
both country-specific and broader international economic 
factors.
    Another key element in our strategy is to encourage the 
IMF, the world's only multilateral international with a mandate 
for exchange rates, to improve its work on exchange rates 
surveillance. Treasury strongly supports IMF Managing Director 
de Rato's efforts to update the IMF's operational rules for 
surveillance.
    Let me turn to China. Although the RMB has appreciated 
against the U.S. dollar by more than 7 percent since July 2005, 
China does not have the currency policy we want it to have and 
that it needs. China's cautious approach to exchange rate 
reform exacerbates distortions in its domestic economy and 
impedes the adjustment of international imbalances.
    Though China has embraced currency flexibility as a policy 
goal, the authorities are not moving quickly enough for the 
United States, for the global community, or for their own good. 
While we agree on China's broad reform agenda, China's leaders 
believe there is a risk in moving too quickly. Secretary 
Paulson has told his Chinese counterparts repeatedly that the 
greater risk is in China moving too slowly.
    Currency movement alone will not significantly reduce 
China's trade surplus with the U.S., nor eliminate distortions 
in the Chinese economy. China's trade surpluses are rooted in 
the structure of the Chinese economy. China needs to rebalance 
its economy so that household consumption powers growth, rather 
than exports and excess investment. The Secretary will again 
reemphasize these messages at the upcoming meeting of the 
Strategic Economic Dialogue.
    Secretary Paulson has laid out several key steps China must 
take to advance toward the goal of currency flexibility: 
Widening the band on daily exchange rate movement; reducing 
intervention; developing its capital market; and setting clear 
monetary policy targets to avoid inflation and increase 
confidence in the value of the RMB.
    On Japan, the Treasury closely monitors Japan's foreign 
exchange policy. The value of the yen is determined in open, 
competitive global markets. Japan has not intervened in the 
foreign exchange market since March 2004. In real price 
adjusted terms, the yen is at its lowest value since the early 
1980s. This is due to a protracted period of deflation in the 
Japanese economy that coincided with rising prices in the U.S. 
and Japan's other trading partners. Japan's deflation reflects 
the drawn-out difficulties of adjustment to the bursting of the 
asset price bubble in the 1990s.
    Japan's economy is recovering, but the recovery has not 
been brisk. One of the most important contributions Japan could 
make to the global economy and to U.S. firms and workers would 
be to resume sustainable and robust domestic demand growth and 
exit completely from deflation.
    We discuss foreign exchange issues with Japan and the other 
G7 partners regularly. Japan has joined in repeated G7 
statements supporting foreign exchange flexibility.
    Thank you, Mr. Chair.
    [The prepared statement of Mr. Sobel follows:]

            Prepared Statement of The Honorable Mark Sobel,
       Deputy Assistant Secretary for International Monetary and
             Financial Policy, U.S. Department of Treasury
    Thank you Chairman Levin, Chairman Gutierrez, Chairman Rush, 
Representative Herger, Representative Paul and Representative Stearns 
and Members of the Subcommittees, for the opportunity to appear today 
to discuss this important issue.
Treasury's Assessment of Exchange Rate Policies
    As you know, twice a year the Department of the Treasury issues a 
Report to Congress on International and Exchange Rate Policies. This 
report, often called the ``Foreign Exchange Report,'' is required by 
the Omnibus Trade and Competitiveness Act of 1988 (the ``Act''). The 
report reviews economic and policy developments of important world 
economies and other economies with which the United States has a large 
trading relationship. The Act states that ``the Secretary of the 
Treasury shall analyze on an annual basis the exchange rate policies of 
foreign countries, in consultation with the International Monetary 
Fund, and consider whether countries manipulate the rate of exchange 
between their currency and the United States dollar for purposes of 
preventing effective balance of payments adjustments or gaining unfair 
competitive advantage in international trade.''
    Treasury takes the preparation of this report very seriously. We 
know that it is read closely by Members of Congress as well as the 
financial community, the general public, and foreign governments. We 
make every effort to ensure that we produce an accurate yet 
comprehensive report that incorporates analysis reflecting the 
realities of today's international monetary and financial systems. In 
developing our assessments, Treasury undertakes a careful review of 
major trading partners' exchange rate regimes and policies, the 
evolution of their external balance of payments positions, their 
accumulation of foreign exchange reserves, macroeconomic developments 
within their economies, and their responses to these developments in 
terms of monetary and financial developments and financial and exchange 
restrictions.
    Treasury has made a concerted effort in recent years to broaden and 
improve the coverage and analytical rigor of the report. We have done 
so because of changing global circumstances since 1988, including 
profound technological change and globalization, which have enabled 
many more economies today to become systemically important from an 
economic and financial perspective. In addition, global capital flows 
have increased greatly since 1988. The interdependence of the United 
States with the world economy has increased, heightening our 
sensitivity to the impact of developments overseas.
    In recent reports, therefore, Treasury has strengthened our 
coverage and analysis of global economic developments and the evolution 
of the U.S. balance of payments position by including a discussion of 
perspectives on interpreting U.S. current account developments and 
international capital flows. In this regard, we have discussed the 
shared international strategy for global adjustment and noted that 
given the large U.S. current account deficit, the counterpart to that 
deficit is inevitably to be found in large surpluses elsewhere in the 
world. We also have provided more extensive descriptions of 
macroeconomic and financial developments in many of the key countries 
of particular interest to the public.
    Further, Treasury has also included a series of appendices on 
critical international monetary policy issues. In this regard, we began 
including a special appendix in which many variables and indicators are 
analyzed on a systematic basis to develop a better understanding of the 
currency policies of key countries. In this light, and given the 
inherent difficulties in defining currency manipulation for the 
purposes of preventing effective balance of payments adjustments or 
gaining unfair competitive advantage in international trade, we have 
examined a range of indicators that economists would typically look at 
when dealing with currency manipulation questions. We have analyzed a 
range of different combinations of indicators and weights in order to 
shed light on the judgments that we are asked to make. The numerical 
examples illustrate the sensitivity of the rankings to the weighting 
scheme chosen and also highlight the fact that, for an array of 
differing reasons, many countries throughout the world have large 
external surpluses.
    Treasury also has made a special effort in the report, through 
additional appendices, to discuss important related topics. Recognizing 
that the International Monetary Fund allows members to choose their own 
exchange rate regime, we have discussed at length the advantages and 
disadvantages of various exchange rate regimes and, more specifically, 
fixed versus flexible exchange rates. In light of the vast accumulation 
of foreign exchange reserves by some countries, especially emerging 
markets, we have discussed the costs and benefits of reserve 
accumulation and some of the ``rules of thumb'' on what are thought to 
be prudent levels of reserves. And in light of the considerable 
attention being given to misaligned exchange rates, we have discussed 
some of the methodological problems involved in estimating equilibrium 
or fair value exchange rates.
    Treasury staff also prepares informal papers, known as Occasional 
Papers (available at: www.treasury.gov/offices/international-affairs/
occasional-paper-series/) on a number of other key international 
monetary policy issues. These staff papers are not statements of 
Administration or Treasury policy, but they shed light on these 
important issues. The question of currency misalignment was discussed 
in detail in a recent Treasury Occasional Paper (www.treasury.gov/
offices/international-affairs/
occasional-paper-series/docs/ExchangeRateModels.pdf). That paper 
reviewed many of the concepts of exchange rate equilibrium in use as 
well as many of the models used to estimate the over or under valuation 
of a currency. An important finding of the paper is the wide variance 
of views that exist with respect to misalignment, as well as the 
sensitivity of the results to various modeling assumptions. In fact, in 
some cases, depending on the price deflators used, currencies were 
found to be overvalued using one deflator but undervalued using another 
deflator. Another main message of the study is that, although the range 
of estimates can and often do vary considerably, it is possible to draw 
certain inferences about misalignment provided the results are drawn 
from a variety of models and the results are largely similar in 
magnitude and direction. This information must, however, be 
supplemented with assessments of other reasons why exchange rates, 
during relevant periods of time, might deviate from perceived 
equilibrium values.
    Treasury reported to Congress, in March 2005, on the procedures and 
inherent difficulties involved in making designations pursuant to the 
Act. That report, entitled, ``Report to the Committees on 
Appropriations on Clarification of Statutory Provisions Addressing 
Currency Manipulation,'' established that to identify exchange rate 
manipulation, standard macroeconomic and microeconomic analysis needed 
to be supplemented with certain indicators, including but not limited 
to: (1) measures of undervaluation; (2) protracted large scale 
intervention in one direction; (3) rapid foreign exchange reserve 
accumulation; (4) capital controls and payments restrictions; and (5) 
trade and current account balances. We have since incorporated much of 
this in one of the aforementioned appendices where I indicated the 
outcomes largely depend on weights assigned and combinations of 
indicators used. As since noted in Treasury's November 2005 Report, 
there is no mechanistic or formulaic approach in determining 
manipulation; a complete assessment requires additional analysis of the 
interactions among economic variables, specific factors affecting 
economies, and current policy formulation and implementation.
    The March 2005 report also noted the role of ``intent'' in 
rendering judgments about designations pursuant to the Act. The 
language of the Act states that currency manipulation must be 
undertaken ``for purposes of preventing effective balance of payments 
adjustments or gaining unfair competitive advantage in international 
trade.'' ``Intent'' of the country in question is a consideration as it 
is inherent in the language of the act. Determining intent behind the 
policy can be difficult to assess.
    The methodology Treasury uses in examining the foreign exchange 
policies of foreign economies was also the subject of a review by the 
Government Accountability Office (GAO) in April 2005. The GAO report 
\1\ concluded that Treasury has complied with the requirements in the 
1988 Trade Act. The GAO report made no recommendations, but did note 
that currency ``manipulation'' is a complex issue that it involves both 
country-specific and broader international economic factors. The report 
also considered the views of outside experts on whether the renminbi 
was undervalued, finding that the views varied widely, with many 
experts maintaining a view that the currency is significantly 
undervalued while others contending that undervaluation was not 
substantial or that estimating it was not possible. According to the 
GAO, even among experts who believe that China's currency to be 
undervalued, there was no consensus on how and when China should move 
to a more flexible exchange rate regime or whether capital account 
liberalization should be a part of that move.
---------------------------------------------------------------------------
    \1\ GAO-05-351; International Trade ``Treasury Assessments Have Not 
Found Currency Manipulation, but Concerns about Exchange Rates 
Continue,'' April 2005.
---------------------------------------------------------------------------
    Another key element of Treasury's strategy to ensure that countries 
pursue appropriate exchange rate policies is to encourage the 
International Monetary Fund (IMF), the world's only multilateral 
institution with a mandate for exchange rates, to improve its work on 
foreign exchange surveillance. Exchange rate manipulation to gain 
competitive advantage is inconsistent with the treaty obligations of 
the 185 member countries of the IMF. Treasury strongly supports IMF 
Managing Director Rodrigo de Rato's effort to update the IMF's thirty-
year old operational rules for exchange rate surveillance.
    We take very seriously our responsibilities to ensure that the 
Report to Congress on International Economic and Exchange Rate Policy 
is of high quality, topical, and thorough. We have been careful to be 
very clear about how we approach the issue of designations pursuant to 
the Act and our reasoning in specific cases.
China
    As the exchange rate policy of China is of interest to the 
Committee Members, I will address it in more detail.
    China's currency policy is an important issue in the economic 
relationship between our two countries. Although China abandoned its 
fixed exchange rate in July 2005 and the RMB has now appreciated 
against the U.S. dollar by a bit more than 7 percent, China does not 
yet have the currency policy we want it to have and that it needs. 
Secretary Paulson has stated that a major objective of his as Treasury 
Secretary will be to press the Chinese government to advance toward the 
goal of an RMB for which the value is freely set in a competitive 
marketplace, based on economic fundamentals. The Secretary and Treasury 
staff meets frequently with Chinese counterparts to press this issue.
    The Secretary has laid out several key steps China must take to 
advance toward this goal, including: widening the band on daily 
exchange rate movement; reducing intervention; developing its capital 
market; and setting clear monetary policy targets to avoid inflation 
and increase confidence in the value of the Chinese RMB. These reforms 
will allow China to develop the market infrastructure it needs for a 
freely floating currency; we are committed to working towards those 
reforms. Although China has embraced currency flexibility as a policy 
goal, Chinese authorities are not moving quickly enough for the United 
States or the rest of the global community. And they are not moving 
quickly enough for China's own good. While we agree on China's broad 
reform agenda, China's leaders believe there is risk in moving too 
quickly. Secretary Paulson has told his Chinese counterparts repeatedly 
that the greater risk is in China moving too slowly. The Secretary will 
again emphasize this message during the upcoming meeting of the 
Strategic Economic Dialogue to take place here in Washington later this 
month. We hope that Chinese leaders at that time will have the benefit 
of meeting with Members of Congress to discuss the U.S.-China economic 
relationship.
    Treasury's foreign exchange report clearly states that China's 
cautious approach to exchange rate reform exacerbates distortions in 
its domestic economy and impedes the adjustment of international 
imbalances. With respect to determining whether or not China 
manipulates its currency as defined in the legislation, Treasury must 
take into consideration the intent of Chinese authorities. In the 
December 2006 Foreign Exchange Report, after careful analysis of 
China's economic and currency policies, Treasury did not find that 
China's policies are designed for the purposes of gaining unfair 
competitive advantage or preventing effective balance of payments 
adjustments. Treasury will continue to carefully analyze China's 
policies as we prepare future Reports.
    While China's currency policy is critical to the United States and 
to China, currency movement alone will not significantly reduce China's 
trade surplus nor eliminate the distortions in the Chinese economy. 
China's trade surpluses are rooted in the structure of the Chinese 
economy and are not solely the result of currency policy. China needs 
to restructure its economy so that household consumption, rather than 
exports and excess investment, powers growth. Reform of China's 
financial system is also critically important for the rebalancing 
process, by providing Chinese households the means to insure themselves 
against major risks and finance expenditures like education. Better 
financial services will also help address many of the reasons why 
Chinese households save so much and can spend so little of their 
incomes. Vibrant domestic consumption is key to the welfare of the 
Chinese population and is the only way that China can grow without 
generating huge trade surpluses.
    To be a responsible international stakeholder in the global 
economy, China needs to take swift and effective action to remedy these 
imbalances. This is both for the global economy and for China's own 
sake. Currency flexibility will enhance the ability of China's economic 
policy makers to use monetary policy to steer China's economy towards 
steady and sustained growth. Rebalancing the structure of economic 
activity in China will help to alleviate global economic imbalances and 
will ensure that China's future growth can be sustained without 
generating huge trade imbalances.
Japan
    The Department of the Treasury closely monitors Japan's foreign 
exchange policy, which is reported on extensively in each Foreign 
Exchange Report.
    The value of the yen is determined in open, competitive global 
markets, responding to the forces of supply and demand. Global trading 
in the yen-dollar market is extremely large, reflecting the importance 
of Japan in world trade and the global financial system. Since 2001, 
the yen-dollar exchange rate has fluctuated in the range of 105 to 135 
yen to the dollar, and stands today at about 120 yen to the dollar. 
While Japan has previously intervened in the foreign exchange market, 
there is currently no intervention and Japan has not intervened since 
March 2004.
    In real, price adjusted terms, the yen is at its lowest value since 
the early 1980s. The yen's real effective value is the result of a 
protracted period of deflation in the Japanese economy that coincided 
with rising prices in the United States and other trading partners of 
Japan. Japan's long deflationary episode reflects the drawn-out 
difficulties of Japan's adjustment to the bursting of the asset price 
bubble in the early 1990s.
    Japan's economy is recovering. The recovery has been underway for 
several years, but it has not been brisk and it has not yet gathered 
steam. One of the most important contributions Japan could make to the 
global economy, and to U.S. firms and workers, would be to resume 
sustainable and robust domestic demand growth and exit completely from 
deflation.
    We discuss foreign exchange issues with Japan and the other G7 
partners regularly. Japan has joined repeated G7 statements supporting 
foreign exchange flexibility.
    Thank you.

                                 

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

STATEMENT OF THE HONORABLE STEPHEN J. CLAEYS, DEPUTY ASSISTANT 
 SECRETARY FOR ANTIDUMPING AND COUNTERVAILING DUTY OPERATIONS, 
INTERNATIONAL TRADE ADMINISTRATION, U.S. DEPARTMENT OF COMMERCE

    Mr. CLAEYS. Thank you Chairmen Levin, Rush and Gutierrez, 
Ranking Members Herger, Stearns and Paul, and Members of the 
Subcommittees for inviting me to discuss the issue of currency 
manipulation and its effects on U.S. businesses and workers. I 
appreciate the opportunity to share with you the Department of 
Commerce's views on this issue, particularly as they relate to 
the U.S. countervailing duty law.
    The statute charges the Department of Commerce with the 
enforcement of the U.S. trade remedy laws. These laws consist 
of the antidumping law and the countervailing duty law. As 
Import Administration's Deputy Assistant Secretary for 
Antidumping and Countervailing Duty Operations, I am directly 
responsible for enforcing those laws.
    China's remarkable economic growth in recent years makes it 
an important engine in the world economy. China is now the 
United States' third-largest goods trading partner. Our exports 
to China totaled $55 billion in 2006, growing at a rate of 32 
percent from the previous year. At the same time, China is our 
second-largest source of imports.
    The tremendous growth in trade has benefited both 
countries, even though this growth has naturally resulted in an 
increase in trade friction. Commerce currently has 62 
antidumping orders against goods from China, having issued 32 
antidumping orders against China since 2001.
    The antidumping and countervailing duty trade laws deal 
respectively with unfair pricing and foreign government 
subsidization of imports. Government subsidies distort the free 
flow of goods and adversely affect American businesses in the 
global marketplace. American companies, workers and farmers can 
compete against anyone in the world. However, they should not 
be expected to compete against foreign governments providing 
subsidies to their own industries.
    China's policy has raised serious questions in this regard. 
Its unfair subsidies can create huge, unfair advantages, and 
China's exports to the United States can also harm U.S. 
producers exporting to China or competing with Chinese exports 
to other countries.
    Under the CVD law, foreign governments subsidize industries 
when they provide financial assistance to benefit the 
production, the manufacture or exportation of goods. Subsidies 
can take many forms, such as direct grants, tax breaks, or 
below-market-rate loans. The amount of subsidies the foreign 
produce receives from the government is the basis for the 
countervailing duty rate through which the subsidy is offset or 
countervailed.
    For Commerce to find a program to be a countervailable 
subsidy, it would need to determine that three required 
statutory criteria apply. The first involves a financial 
contribution from the government. Second, it confers a benefit, 
and third is specific, meaning that it is either an export 
subsidy or import substitution subsidy, or is only available to 
a limited number of industries or companies.
    Whether a petition from a U.S. industry sufficiently 
alleges these criteria, and whether Commerce determines that a 
program indeed constitutes a countervailable subsidy, will 
depend on the facts and arguments presented to Commerce in a 
particular case.
    A related issue is applying the CVD law that a subsidy is 
provided by China. Since the mid-1980s, Commerce maintained a 
policy of not applying our countervailing duty law to countries 
classified as nonmarket economies for antidumping purposes, 
such as China. Commerce reasoned that subsidies had no 
measurable economic impact in the 1980s Soviet-style economies 
that were under consideration when we established the policy.
    On March 30th, Commerce revised this policy by announcing 
its preliminary decision to apply the countervailing duty law 
to imports of glossy paper from China. Commerce determined that 
the current nature of China's economy does not create obstacles 
to applying the CVD law because the nature of the Chinese 
economy today allows us to determine whether the Chinese 
government has bestowed countervailable subsidies.
    We are committed to identifying and addressing trade-
distortive and injurious subsidies from all countries. That is 
a top priority for us. Commerce will not hesitate to use the 
tools at our disposal to discipline China's use of unfair 
subsidies.
    Thank you for giving me this opportunity to testify on this 
important topic today, and I'm happy to take your questions. 
Thank you.
    [The prepared statement of Mr. Claeys follows:]

  Prepared Statement of The Honorable Stephen Claeys, Deputy Assistant
     Secretary for Antidumping and Countervailing Duty Operations,
                         Department of Commerce
    Thank you Chairmen Levin, Rush, and Gutierrez, Ranking Members 
Herger, Stearns, and Paul, and Members of the Subcommittees for 
inviting me to discuss the issue of currency manipulation and its 
effect on U.S. businesses and workers. I appreciate the opportunity to 
share with you the Department of Commerce's views on this issue, 
particularly as they relate to the U.S. countervailing duty (CVD) law.
    The statute charges the Department of Commerce with the enforcement 
of the U.S. trade remedy laws. These laws consist of the antidumping 
law, which remedies unfairly priced imports, and the countervailing 
duty law, which remedies foreign-government subsidized imports. As 
Import Administration's Deputy Assistant Secretary for Antidumping and 
Countervailing Duty Operations, I am directly responsible for enforcing 
these laws.
    China's remarkable economic growth in recent years makes it one of 
the most important engines of the world economy outside of the United 
States. In trade terms, China is now the United States' third largest 
goods trading partner. China represents one of the fastest-growing 
markets for U.S. goods and services. Our goods exports to China, which 
for the most part are high value-added products, totaled $55 billion in 
2006, growing at a rate of 32 percent from the previous year. That 
makes China our fourth largest export market. At the same time, China 
is our second largest source of imports. Goods imported from China into 
the United States totaled $288 billion in 2006.
    The tremendous growth in U.S.-China trade has benefited both 
countries, even though this growth has resulted in, quite naturally, an 
increase in trade frictions as well as our trade remedy activities 
involving China. Commerce currently has 62 antidumping orders against 
goods from China. Since 2001, we have issued 32 antidumping orders 
against goods from China, compared to the 24 orders put into place 
between 1993 and 2000.
    The antidumping trade rules and countervailing duty trade rules are 
both tools sanctioned by the World Trade Organization (WTO) to deal, 
respectively, with unfair pricing and foreign government subsidization 
of imports. Government subsidies distort the free flow of goods and 
adversely affect American businesses in the global marketplace. 
American companies, workers and farmers can compete against anyone in 
the world. However, they should not be expected to compete against 
foreign governments providing subsidies to their own industries.
    China's policies raise serious questions in this regard. The 
Chinese press is rife with examples of subsidies given to various 
industries and products across the spectrum, from agricultural products 
to steel. Unfair subsidies, whether they come from the central, 
provincial, and/or local governments to Chinese companies, all have the 
power to distort trade conditions for U.S. producers, both here in the 
U.S. market and abroad. These kinds of subsidies can create huge, 
unfair advantages to China's exports of a wide range of products to the 
United States. They can also harm U.S. producers hoping to export 
successfully to China or compete with Chinese exports to third-country 
markets.
    Under the CVD law, foreign governments subsidize industries when 
they provide financial assistance to benefit the production, 
manufacture or exportation of goods. Subsidies can take many forms, 
such as direct cash payments, credits against taxes, and loans at terms 
that do not reflect market considerations. U.S. trade laws and 
Commerce's regulations establish standards for determining when an 
unfair subsidy has been conferred and for measuring the amount of the 
subsidy. The amount of subsidies the foreign producer receives from the 
government is the basis for the countervailing duty rate by which the 
subsidy is offset or ``countervailed.''
    When a U.S. industry files a petition alleging unfair subsidies and 
seeking relief under the CVD law, Commerce looks at each of the alleged 
subsidies, consistent with our obligations under U.S. law, to determine 
whether the petition meets the statutory requirements for initiation. 
The basis for a countervailing duty petition is an allegation that 
foreign producers or exporters are receiving countervailable subsidies 
(as well as an allegation that those subsidies are causing material 
injury to a domestic industry). As a result, the subsidy allegation 
must include documentary evidence that such subsidies exist.
    Under U.S. law, a countervailable subsidy exists where an authority 
provides a ``financial contribution'' to a company that confers a 
measurable ``benefit.'' The subsidy must also be ``specific,'' meaning 
that it must either be an export subsidy or import substitution subsidy 
(i.e., prohibited subsidies) or is only available to a limited number 
of industries or companies. Commerce must look to see whether the CVD 
petition addresses each of these elements for each subsidy that is 
alleged on the basis of ``information that is reasonably available'' to 
the petitioning U.S. industry. If an allegation meets this statutory 
requirement (and there is a sufficient allegation that the alleged 
subsidies are causing material injury to a domestic industry), Commerce 
will initiate a CVD investigation. During the subsequent investigation, 
Commerce then determines if, in fact, the alleged subsidy meets these 
criteria and, thus, is countervailable.
    In summary, for Commerce to find a countervailable subsidy, it 
would need to determine that the three statutory criteria discussed 
above apply: 1) the subsidy involves a financial contribution from the 
government; 2) the subsidy confers a benefit; and 3) the subsidy is a 
prohibited subsidy or is otherwise specific. Whether a petition from a 
U.S. industry sufficiently alleges these criteria and whether Commerce 
determines that a subsidy indeed constitutes a countervailable subsidy 
will depend on the facts and arguments presented to Commerce in a 
particular case.
    A related issue is applying the CVD law to subsidies provided by 
China. For more than 20 years, throughout four Administrations, 
Commerce maintained a policy of not applying our CVD law to countries 
that we have classified as non-market economies for antidumping 
purposes, such as China. This policy was upheld in the 1986 Georgetown 
Steel decision, in which the Court of Appeals for the Federal Circuit 
affirmed that Commerce has the discretion to decide whether to apply 
the countervailing duty law to non-market economy countries. Commerce 
reasoned that subsidies had no measurable economic impact in the 1980s 
Soviet-style economies that were then under consideration.
    On March 30, 2007, Commerce revised this policy by announcing its 
preliminary decision to apply the CVD law to imports of glossy paper 
from China. After a careful analysis of the parties' arguments and 
information on the record of this case, Commerce determined that the 
current nature of China's economy does not create the obstacles to 
applying the CVD law that were present in the ``Soviet-style 
economies'' at issue in Georgetown Steel. For purposes of this 
preliminary determination, Commerce found that the nature of the 
Chinese economy today allows us to determine whether the Chinese 
Government has bestowed countervailable subsidies. Just as China has 
evolved, so has the range of tools available to make sure that China 
trades fairly. All interested parties will have ample opportunity to 
provide comments for the record on this investigation before Commerce 
makes its final determination later this year.
    We are committed to identifying and addressing trade-distortive and 
injurious subsidies from all countries, including China. That is a top 
priority for us. Commerce will not hesitate to use the tools at our 
disposal to discipline China's use of unfair subsidies. Thank you for 
giving me this opportunity to testify on this important topic today and 
I am happy to take your questions.

                                 

    Chairman LEVIN. Thank you.

   STATEMENT OF THE HONORABLE DANIEL BRINZA, DEPUTY GENERAL 
COUNSEL AND ASSISTANT U.S. TRADE REPRESENTATIVE FOR MONITORING 
    AND ENFORCEMENT, OFFICE OF THE U.S. TRADE REPRESENTATIVE

    Mr. BRINZA. Thank you, Mr. Chairman, Members of the 
Committees. I am pleased to participate in today's hearing. As 
you know, within the administration, the Treasury Department is 
charged with the responsibility for currency and exchange rate 
matters while the Office of the U.S. Trade Representative is 
responsible for developing and coordinating U.S. international 
trade and direct investment policy.
    Our work aims at increasing exports by expanding market 
access for American goods and services abroad and protecting 
American intellectual property rights around the world. USTR's 
efforts to achieve market-driven, market opening trade policies 
abroad fit into a larger economic policy picture, of course. 
They support Treasury's efforts to get results on currency and 
other matters in the financial realm, as well as the Commerce 
Department's work on global competitiveness, export promotion, 
and its administration of domestic trade remedy laws.
    To provide more concrete perspective on our work, I will 
give you a brief overview of USTR's recent engagement with both 
China and Japan, touching on the mechanisms USTR uses to 
address key trade concerns.
    With respect to China, China's accession to the WTO marked 
a critical step forward toward China fully embracing its role 
as a responsible stakeholder in an international rules-based 
system. Since acceding to the WTO 5 years ago, China has taken 
significant steps in an effort to bring its trading system into 
basic compliance with WTO rules. U.S. businesses, workers, 
farmers, service providers and consumers have benefited 
significantly from these steps, and continue to do so as U.S.-
China trade grows.
    Despite this progress, China's record in implementing its 
WTO obligations is decidedly mixed. In our engagement with 
China, the U.S. follows a dual-track approach to resolving its 
WTO concerns--bilateral dialog to try to achieve practical 
solutions, together with a full willingness to use WTO dispute 
settlement where appropriate to resolve problems.
    For example, in March 2004, we commenced a WTO dispute 
against China's discriminatory value-added tax integrated 
circuits.
    In March 2006, in coordination with the European 
Communities and Canada, we commenced a WTO dispute settlement 
case in challenging Chinese discriminatory charges on imported 
auto parts.
    In February 2007, we, later joined by Mexico, filed a WTO 
consultation request in a case challenging several subsidy 
programs that appear to be prohibited under WTO rules.
    In April 2007, we requested WTO consultations regarding 
various deficiencies in China's legal regime for protecting and 
enforcing copyrights and trademarks. In April of 2007 on the 
same day, the U.S. requested WTO consultations regarding 
certain barriers to market access for U.S. copyright-intensive 
industries, including books, music, home videos and movies.
    With respect to Japan, non-tariff measures have long been 
an issue for U.S. companies in Japan's market. As a result, 
much of USTR's work with Japan continues to focus on removing 
these barriers. We use a variety of approaches to address 
specific issues, while also continuing to urge Japan to make 
more fundamental changes that significantly improve the 
business environment and further open its economy.
    Regular engagement enables to carefully monitor progress 
and raise concerns before major decisions are made that would 
affect U.S. stakeholders. For example, with respect to Japan, 
postal reform and privatization, we have successfully 
encouraged Japan to take measures to ensure the new postal 
insurance company meets the same licensing disclosure and 
supervisory requirements as private-sector financial 
institutions.
    Where we have not been able to work our concerns directly 
with Japan, and where the WTO dispute settlement process offers 
an opportunity for effective resolution of a problem, we have 
not hesitated to use this process to secure changes in Japan's 
measures. Most recently, we were able to secure a clear 
conclusion to a longstanding WTO case involving Japan's 
unscientific requirements on U.S. apple exports. We will 
continue to evaluate Japan's practices using the WTO yardstick 
and bring WTO cases where appropriate.
    In summary, USTR is committed to ensuring that we are using 
the most effective tools at our disposal to pursue open and 
fair trade relationships with China and Japan. This effort ties 
into broader Administration engagement on international 
economic issues, including work by Treasury and Commerce, and 
work with Members of Congress to achieve our common goals; a 
more flexible, market-based exchange rate for China's currency 
and a level playing field for American businesses, workers and 
farmers.
    Thank you for this opportunity to testify. I will be happy 
to take your questions.
    [The prepared statement of Mr. Brinza follows:]

           Prepared Statement of The Honorable Daniel Brinza,
         Assistant U.S. Trade Representative for Monitoring and
          Enforcement, Office of the U.S. Trade Representative
Introduction
    Chairman Levin, Ranking Member Herger, Chairman Gutierrez, Ranking 
Member Paul, and Chairman Rush and Ranking Member Stearns, and 
distinguished Members of the Ways and Means Subcommittee on Trade, the 
Financial Services Subcommittee on Domestic and International Monetary 
Policy, Trade, and Technology, and the Energy and Commerce Subcommittee 
on Commerce, Trade and Consumer Protection, I am pleased to participate 
in today's hearing.
    I understand that today's hearing is focused principally on issues 
related to China and Japan's currencies. As you know, within the 
Administration, the Treasury Department is charged with responsibility 
for currency and exchange rate matters, while the Office of the U.S. 
Trade Representative (USTR) is responsible for developing and 
coordinating U.S. international trade and direct investment policy. Our 
work aims at increasing exports by expanding market access for American 
goods and services abroad and securing a level playing field for 
American workers, farmers and businesses in overseas markets. USTR 
oversees negotiations with other countries on these matters. In 
addition, we seek to resolve trade problems using a wide variety of 
tools, including bilateral discussions, negotiations, and formal 
dispute settlement proceedings.
    USTR's efforts to achieve market-driven, market opening trade 
policies abroad fit into a larger economic policy picture, of course. 
They support Treasury's efforts to get results on currency and other 
matters in the financial realm as well as the Commerce Department's 
work on global competitiveness, export promotion and its administration 
of domestic trade remedy laws. Taken together, the Administration's 
engagement in the international economic realm uses the best tools 
available to us to serve the American people's interest in building 
strong, mutually beneficial economic relations with our global trading 
partners, including Japan and China.
    To provide more concrete perspective on our work, I will give you a 
brief overview of USTR's recent engagement with both China and Japan, 
touching on the mechanisms USTR uses to address key trade concerns.
Key China Trade Efforts
    China's accession to the WTO marked a critical step forward toward 
China's integration into the international rules based system. Since 
acceding to the WTO five years ago, China has taken significant steps 
in an effort to bring its trading system into basic compliance with WTO 
rules. These steps have helped to deepen and strengthen economic 
reforms that China had begun 20 years earlier. U.S. businesses, 
workers, farmers, service providers and consumers have benefited 
significantly from these steps and continue to do so as U.S.-China 
trade grows. Indeed, last year, U.S. exports to China climbed by 32 
percent (while China's exports to the United States increased by 18 
percent). These data suggest 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.
    Despite this progress, China's record in implementing its WTO 
obligations is mixed. While China has fully implemented many of its WTO 
obligations, there are a number of areas where it still has work to do, 
as it continues to transition from a centrally planned economy to a 
free-market economy governed by rule of law.
    In our engagement with China, the United States follows a dual-
track approach to resolving its WTO concerns--bilateral dialog to try 
to achieve practical solutions where possible, together with a full 
willingness to use WTO dispute settlement where appropriate to resolve 
problems.
    The United States remains committed to seeking cooperative and 
pragmatic resolutions through bilateral dialog with China, and the 
United States has achieved some important successes. For example, 
through our recent bilateral dialogs, China made several commitments 
related to IPR protection and enforcement. It also committed to 
eliminate duplicative testing and certification requirements applicable 
to imported medical devices, to make adjustments to its registered 
capital requirements for telecommunications service providers, and to 
finalize a protocol allowing the resumption of trade in U.S. beef and 
beef products. China also reaffirmed past commitments to technology 
neutrality for 3G telecommunications standards and to ensuring that new 
rules in the postal area would not negatively affect foreign express 
couriers. In addition, China committed to commence, by no later than 
December 31, 2007, formal negotiations to join the WTO's Government 
Procurement Agreement. The United States has been working with China to 
make sure that it implements all of these commitments.
    However, we have been unable to resolve other important issues 
through bilateral discussions, despite extensive effort, and we have 
turned to formal WTO dispute settlement in five instances:

      In March 2004, we commenced a WTO dispute against China's 
discriminatory value-added tax on integrated circuits. We were able to 
work successfully with China to resolve this issue during the 
consultation phase, and China repealed the discriminatory treatment.
      In March 2006, the United States, acting in coordination 
with the European Communities and Canada, commenced a WTO dispute 
settlement case challenging Chinese discriminatory charges on imported 
auto parts. We are now pursuing this case in front of a WTO arbitral 
panel.
      In February 2007, the United States, later joined by 
Mexico, filed a WTO consultation request in a case challenging several 
subsidy programs that appear to be prohibited under WTO rules, either 
because they are contingent upon exportation or contingent upon the use 
of domestic over imported goods. The parties held a first round of 
consultations in March 2006.
      In April 2007, the United States requested WTO 
consultations regarding certain deficiencies in China's legal regime 
for protecting and enforcing intellectual property rights related to 
copyrights and trademarks that affect a wide range of products. The 
problems identified include high thresholds for criminal prosecution 
that create a substantial ``safe harbor'' for wholesalers and retailers 
who distribute or sell pirated and counterfeit products in China, 
inadequate rules for disposal of IPR infringing goods seized by Chinese 
customs authorities, the Chinese copyright law's apparent denial of 
copyright protection for works poised to enter the market but awaiting 
Chinese censorship approval, and a possible loophole in China's 
criminal law that may only allow prosecution for unauthorized 
reproduction of a copyrighted work if it is accompanied by unauthorized 
distribution. China already has taken measures that may address this 
last U.S. concern. Under WTO rules, formal consultations will take 
place in this case before mid-June.
      In April 2007, on the same day as the filing of the IPR 
case, the United States requested WTO consultations regarding certain 
barriers to market access for U.S. copyright-intensive industries, 
including books, music, home videos and movies. Consultations in this 
case also are due before mid-June.

    USTR provides a detailed discussion of the efforts the United 
States has made to address these and other areas of concern, using 
bilateral dialog and WTO dispute settlement, in the ``2006 USTR Report 
to Congress on China's WTO Compliance,'' issued on December 11, 2006. 
The report is available on the USTR website (www.ustr.gov).
Key Japan Trade Efforts
    Non-tariff measures have long been an issue for U.S. companies in 
Japan's market. As a result, much of USTR's work with Japan continues 
to focus on removing these barriers. We use a variety of approaches to 
address specific issues, while also continuing to urge Japan to make 
more fundamental changes that significantly improve the business 
environment and further open its economy. While we continue to make 
progress in a number of areas, many challenges also remain.
    Much of our detailed work with Japan takes place in our bilateral 
Regulatory Reform Initiative, which is chaired by USTR and includes the 
participation of several other U.S. agencies. The scope of that forum 
is comprehensive, including cross-cutting issues ranging from 
competition policy to intellectual property rights protections, as well 
as resolving industry-specific concerns. Progress achieved under this 
Initiative is equally broad in scope and is documented in an annual 
report. Our last report outlined 45 pages of steps that Japan is taking 
to address non-tariff issues, and we are currently on track to conclude 
our next report in the coming weeks that will outline new progress.
    We also use other fora to raise our concerns with Japan's practices 
where needed. USTR leads our bilateral Trade Forum, for example, which 
has been used as a flexible vehicle to address emerging as well as 
acute trade concerns. At the senior level, Ambassador Bhatia also 
participates in our bilateral Sub-Cabinet Economic Dialogue which 
addresses pressing economic issues while bringing overall direction to 
our bilateral economic relationship. USTR also of course remains 
engaged with Japan on a regular basis at all levels in other ways to 
address market access concerns.
    We continue to see progress in some sectors. Recent improvements 
include heightened transparency of Japan's regulatory process, the 
introduction of a program aimed at helping thwart illegal cartels and 
bid rigging, a more rational rate structure for telecommunications wire 
line interconnection that removes cost distortions that have limited 
wholesale network access, opening new opportunities for sales of 
insurance products through banks, and starting a one-stop service for 
motor vehicle registration.
    Regular engagement enables us to carefully monitor progress and 
raise concerns before major decisions are made that would affect U.S. 
stakeholders. In the medical device and pharmaceutical sector, for 
example, we have recently seen Japan dedicate more staff resources to 
help speed reviews of product applications. With respect to Japan Post 
reform and privatization, we have successfully encouraged Japan to take 
measures to ensure the new postal insurance company meets the same 
licensing, disclosure, and supervisory requirements as private sector 
financial institutions.
    Where we have not been able to work out our concerns directly with 
Japan, and where the WTO dispute settlement process offers an 
opportunity for effective resolution of a problem, we have not 
hesitated to use this process to secure changes in Japan's measures. 
Most recently, we were able to secure a clear conclusion to a long-
standing WTO case involving Japan's unscientific requirements on U.S. 
apple exports. USTR will continue to evaluate Japan's practices using 
the WTO yardstick and bring WTO cases where appropriate.
    One area where we have not yet reached a satisfactory conclusion, 
with either Japan or China, is in the area of beef trade. Working 
closely with the Department of Agriculture, we have been in contact 
with both countries to seek a full re-opening of the beef market 
consistent with international standards.
    In summary, USTR is committed to ensuring that we are using the 
most effective tools at our disposal to pursue open and fair trade 
relationships with China and Japan. This effort ties into broader 
Administration engagement on international economic issues, including 
work by Treasury and Commerce, and work with Members of Congress to 
achieve our common goals: a more flexible, market-based exchange rate 
for China's currency and a level playing field for American businesses, 
workers, and farmers.
    Thank you for the opportunity to testify. I will be happy to take 
your questions.

                                 

    Chairman LEVIN. Thank you very, very much. I'm going to 
spend time mostly on the currency issue. That's the purpose of 
the hearing.
    To Secretary Brinza, I think you can imagine that there are 
some serious disagreements here, at least among some of us, on 
the record of this administration in terms of active pursuit of 
China's agreements. The failure, in my judgment, to use the 
annual review process and the WTO. Really, the failure to use 
421, four times recommended by the ITC, the administration said 
no. Then the years that went by when there was essentially 
nothing filed, one in '04, and then one in '06, and finally a 
flurry of activities as Congress changed its maturity.
    But let's leave that aside and talk about the currency 
issue, because that's the focus here. I very much agree with 
the statement that was in Secretary Claeys testimony, that 
American companies, workers and farmers can compete against 
anyone in the world. However, they should not be expected to 
compete against foreign governments providing subsidies to 
their own industry.
    So, in a sense, whether you look at it technically or not, 
the issue is whether a very unbalanced currency, and indeed a 
rigged currency, is a kind of a subsidy. Forget the 
technicality for a moment. The reality is for American 
businesses and workers, it's the same as a subsidy. It's an 
assistance by a government to its producers. There's immense 
unrest about this continued imbalance.
    So, let me ask a straight question first to Secretary 
Sobel. Do you think that the present structure in terms of 
currency, China and the U.S., prevents effective balance of 
payment adjustments or gains unfair competitive advantage in 
international trade? Take the latter. Does China have an unfair 
competitive advantage in international trade because of its 
currency? Is it possible for a yes or no answer?
    Mr. SOBEL. Thank you for the question.
    Chairman LEVIN. I'm not sure you want to thank me.
    [Laughter.]
    Chairman LEVIN. I mean, but seriously.
    Mr. SOBEL. It's a fair and legitimate question, and it's 
one we think about often. Let me share with you our thinking a 
bit more broadly. When we write the Foreign Exchange Report, we 
do so pursuant to the 1988 Trade Act.
    Chairman LEVIN. Okay. But--I understand. I was afraid you 
were going to talk about that. I was there in '88. I must 
confess I don't remember all the details. But let me just ask 
you point blank. Does the weak Chinese currency provide an 
unfair competitive advantage in international trade?
    Mr. SOBEL. I think that the Chinese economy is imbalanced.
    Chairman LEVIN. Is what?
    Mr. SOBEL. Imbalanced. and I think the exchange rate policy 
is part of that imbalance.
    Chairman LEVIN. Unbalance?
    Mr. SOBEL. Unbalanced, yes, sir. The Chinese economy is 
unbalanced. The exchange rate policy is part of that. Because 
the exchange rate is undervalued, as Secretary Paulson has 
said, it has the effect of causing Chinese economic actors and 
agents to focus more on the production of internationally 
tradable goods, more so than would otherwise be the case. That 
that comes at the expense of producing goods and services for 
the domestic market.
    Chairman LEVIN. I understand that.
    Mr. SOBEL. So----
    Chairman LEVIN. How about--and I'm not--I'm trying not to 
be argumentative. I'm trying to be clear. Isn't there a yes or 
no answer to that? Does anybody--can anybody really argue that 
they don't have an unfair competitive advantage because of that 
imbalance? Would they have the same competitive advantage if 
there were a major change in the balance?
    Mr. SOBEL. I think that the persisting current account 
surpluses, large trade surpluses in China are fundamentally 
associated with the saving and investment relationship in the 
economy.
    I think that we share your frustration about the RMB. 
Secretary Paulson raises it at every opportunity with Chinese 
officials. We meet with Chinese officials at all levels from 
all parts of the government. We talk to the Chinese in G7 
meetings. We talk to the Chinese in G20 meetings. We talk to 
them in the IMF.
    Chairman LEVIN. Okay. Let me just--chairs don't have 5 
minutes, but I want to try to abide by it.
    Mr. SOBEL. Okay. But----
    Chairman LEVIN. But why can't you say--why can't you simply 
acknowledge that it provides them an unfair competitive 
advantage in international trade?
    Mr. SOBEL. I think what I was trying to get at, Mr. Levin, 
is that even if the RMB moved higher, China's part of a very 
competitive East Asian economy, and we do not think it would 
have much of an impact on the bilateral deficit that we have 
with China.
    Chairman LEVIN. How about their competitive advantage? I'll 
tell why you're resisting. You see----
    Mr. SOBEL. As I said, obviously a weaker--an undervalued 
exchange rate does, as I said, encourage production of exports.
    Chairman LEVIN. Which is another way of saying a 
competitive advantage. See, here's the problem. Then I'm going 
to quit. The language in the '88 Act talks about unfair 
competitive advantage and talks about preventing an effective 
balance of payments. No one can deny that there is a prevention 
of an effective balance of payments, right? I mean, you can't 
deny that. There's no balance.
    So, what you do is fall back on the word ``intent'' because 
it says for the purpose. But no one I think really believes for 
a second that the Chinese policy isn't purposeful. So, 
essentially, what Treasury has been doing, and I reviewed your 
reports over time, like in '05 said the Chinese authorities 
should by the time of this report do so-and-so, and of course 
they did not.
    Essentially, what you do is to look for reasons not to name 
them. All my suggestion is the time has come for us to be 
straightforward with each other and with the American people. 
Clearly, I think the manipulation--the handling of currency is 
for the purpose of preventing an effective balance of payment, 
and to gain unfair competitive advantage. There may be other 
reasons that you don't want to name China. I think it turns off 
the American people and this Congress when there isn't a 
straight out acknowledge that there's a one-way street here or 
an imbalance that hasn't been adjusted, needs to be, and so far 
our policies have not helped to bring it about, more than a 
change that is really in real terms just nominal.
    As long as you kind of dance around it, you're going to 
cause disillusionment and in the end I think some action here. 
I'll close. When's the April 15 report coming out?
    Mr. SOBEL. As you know, Mr. Chairman, Secretary Paulson 
will be leading the Strategic Economic Meeting on May 22nd and 
May 23rd. We think it's an important event, and we would like 
to be able to reflect the meeting in what we submit. So, it 
will be coming out----
    Chairman LEVIN. Afterward?
    Mr. SOBEL. Afterwards.
    Chairman LEVIN. Okay. That's reasonable. I hope it will be 
straightforward and not sugar coat.
    Mr. SOBEL. Thank you.
    Chairman LEVIN. Chairman Gutierrez. Then I think what we'll 
do, because this is somewhat unusual, maybe Mr. Herger could go 
after you and then Chairman Rush. Is that okay?
    Chairman RUSH. That's quite all right, Mr. Chairman.
    Chairman LEVIN. Okay. Thank you.
    Chairman GUTIERREZ [presiding]. I just want to follow up on 
Mr. Levin's question. In June of 2005, Treasury Secretary Snow, 
then-Secretary, appeared before the Senate Finance Committee. 
He stated, I quote, ``If current trends continue without 
substantial alteration, China's policies will likely meet the 
technical requirements of the statute for designation.'' Of 
course he was referring to triggers for designating China as a 
current manipulator. Now I know we're going to wait for your 
April 15th report for sometime in June.
    Given that China has not changed since then-Secretary Snow 
spoke in June of 2005, are you guys at Treasury getting ready 
to designate China as a manipulator in the report? If not, why 
not?
    [Pause.]
    Chairman GUTIERREZ. Five minutes. It's only 5 minutes.
    Mr. SOBEL. Again, as I said in my longer testimony, we----
    Chairman GUTIERREZ. I guess, Mr. Secretary, are you going 
to designate them as a manipulator of currency? Are you ready 
to designate them?
    Mr. SOBEL. We haven't written the report yet.
    Chairman GUTIERREZ. You haven't written the report. You 
don't have an outline of the report? You haven't had any 
discussion? Are you close to designating them? Are you leaning 
toward designating them?
    Mr. SOBEL. I have no comment on the report, particularly--
--
    Chairman GUTIERREZ. You have no comment.
    Mr. SOBEL [continuing]. Because we haven't written it. We 
do believe that a finding of intent is inherent to making a 
designation under the Act, and it has not been our view that 
the Chinese policies are designed for the purposes of gaining 
unfair competitive advantage----
    Chairman GUTIERREZ. Let me just do this.
    Mr. SOBEL. Could I also just say, I do think that there has 
been movement. I do think there has been some movement. But as 
the Secretary has said, they're moving way too slowly, and 
we're very frustrated by the pace of----
    Chairman GUTIERREZ. I wish your frustration would be 
revealed in your report. Let me do this. Chairman Levin, most 
of the questions that were exactly where I was going, I would 
like to yield the remainder of my time to my friend and 
colleague from Ohio, Mr. Ryan, to continue with my time.
    Mr. RYAN. Thank you, Mr. Chairman. I just came in a little 
bit late to Secretary Sobel's comments. Did I--were you saying 
that you don't think that a revaluation would have an effect on 
the deficit? I just caught the end of what--I thought that's 
what you said, but I wasn't sure.
    Mr. SOBEL. Thank you. Our view is that China is part of a 
highly competitive East Asian economy and that upward movement 
in the currency may not have much of an impact in affecting the 
bilateral deficit.
    Our view is that China's imbalances, its persisting 
surpluses, are fundamentally related to saving and investment 
patterns in the economy. As you know, if a country has higher 
national saving than national investment, then it will run a 
current account surplus. China has an extraordinarily high----
    Mr. RYAN. If I could interrupt you, just because our time 
is limited. But if the value of the RMB goes up, their export-
driven economy, at least through exports, is going to slow 
down. Wouldn't that have some effect on the deficit? My 
question I guess is, that you guys are pushing--saying you're 
pushing and pushing and talking and talking and talking, to use 
your words. If it's not going to have an effect on the deficit, 
why are you talking to them and trying to force them to move?
    Mr. SOBEL. First of all, as I said, we think it will have 
some impact. But, again, we think the more fundamental issue is 
to get China to rebalance its economy. China's saving is 
extraordinarily high. Half of national income is being saved. 
It's being saved because they've lost their social safety net, 
and they don't have developed financial markets. So people now 
have to save for their futures. They have to save for their 
pensions, because there aren't pensions. They don't have the 
state security blanket any more. They have to save excessively 
because they basically have put their money in the banks----
    Mr. RYAN. Well, not to interrupt you, but wouldn't a 
revaluation help them save more? The RMB that they're holding 
in their pockets would be worth more. I think this is a win for 
everyone.
    Mr. SOBEL. Sir, as I said earlier, we're totally frustrated 
with the pace of reform in China. We are not satisfied at all 
with the movement, the upward movement in the RMB, nor are we 
satisfied with the degree of currency flexibility that exists 
in the exchange system. I can assure you, Secretary Paulson 
pushes extraordinarily hard on these issues. As I said in my 
testimony, it's in China's self-interest to move for the health 
of their own economy. It's in the world's interest that they 
move.
    I think the point I'm trying to make is that ultimately 
it's the structure of the Chinese economy that is driving these 
large surpluses, and that is what needs to change. Exchange 
rates are part of that process. The exchange rate system needs 
to become more liberal so China can rebalance its economy to 
produce much greater domestic demand.
    Mr. RYAN. We know that. If I could just say one--we're 
trying to help you. We're on the same team. We're trying to 
give the President and you folks who are sitting here the tools 
that you need to get tough with China and to have some real 
teeth in some laws that you can go and use when you're 
negotiating. You said yourself, talk, talk, talk.
    Well, many people who sit on this Committee--and this isn't 
about bashing China--this is about good people in the United 
States of America losing their jobs that pay a lot of money and 
contribute to the tax base of communities, leaving because of 
an unfair trade practice and an intentional, in my mind, 
currency manipulation or misalignment or whatever the technical 
terms we need to use. But that's what's happening on the 
ground.
    People in Ohio and Michigan and, you know, Members of this 
Committee, are losing their job, and communities can't pass 
school levies because of this. This is what this is coming down 
to. This isn't a theory.
    So I'm going to encourage you. We want to be a part of the 
solution. We want to work with you. The legislation that we're 
talking about is to give you the tools and the President the 
tools that you guys need to get this job done. We want to be 
supportive of you and work with you, but it's becoming very 
difficult when we hear talk, talk, talk for years and years and 
years, and it's gotten to the point where we're going to need 
congressional action.
    So, I want thank the Chairman----
    Chairman LEVIN [presiding]. Thank you.
    Mr. RYAN [continuing]. For the opportunity to even 
participate in this Committee.
    Chairman LEVIN. Thank you very much. Mr. Herger?
    Mr. HERGER. Thank you, Mr. Chairman. Mr. Sobel, I'm always 
skeptical of estimates of the real value of Chinese currency 
with respect to the dollar. The best model would be a real free 
market in currency which we should all agree is the better 
judge of the currency values. So, rather than just conclude 
there is under-evaluation and pick a number, I'm more 
interested in seeing that the mechanism to determine that rate 
is a market-driven one.
    Part of China's delay in reforming its currency has been in 
developing a more sophisticated capital market. Some in 
Congress feel that is an excuse to put off reform of the 
currency which has a more immediate effect on trade. Would you 
please, Mr. Sobel, describe the mechanisms the Chinese are 
developing to create a market-driven currency, what steps it 
must take, and how long it would take?
    In addition, can you explain the importance of China's 
broader financial reforms and how they must go hand-in-hand 
with currency reform?
    Mr. SOBEL. Thank you. First of all, I want to totally agree 
with you that the ultimate goal should be a freely floating 
RMB. I think we totally agree with that. We also agree that a 
strong financial system is an important component of that.
    There are many interlinkages between the financial system 
and the exchange rate regime. Normally what's happened is that 
emerging markets that have been moving towards floating are 
doing so at the same time they're opening up their capital 
account, and there have always been concerns that if people 
don't have confidence in the banking system, money will flow 
out rapidly.
    Also, a country needs a sufficiently deep financial system 
that it can absorb inflows and outflows. It needs hedging 
instruments so that economic agents engaged in international 
trade can hedge receipts and adjust to volatility. For that you 
need a benchmark yield curve throughout the maturity structure. 
You need a credible central bank.
    It's easy to run a pegged-exchange rate regime, but if 
you're going to run an independent monetary policy, we take for 
granted things such as domestic money market operations and 
what not. But you need Treasury bill markets and you need banks 
that are able to intermediate funds. China doesn't really have 
a lot of those basic requisites.
    Now, Secretary Paulson gave a speech in March in Shanghai 
on the Chinese financial system and the progress that's been 
made. He underscores that far more is needed. China, for 
example, still has--even though it is moving to begin to clean 
up the banking system--many nonperforming loans (NPLs). The 
capital market is very underdeveloped. There's hardly any 
corporate bond market because of excessive regulation and the 
like.
    So, we've been working with them. We're trying to urge them 
to develop the financial system. What's happening now is that 
because of this massive reserve inflow into China, they are 
pumping out a lot of liquidity into the system, and this is 
creating inflationary pressures. It's contributing to the 
overheating and the excess investment in the economy, and it 
also has the potential to reduce the quality of lending 
standards.
    So, if China wants to have an independent monetary policy 
where they can just target inflation, they're going to need to 
allow much greater currency flexibility, and at the same time 
have robust financial institutions in place which are capable 
of dealing with the central bank.
    Mr. HERGER. So, how are they coming about doing this? As 
you can tell, we're very impatient on their degree of 
improvement. We are looking at an economy that basically came 
out of the 1930s and is jumping into the 21st century. But I'm 
sure you feel the impatience of everyone on this Committee to 
put the pressure on and to work with them in every way we can, 
but at the same time not destroy our relationships.
    Mr. SOBEL. Let me assure you, Congressman, we share your 
frustration. We share your impatience. Again, how are they 
coming along? They're coming along gradually and slowly. I 
think they've taken some very good steps in the banking sector 
to try and recapitalize some of the major banks as well as in 
that regard, to launch IPOs which have subjected these banks to 
better risk management practices and to better accounting 
standards and better disclosure standards.
    The securities market faces a very long road ahead of it. 
They need, in our view, to move much faster in developing a 
corporate bond market. So, again, I think in some areas there's 
greater progress than others, but it's a very long road ahead, 
and we agree with you. We share your impatience.
    We are also working very hard to open up the Chinese 
financial system to foreign participation, because we believe 
that foreign participation could bring in greater technology, 
know-how, capital and the kind of skills that could help China 
get there faster.
    Mr. HERGER. Thank you.
    Chairman LEVIN. Thank you. Chairman Rush.
    Chairman RUSH [presiding]. Thank you, Mr. Chairman. With 
all due respect to the witnesses, I have a number of questions 
that I will ask, respectfully ask that you keep your answers to 
a minimum, please.
    Mr. Claeys, in your testimony, you stated that subsidies to 
industries may take many forms. The weak yen has allowed 
Japanese auto manufacturers to accrue an average subsidy of 
about $4,000 on a mid-size sedan. In addition, Japan's major 
automakers reported huge windfall profits in '06 as a result of 
the weak yen.
    My question is, how is one to conclude that the weak yen 
dollar exchange rate is not an unfair de facto export subsidy 
to Japanese manufacturers, which comes at the price of American 
jobs and American industry?
    Mr. CLAEYS. Thank you, sir. The issue that the Department 
of Commerce needs to decide is not only is something a subsidy, 
but is it a countervailable subsidy under the laws as written. 
For a subsidy to be determined to be countervailable, as I 
mentioned earlier, it has to meet three elements. It has to 
constitute a financial contribution. It has to confer a 
benefit. It has to be either an export subsidy or specific to a 
certain sector.
    The Department makes these determinations within the 
context of a case that's oftentimes brought to us by a domestic 
industry that feels that it is unfairly--it's being injured or 
threatened with injury by unfair imports that they are 
subsidized.
    So, for the Department to determine whether Japan's 
currency policy or any other type of subsidy progress is 
countervailable, we need to analyze it within those criteria, 
and then also within the context of a case that's brought 
before us by a domestic industry. So, I can't at this time say, 
you know, yes or no, because it will depend upon the arguments 
and the facts that are brought before us within--you know, if 
the issue is brought before us in a particular case.
    Chairman RUSH. Mr. Sobel, as you are well aware, the 
Treasury Department did not cite Japan as a currency 
manipulator in its December '06 report to Congress on exchange 
rates. Some have argued that Japan's jawboning on currency as 
well as its maintenance of massive foreign currency reserves 
signal its continued and future intent to intervene in currency 
markets. Moreover, Japan has both a significant current amount 
surplus and bilateral trade surplus with the U.S.
    These three facts, intent to manipulate exchange rates and 
the maintenance of current account and bilateral trade 
surpluses, are the three distinguishing characteristics of a 
currency manipulator as defined in the '88 Omnibus Trade and 
Competitiveness Act.
    In light of these three elements, why did the Treasury 
Department not cite Japan for currency manipulation in '06 or 
in other years of the immediate past, for that matter?
    Mr. SOBEL. Thank you. First of all, let me say that we very 
much appreciate the difficulties being faced in the U.S. 
automotive----
    Chairman RUSH. You have about one minute for the answer, 
please.
    Mr. SOBEL. I also want to say that we also recognize that 
the yen is trading at a two-decade low and trade-weighted 
terms. The Secretary has stated that the yen's value is 
determined freely in large and open foreign exchange markets 
around the world. Japan has not intervened since March of 2004.
    If I could say very quickly, I follow foreign exchange 
markets on a daily basis for Treasury. What's going on is that 
there are huge interest differentials in international capital 
markets. Japan is an economy that is only recovering tepidly, 
and it still hasn't really gotten out of deflation, so interest 
rates are rock bottom in Japan.
    In Europe, the economy is growing fairly well. Expectations 
are for further hikes in the marketplace. In the United States, 
interest rates are higher. Capital is flowing out of Japan to 
other markets, including from Japanese retail investors. So, 
there's a market-driven process where capital is flowing out of 
Japan.
    Now you could ask me maybe should Japan should have a 
different fiscal and monetary policy. Our view is that we have 
sympathies for Japan's desire to consolidate its public 
finances----
    Chairman RUSH. Thank you very much.
    Mr. Chairman.
    Chairman LEVIN [presiding]. I believe we have Mr. Stearns 
next.
    Mr. STEARNS. In all deference to my colleague, Mr. Rush, it 
didn't sound like you really answered his question. He was 
trying to be I thought rather clear of what he wanted an 
answer, and I'm not sure that--I think the frustration we have 
up here, you talked about frustration, but even the answers 
we're getting from you folks, and I'm on your side of the aisle 
here. I'm trying to support you. So, I think you need to be a 
little bit more focused here.
    Let me just ask each of and just a yes or no answer. I 
always like to try to do this. It's sometimes difficult. Does 
the administration have sufficient tools to address currency 
manipulation as it stands now? Just yes or no. I'll start with 
Mr. Sobel, just yes or no, whether you have the tools to 
address currency manipulation. You've got to answer yes or no. 
If you say no, nothing's going to happen to you. There's no 
trap door.
    [Laughter.]
    Mr. SOBEL. Just, the point I want to make is, we write the 
report. We work within the language to keep it up to date and 
flexible.
    Mr. STEARNS. No, but the question is basic. It's just a yes 
or no answer. Do you have the tools right now to handle--to 
address currency manipulation? Just you as a professional in 
your present job, do you have the tools? Would you say yes or 
no? If you're undecided, you can do undecided.
    Mr. SOBEL. I----
    Mr. STEARNS. Is that the hardest question you've had today?
    Mr. SOBEL. The hardest question I've had today.
    Mr. STEARNS. Okay.
    Mr. SOBEL. We----
    Mr. STEARNS. Well, let me move on. The next gentleman. What 
do you say?
    Mr. CLAEYS. Well, sir, probably you're not going to be 
happy with my answer in that----
    Mr. STEARNS. Well, just yes or no.
    Mr. CLAEYS. Well, the Department of Treasury has the lead 
on all currency issues.
    Mr. STEARNS. I understand.
    Mr. CLAEYS. So, therefore, the Department of Commerce----
    Mr. STEARNS. But you can give your opinion.
    Mr. CLAEYS. I have to defer, rightly, since the issue 
falls----
    Mr. STEARNS. But as a professional, you could say you're 
on--you're up here testifying, you know, you're one of the 
experts here we look to, and we're asking you in your position, 
present position now, you're Deputy Assistant Secretary for 
Antidumping and Countervailing Duty Operations, International 
Trade Administration. Just in the time you've been there. How 
long have you been there?
    Mr. CLAEYS. I've been in the current position a year-and-a-
half.
    Mr. STEARNS. Okay. In that year-and-a-half, have you found 
that you have enough tools to address currency manipulation?
    Mr. CLAEYS. I can say we have the sufficient tools to 
address countervailable subsidies.
    Mr. STEARNS. Okay. Your answer is yes. Okay. Mr. Brinza, 
what's your feeling here?
    Mr. BRINZA. I think, Mr. Stearns, similar to my colleague 
from the Commerce Department. As you know, the Department of 
Treasury does have the lead on currency manipulation, so----
    Mr. STEARNS. Can you speak a little closer to the mic? I 
can't----
    Mr. BRINZA. I'm sorry. I was saying similar to my colleague 
from the Department of Commerce, USTR is in the same position, 
which is that we defer to the Department of Treasury in terms 
of----
    Mr. STEARNS. Okay. So, you're really saying that because 
you have to defer to the Department of Treasury, you can't 
answer this. I mean, would you on a personal note, I mean, 
would you want to venture how you feel about this? I guess I'm 
trying to move toward, do you need additional or improved tools 
that we should grant you? If so, what they are.
    One suggestion from my staff is should we start with 
creating unilateral tools or by improving the tools available 
to us in the international community?
    I think perhaps earlier my colleagues have asked you about 
H.R. 782. Let me just ask each of you, obviously if we don't 
see anything happening here, we've got a bipartisan bill, H.R. 
782. Mr. Sobel, if we passed H.R. 782, what's your feeling 
about that bill?
    Mr. SOBEL. Well, I mean----
    Mr. STEARNS. Do you think it would be the end of the world 
if we passed this bill?
    Mr. SOBEL. We do not have----
    Mr. STEARNS. Do you support the bill or against it?
    Mr. SOBEL. We do not have any position on----
    Mr. STEARNS. You have no position on the bill?
    Mr. SOBEL. We do not have a position on any specific bill. 
If Congress chooses to propose new legislation, we will 
certainly work with Congress.
    Mr. STEARNS. Okay. How about the U.S. Department of 
Commerce? How about you? Do you have any feeling on the bill?
    Mr. CLAEYS. As the same with Treasury, we have no position 
on the bill, though we welcome the opportunity to work with the 
Committee on drafting it.
    Mr. STEARNS. Okay. So,--and what about the U.S. Trade 
Representative? What's your feeling?
    Mr. BRINZA. Very similar, sir. We would be developing a 
position in tandem with our colleagues in the administration 
and be happy to work with the Committees on that.
    Mr. STEARNS. Okay. Mr. Sobel, are there tools available in 
the international realm for the administration to address 
currency manipulation?
    Mr. SOBEL. Could you repeat that?
    Mr. STEARNS. Are there tools available in the international 
realm for the administration to address currency manipulation? 
I mean, for example, can the IMF do anything?
    Mr. SOBEL. I was just going to mention the IMF.
    Mr. STEARNS. I mean, we're told--critics claim that the IMF 
is not equipped to deal with currency manipulation for the 
purpose of creating unfair trade advantages. In your opinion, 
is this true?
    Mr. SOBEL. The language in the '88 Act mirrors the language 
in the IMF articles and also the fund agrees with that in a 
finding of intent is needed. However, what we've been focused 
on lately is working with the IMF to improve the IMF's conduct 
of foreign exchange surveillance. We think that one of the 
central tasks of the IMF is to exercise firm surveillance over 
members exchange rate policies.
    We've been working to have the IMF 1977 decision on 
exchange rate surveillance, which governs how it operationally 
does its work in this area, updated. We think it's an out-of-
date document that needs to reflect the realities of today's 
marketplace and experiences that have been gained, and we think 
that's important not only so that the fund has a modern 
document, but secondly because we think that updating it will 
send a powerful political signal to the global community and to 
the fund's staff that this task needs to be emphasized more 
seriously.
    Now rewriting the decision in and of itself will not get 
the job done. A revised decision will have to be implemented 
very vigorously.
    Chairman RUSH [presiding]. Would you please bring your 
answer to a close? Okay. Mr. Sherman is recognized.
    Mr. SHERMAN. Thank you, Mr. Chairman. We've got three 
Subcommittees represented here. One could argue there could 
even be a fourth, although I think three may be a record, and 
that is the Foreign Affairs Committee could also be represented 
here.
    We've got Treasury, USTR and Commerce represented here. One 
could argue that State ought to be here as well. Because the 
unanswered question is whether our pitiful policy on currency 
is somehow, especially as to China, is somehow a plan to 
acquiesce to them on that issue in return for help on foreign 
policy issues.
    Let me report, because I do chair the relevant Foreign 
Affairs Subcommittee, that that is hardly the case. China is a 
major obstacle toward any reasonable effort to prevent Iran 
from developing nuclear weapons. It is the chief protector of 
the Sudanese committing genocide, and it is of slight help on 
North Korea's program, but it is also the major reason that 
program can continue, since that regime is totally dependent on 
subsidies from China.
    Thus I know those watching these hearings will wonder, why 
has Congress and the administration surrendered American jobs 
and I think ultimately America lives in order to allow China to 
continue its current currency policy and trade policy?
    Let me make it clear. We're not giving that up in order to 
achieve foreign policy objectives. We're doing so because of 
the overwhelming power in this town of the importers. Now I've 
got a whole lot of questions I'll probably ask you to respond 
for the record or I'll give you some time at the end. But I've 
got so many questions, I do want to at least get them into the 
record.
    I am surprised to hear testimony that the trade 
relationship between the United States and China benefits both 
countries. It is in fact the most cancerous and lopsided trade 
relationship in the history of mammalian life. Not only do we 
have a $232--or $233 billion deficit, but that deficit is five 
times the size of our exports. We could imagine a beneficial 
trade relationship with China, but to regard this lopsided 
relationship as beneficial can only be done from a pro-importer 
view.
    I would also point out that this large trade deficit is 
setting up the world for the kind of dislocations that the 
world economy has not faced since the 1930s.
    I hope the Treasury would respond for the record as to 
whether we have an emergency plan if the dollar drops by 20 
percent in a week or 40 percent in a month. I realize it hasn't 
dropped by that much, but it's hard to think of a more bizarre 
and lopsided trade policy or a more--or a larger trade deficit. 
Things that can't continue forever don't. The trade deficit 
can't. It won't, and it may not be pretty. When it ends, it may 
not be smooth.
    I also hope the gentleman here would respond to whether it 
would be in America's interest to have a weak dollar policy, 
whether we're allowing our machismo to interfere with what 
would be good for American workers. I'll point out that Japan 
certainly has a weak yen policy, at least to the full extent 
allowed by law.
    It is I think you'll conclude helpful to us to have a 
strong dollar and that we import capital, but that in a way 
means that we're papering over a problem with our Federal 
budget deficit and with our low savings rates.
    The real question before is, why are we talking to China 
instead of acting? Only in Washington is ``pushing hard'' a 
synonym for doing nothing but begging in many different forums 
that China change its policy. China has not.
    There are people in my district, one person I'm thinking of 
in particular, who lost their job as a result I think of the 
Chinese currency manipulation, became an alcoholic, committed 
suicide, and died. I'm sure we all have those situations in our 
own district. Usually when a crime is committed and death 
results, police action is immediate. Yet it is clear that 
Chinese currency manipulation is criminal, that deaths in the 
United States have resulted, and the response is that we beg 
China to consider some future change. Rarely is someone causing 
that amount of harm and doing so criminally asked when they're 
going to stop their ongoing policies.
    So, I look forward to hearing from you gentleman what we're 
going to do in order that I don't have to go back to my 
district and explain that the power of the importers here in 
Washington is so great that people will have to continue to 
lose their jobs due to an unlawful violation of the world's 
currency rules by China. I yield back. I look forward to your 
answers for the record.
    Chairman RUSH. The Chair recognizes Mr. Brady.
    Mr. BRADY. Thank you, Mr. Chairman. I know of no recorded 
Chinese suicide efforts in our community, and getting back to 
the subject, clearly an artificially low currency in China 
impacts their exports, makes it more difficult for our imports 
over there. Whether we care to believe it or not, it also in 
effect subsidizes lower consumer prices here in America, 
contributes to a lower interest rate and a lower inflation 
rate.
    I think our goal in Congress is to find a way to maximize 
our exports to China, to provide the greatest economic benefit 
to our products, but also do it in a way that we do the least 
economic harm in the country to our consumers. We have a number 
of pieces of legislation to deal with this issue. I'm skeptical 
of much of them. My fear is that we are using a sledge hammer 
rather than a surgical knife to attack this issue, and there 
will be a boomerang effect on some of our families and economy.
    So, the question, though, is given the frustration in 
Congress, why shouldn't Congress create new legislative tools 
to address this currency? Why should we rely upon this dialog 
to produce results? Because there is such a high level of 
frustration here in Congress. When can we expect to see results 
that can show us that there is movement in a balanced way to a 
market-based currency in China?
    Why don't we just go down the line if we could. Mr. Sobel.
    Mr. SOBEL. Thank you. Just to say, to repeat that we don't 
have any specific position on any bills. We look forward to 
working with Congress. I think the Secretary believes that the 
U.S. economy benefits from openness and that will be an 
important lens through which the Treasury views any 
legislation.
    One thing I would like to say is that it's important that 
we keep working with China to reform its system. The Secretary 
strongly believes that the Strategic Economic Dialogue is the 
best vehicle for doing that, for tackling the imbalances in the 
economy.
    I think many of us have some concern that some tools 
potentially could put China in a defensive posture with respect 
to engaging with us, rather than working with us to reform its 
currency system.
    In terms of getting results with the Chinese, I think that 
reforming the Chinese economy and making it a market system is 
going to involve a longer-term process of engagement. Reforming 
financial markets, changing the economy to reduce savings and 
creating the social safety nets and the things that are needed 
to boost domestic demand, reforming the exchange rate system, 
will take a while. But I think that we will need to make sure 
that we achieve results over time, and I think that that is an 
important focus of the Secretary and the Strategic Economic 
Dialogue.
    Mr. CLAEYS. Congressman, Congress's responsibility in this 
realm or in general is to enforce the anti-subsidy 
countervailing duty law. I believe that we have already 
sufficient legal tools to apply the countervailing duty law to 
those subsidies that should be subject to the law in the way 
the law is written, and also in accordance with our 
international obligations.
    Mr. BRINZA. Thank you. With respect to whether we need 
additional tools or with respect to whether we need additional 
tools in order to address currency manipulation, we would defer 
to the Department of the Treasury, who has the responsibility 
for that.
    In terms of trade policy, we believe we have sufficient 
tools in order to be able to address those matters that would 
raise a difficulty under our agreements.
    Mr. BRADY. Thank you. Thank you, Chairman.
    Chairman RUSH. The Chair intends to engage in a second 
round of questioning and I recognize myself. Mr. Sobel, do you 
believe that Japan is using a low interest rate policy in order 
to keep the yen undervalued? If so, is that not a de facto form 
of currency manipulation?
    Mr. SOBEL. Thank you for that question, because I wanted to 
carry on a little bit from earlier. The Japanese economy was 
very weak throughout the 1990s, and that period of weakness 
continued early into this decade.
    Japan was mired in deflation. Japan acted to substantially 
expand its money supply to help sustain the recovery and begin 
to exit from deflation. As we said in the testimony, recovery 
of the Japanese economy is not as brisk as we would like to see 
it. With deflation continuing--prices basically are still 
hovering around flat, give or take a few tenths of a point here 
and there--Japan has not firmly exited from deflation.
    In those circumstances, we understand that Japan is running 
a highly accommodative monetary policy.
    Chairman RUSH. All right. So, the answer is yes. Can I 
summarize your answer as yes?
    Mr. SOBEL. The specific question was?
    Chairman RUSH. Is Japan using a low interest rate policy in 
order to keep the yen undervalued? According to----
    Mr. SOBEL. They're trying to exit from deflation. They're 
trying to support their economy's exit from deflation. That is 
my answer.
    Chairman RUSH. Okay. Is that not a de facto form of 
currency manipulation?
    Mr. SOBEL. Again----
    Chairman RUSH. Okay. Let me move on to the next question. 
Japan now has significant occurring account in bilateral trade 
surpluses. It also has a great amount of foreign reserves. 
Explain to us why this low interest rate is warranted, why 
these low interest rates are warranted.
    Mr. SOBEL. Again, sir, the accommodative monetary policy is 
warranted in order to help Japan sustain its recovery and to 
exit firmly from deflationary pressures in the economy.
    Chairman RUSH. How long are we to wait for Japan to exit 
its recovery, from its recovery period?
    Mr. SOBEL. We're hopeful that Japan will soon restore more 
robust growth and higher productivity.
    Chairman RUSH. Okay. Thank you. What plans does the 
administration have for raising the topic of Japanese and 
Chinese currency manipulation at the upcoming meetings of the 
Strategic Economic Dialogue and the G7?
    Will the administration voice the concerns of many in this 
Congress that the persistence of Japan and China in maintaining 
artificially low exchange rates harms American industry and 
workers? Furthermore, what course of action will the 
administration suggest at these meetings in order to correct 
imbalances in the international exchange rates?
    Mr. SOBEL. Let me assure you that, again, we share your 
frustration with the pace of change in the RMB. The Secretary 
raises this at every opportunity he can with the Chinese; the 
need for the RMB to move faster, the need for greater currency 
flexibility. We totally support your sentiments in this regard. 
I can assure you that when the Strategic Economic Dialogue 
happens later this month, the Secretary will have a full 
discussion of this issue with the Chinese representatives.
    As I said in my testimony, in my longer testimony, we very 
much want to bring Chinese leaders to meet Members of Congress 
so they can directly hear your thoughts and views on these 
issues.
    Chairman RUSH. Thank you. Mr. Brady?
    Mr. BRADY. No further questions.
    Chairman RUSH. Well, that concludes this hearing. I again 
want to thank all the witnesses for your participation, and 
this hearing is now adjourned.
    [Whereupon, at 3:21 p.m., the Subcommittees were 
adjourned.]
    [Questions submitted by the Members to the Witnesses 
follow:]
              Question submitted by Mr. Neal to Mr. Sobel
    Question: Mr. Sobel, I understand China is requiring that a foreign 
non-life insurance company doing business there must first apply to 
convert its ``branch'' office into a ``subsidiary'' before it can 
expand its operations in China. I also understand that China has not 
acted on these U.S. conversion applications for almost 2 years, and by 
doing so is improperly limiting foreign companies' access to its 
market, while giving Chinese companies a competitive advantage and a 
head start. I understand that China has granted subsidiary licenses to 
two Korean and Japanese companies, but no U.S. companies. All of this 
raises some serious questions.
    To your credit, I understand that USTR and Treasury have raised 
this issue several times with China in the context of the Strategic 
Economic Dialoguee. Can you tell us how these queries have been 
received, and more specifically, whether you think this issue can be 
resolved bilaterally or will it take a formal dispute process at WTO 
before China will honor its obligations? 
    Answer: [PENDING]
              Question submitted by Mr. Neal to Mr. Brinza
    Question: Mr. Brinza, you may be familiar with a dispute impacting 
a Massachusetts company and a major employer in my home state. EMC has 
been experiencing difficulties over the past decade registering its 
well-known trademark in China. It has been denied registration on the 
basis that a China company, Proview International, with an entirely 
different business had a pre-existing mark. Although EMC's trademark 
predates the Chinese one by over a decade, the government agency has 
refused to recognize the U.S. company mark allowing the other company 
to expand into this area with the blessing of the China trademark 
agency. Recently, this other company sent a demand for $50 million to 
EMC to get back its own trademark, even though EMC has over 100 
trademark registrations covering all major countries except China. How 
can this problem be rectified?
    Answer: [PENDING]
    Question submitted by Mr. Rush to Mr. Evans, Mr. O'Shaughnessy,
    Mr. Roach, Mr. Bergsten, Mr. Mohatarem, Ms. Lee, and Mr. Hickey
    Question: One phenomenon that has received much attention in the 
press lately is the carry trade. In Japan, where the interest rate is 
quite low--valued currently at half a percent--currency traders borrow 
yen in order to purchase higher-yielding dollars. The offshoring of yen 
as a result of the carry trade serves to keep the value of the yen 
artificially low vis-a-vis other currencies. Professor Steven Hanke of 
the Johns Hopkins University estimates that the yen carry trade 
accounts for perhaps one trillion dollars in yen-denominated 
borrowings. Given this, could one conclude that Japan is pursuing a low 
interest rate strategy in order to artificially depress the value of 
its currency? Would this not constitute an indirect form of currency 
manipulation? 
    Answer from Mr. Evans: [PENDING]
    Answer from Mr. O'Shaughnessy: [PENDING]
    Answer from Mr. Roach: [PENDING]
    Answer from Mr. Bergsten: [PENDING]
    Answer from Mr. Mohatarem: [PENDING]
    Answer from Ms. Lee: [PENDING]
    Answer from Mr. Hickey: [PENDING]
            Question submitted by Mr. Rush to all witnesses
    Question: I understand that the yen-dollar exchange rate has 
allowed Japanese auto manufacturers to accrue an average subsidy of 
about $4,000 on a mid-sized sedan. In addition, Japan's major 
automakers reported huge windfall profits in 2006 as a result of the 
weak yen. These profits are in turn re-invested in production 
facilities located in Japan, despite flagging domestic demand for 
automobiles. Added to this is the fact that Japan exported more 
vehicles to the United States in 2006 than it has since the mid-1980s. 
How is one to conclude that the weak yen-dollar exchange rate is not an 
unfair de facto export subsidy to Japanese manufacturers, which comes 
at the price of American jobs and industry?
    Answer from Mr. Evans: [PENDING]
    Answer from Mr. O'Shaughnessy: [PENDING]
    Answer from Mr. Roach: [PENDING]
    Answer from Mr. Bergsten: [PENDING]
    Answer from Mr. Mohatarem: [PENDING]
    Answer from Ms. Lee: [PENDING]
    Answer from Mr. Hickey: [PENDING]
    Answer from Mr. Sobel: [PENDING]
    Answer from Mr. Claeys: [PENDING]
    Answer from Mr. Brinza: [PENDING]
              Question submitted by Mr. Rush to Mr. Sobel
    Question: The Treasury Department responded in part to a 2005 
report by the General Accountability Office entitled, ``Treasury 
Assessments Have Not Found Currency Manipulation, but Concerns about 
Exchange Rates Continue,'' by commenting that it does not take into 
account the impact of the exchange rate on the economy. Several of our 
witnesses today, and indeed others, have argued that currency 
manipulation leads to the loss of jobs in U.S. exporting industries. 
This is a strong statement. Given this assertion and moreover the clear 
impact that exchange rates have on the flow of trade, why does the 
Treasury Department not take into account the effects of currency 
manipulation on the domestic economy?
    Answer: [PENDING]

                                 

    [Submissions for the record follow:]
                                           American Foundry Society
                                         Schaumburg, Illinois 60173
                                                       May 23, 2007

Chairman Sander Levin
House Ways and Means Trade Subcommittee
1104 Longworth House Office Building
Washington, D.C. 20515

Dear Chairman Levin:

    On behalf of the American Foundry Society (AFS), thank you for the 
opportunity to submit testimony to the House Ways and Means 
Subcommittee on Trade regarding the impact of Chinese currency 
manipulation on the metalcasting industry.
    AFS applauds you and your colleagues for holding a truly historic 
``tripartite'' hearing on currency undervaluation and its effects on 
U.S. business and workers on May 9th. The hearing provided an 
opportunity to highlight the devastating impact of cheap imports which 
has led to China's skyrocketing trade surplus with the United States 
and the significant loss of American manufacturing jobs. This sort of 
mercantilist behavior harms the United States and jeopardizes the 
economic and financial stability of the rest of the world as well.
Overview of Foundry Industry
    AFS is the leading metalcasting association in America with more 
than 9,000 members representing over 3,000 metalcasting firms, their 
suppliers and customers. The metalcasting industry directly employs 
over 200,000 men and women. Our member companies' produce cast metal 
components that are found in over 90 percent of all manufactured goods 
and equipment. There are currently 2,190 foundries nationwide, with a 
large concentration in the Midwest.
    Our industry supports the viability of numerous other key sectors 
including automotive, electronics, national defense, construction, 
telecommunications, and agricultural. Your car couldn't run without the 
cast engine block. Grocery stores would be empty without farm machinery 
made from castings. Your home would be cold, waterless and powerless 
without cast furnaces, faucets and electrical components. The safety of 
your home depends on the cast fire hydrant on the corner.
Impact of Chinese Currency Manipulation on the Foundry Industry
    The future of the U.S. foundry industry is being severely 
threatened by low-priced castings, imported primarily from China. A 
number of U.S. trading partners, most prominently China, actively have 
pursued for years policies that undervalue their currencies.
    American foundries and workers cannot compete when the playing 
field is rigged. And that is what China has been doing--rigging its 
currency at a level that economists agree is substantially below its 
fair value. China's currency manipulation has a real impact on our 
member companies and their workers. For too long, foundries have been 
losing work because of the influx of low cost imported castings, laying 
off employees, and shutting their doors. It is time to take concrete 
action to stop this un-level playing field.
    Economists estimate that the yuan is undervalued by as much as 40 
percent, giving Chinese companies an unfair trade advantage that has 
helped push the U.S. trade deficit with China to a record $233 billion 
last year. The resulting competitive advantage props up its exports, 
production and jobs at the expense of producers in the United States. 
It has provided Chinese foundries with a nearly insurmountable 
advantage over U.S. foundries. Meanwhile, metalcasters continue to lose 
contracts to their Chinese counterparts since the cost of raw materials 
alone is equal to or higher than the pricing of finished parts being 
dumped in the U.S.
    Furthermore, our members are not just competing against other 
global companies--they are competing against other governments that 
strongly support their manufacturing sectors with currency manipulation 
and trade barriers against our U.S. products. Additionally, China's 
complex web of subsidies also increases its exports in clear violation 
of World Trade Organization rules. The Chinese government is 
subsidizing the purchase of raw materials and energy and/or providing 
them below cost via state-owned enterprises. In fact, China's 
government controls the price of gasoline and electricity, thereby 
allowing Chinese manufacturers to obtain these vital items at 
subsidized prices.
    Moreover, American foundries must compete against Chinese foundries 
that have cheap labor costs, do not pay or pay very little for health 
insurance and legacy costs, and do not have to meet our strict 
environmental and safety standards. The Chinese social safety net is 
inadequate. There's no universal Social Security, and less than 20 
percent of workers have pensions. Less than 15 percent are covered by 
unemployment insurance.
    The U.S. International Trade Commission (ITC) conducted a Section 
332 fact-finding investigation, at the request of the House Ways and 
Means Committee, into the competitive conditions facing the U.S. 
metalcasting industry.
    The report, issued in May 2005, revealed that foundry customers 
``significantly increased their purchases of foreign-produced castings 
at the expense of U.S.-produced castings, primarily because of lower 
foreign pricing.'' \1\ Furthermore, the ITC report indicated that China 
was a major source of the cheap imports flooding the U.S. market. This 
huge surge in imported castings has directly contributed to the loss of 
thousands of foundry jobs and numerous foundry closures in recent 
years, as well as having a negative impact on the total U.S. 
manufacturing sector.
---------------------------------------------------------------------------
    \1\ Foundry Products: Competitive Conditions in the U.S. Market. 
U.S. International Trade Commission--Investigation No. 332-460, May 
2005.
---------------------------------------------------------------------------
    Our member companies have seen significant production outsourced to 
China to take advantage of this unfair trade advantage. Here are just a 
few examples of what American foundries are facing:

      Over 700 foundries have closed during the past ten 
years--which means over 50 foundries are closing each year. These 
closures have a devastating impact on communities across this country. 
Foundries provide reliable, good-paying and rewarding jobs for their 
constituents, while substantially adding to the tax base at all levels 
of government.
      Earlier this month, Ford Motor Co. announced that it will 
be closing down its foundry, Cleveland Casting, in Brook Park, Ohio by 
2009, and thus, eliminating over 1,000 good paying jobs. The facility 
produces cast-iron engines for Ford F-Series Super Duty trucks, Ford E-
Series vans and Ford Expedition and Lincoln Navigator SUVs. It is one 
of several foundries being closed by the automaker this decade.
      Many companies that have upgraded their plants to be 
highly automated don't have enough work to pay off their investment. 
This creates a situation for foundries where all of the volume has gone 
away thus causing them to lose the contribution margin to absorb the 
fixed overhead.
      An Indiana foundry employing over 100 employees has lost 
over 35 percent of its casting business to China since 2001.
      A Texas-based foundry which supplies the automobile 
industry in North America describes how some of its major customers 
such as TRW and Bosch have outsourced brake castings to foundries in 
China. These customers then use the subsidized low prices from China as 
their ``World'' price and demand such from their American suppliers, 
which have gradually dragged the market price for brake castings to all 
time lows. This U.S. foundry has managed its costs down to where it is 
selling castings today for 35% less per ton than in the mid-70's (no 
adjustments for inflation taken into account!) It has almost no room 
for further cost reduction, being squeezed by prices on one end, and 
increasing costs for energy and raw materials on the other.
      Suppliers to our industry report that customer after 
customer now imports tooling that in years past would have been built 
in the U.S. at a fair price. Presently, an Indiana tool & die shop has 
one tool in its 15-man shop and not one prospect in sight. The once 
proud tool manufacturing sector has been reduced to a mere shell of its 
former self.
      A Pennsylvania foundry reports that it has lost over 
$1,000,000 in sales as a result of lower priced Chinese castings.
      A Georgia-based family-owned foundry is currently facing 
the possibility of losing a $500,000 contract for a regular customer in 
Houston, Texas, to a Chinese company.
What Can Congress Do Regarding Currency Manipulation
    With little to show after four years of U.S. pressure on China to 
revalue its yuan currency, we urge you and your fellow lawmakers to 
pass legislation, The Fair Currency Act (H.R. 782), which would define 
currency manipulation as a subsidy under U.S. trade law and make it 
easier for the U.S. Commerce Department to impose new tariffs on 
Chinese goods under a countervailing duty law against foreign 
government subsidies. If enacted, this legislation would help U.S. 
manufacturers and workers to counteract currency undervaluation by 
China and other countries that injures our economy. Countries that 
engage in ``exchange-rate misalignment'' should be put on notice that 
such behavior is not acceptable and has legal consequences.
    Unfortunately, the U.S. Department of Treasury in its semi-annual 
reports has persistently chosen not to cite China for exchange-rate 
``manipulation'' within the meaning of the International Monetary 
Fund's Articles of Agreement. The report claims that it cannot be 
determined if China's policy of undervaluation is intended to gain an 
unfair competitive advantage in trade or to prevent adjustments in 
China's balance of payments. AFS feels this longstanding approach by 
the Treasury Department has been fruitless and will remain so, and a 
legislative strategy needs to be adopted to hold countries like China 
to account under their international legal obligations.
    Since China continues to enjoy the benefits of membership in the 
international economic community, it is only fair that it abide by the 
community's rules and responsibilities. The time for change is now, 
before our industry and the rest of U.S. manufacturing is put further 
at risk. AFS is committed to working with you on this important matter.

            Sincerely,

                                                         Jerry Call
                                           Executive Vice President

                                 

     Prepared Statement of the Retail Industry Leaders Association
    The Retail Industry Leaders Association (RILA) appreciates the 
opportunity to submit written comments for today's hearing on currency 
manipulation. RILA promotes consumer choice and economic freedom 
through public policy and industry operational excellence. Our members 
include the largest and fastest growing companies in the retail 
industry--retailers, product manufacturers, and service suppliers--
which together account for more than $1.5 trillion in annual sales. 
RILA members provide millions of jobs and operate more than 100,000 
stores, manufacturing facilities and distribution centers domestically 
and abroad.
    RILA supports the longstanding U.S. policy of economic engagement 
with China and Japan and opposes legislation that threatens to cut off 
access to the U.S. market as a means of pressuring China and/or Japan 
on policy issues such as exchange rates. RILA advocates a balanced 
trade policy--one that recognizes the tremendous opportunities and 
benefits that trade and investment with China and Japan bring to the 
U.S. economy, while also effectively addressing market access barriers 
and other unfair trade practices that affect U.S. companies doing 
business with these countries. RILA supports a rules-based resolution 
of trade disputes in a manner consistent with World Trade Organization 
(WTO) obligations.
    While RILA members strongly support positive economic engagement 
with both China and Japan, our comments today are focused on China. 
U.S. exports to China are rapidly growing. In 2006, China and Hong Kong 
combined ranked as the third-largest U.S. export market, with exports 
of goods totaling more than $73 billion. Furthermore, U.S. exports to 
China are growing far more rapidly than exports to any other major 
market. U.S. exports to China in 2006 were 240 percent higher than in 
2000, the last full year before China joined the WTO. By comparison, 
the second-fastest-growing market for U.S. goods during this time was 
the Netherlands, with cumulative growth of 42 percent.
    U.S. services exports to China are also growing. The U.S. already 
has a small services trade surplus with China--$2.6 billion in 2005--
and that surplus is forecasted to grow to $15 billion or more by 2015 
as more U.S. companies take advantage of market access openings 
negotiated as part of China's WTO accession.
    Congressional actions toward China should focus on positive 
economic engagement with China with a broader focus than simply 
currency exchange rates. The effect of China's exchange rate policy on 
bilateral trade is likely overstated. According to Stephen Roach, chief 
economist at Morgan Stanley, the trade deficit with China is also the 
result of other factors, including a high U.S. personal consumption 
rate, a very low U.S. savings rate--just over 1% over the past three 
years--by domestic businesses, households, and the government, and a 
high personal saving rate in China (about 30% of household income). The 
low U.S. savings rate means that America must import surplus saving 
from abroad to fuel U.S. economic growth.
    Congress should enact policies that promote more U.S. domestic 
saving, and encourage China to move from an economy based on export 
growth to one based on growth in domestic consumption. For example, 
Congress should encourage China to break down the remaining barriers to 
foreign investment in China's retail sector. Growth in the supply of 
retail outlets in China will increase consumer choice and competition 
and enable Chinese consumers to increase their purchases.
    While RILA members seek to benefit from the growing trade 
opportunities with China, we also recognize that the valuation of 
China's currency is a significant concern for both the Administration 
and Congress. RILA believes that China should indeed implement steady, 
measured, but concrete movement toward a market-determined exchange 
rate. Toward this end, RILA supports efforts by Treasury Secretary 
Henry Paulson in the context of the Strategic Economic Dialogue 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.
    Some of the legislative proposals such as H.R. 782 and S. 796 to 
address China's currency regime would be counterproductive as they are 
inconsistent with WTO rules. Such measures could prompt harmful Chinese 
retaliation against U.S. exports to China. Specifically, the WTO 
Agreement on Subsidies and Countervailing Measures (WTO SCM) requires 
that a countervailable subsidy: (1) confer a benefit, (2) involve a 
``financial contribution'' from the government, and (3) be ``specific'' 
to an enterprise or industry. China's currency policy likely doesn't 
meet these criteria because the government is not transferring anything 
of value to firms, and the policy is not specific to a particular 
enterprise, industry, or group of enterprises or industries. While 
these bills revise U.S. law to assert that exchange rate misalignment 
satisfies the WTO criteria, that does not in itself make the 
legislation WTO-consistent.
    In conclusion, U.S. trade and investment with China and Japan 
benefit RILA members and the U.S. economy directly through imports and 
exports as well as through broader effects such as lower prices and 
higher productivity. RILA supports efforts to find solutions to these 
issues that are balanced and do not undermine the significant 
opportunities and benefits to the U.S. economy that come from trade and 
investment with these countries.

                                  
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