[Senate Hearing 110-916]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 110-916
 
U.S. ECONOMIC RELATIONS WITH CHINA: STRATEGIES AND OPTIONS ON EXCHANGE 
                        RATES AND MARKET ACCESS 

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
              SECURITY AND INTERNATIONAL TRADE AND FINANCE

                                 OF THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                                   ON

 INFORMATION ABOUT STRATEGIES AND OPTIONS ON EXCHANGE RATES AND MARKET 
                                 ACCESS


                               __________

                        WEDNESDAY, MAY 23, 2007

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


     Available at: http: //www.access.gpo.gov /congress /senate /
                            senate05sh.html

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman
TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         WAYNE ALLARD, Colorado
EVAN BAYH, Indiana                   MICHAEL B. ENZI, Wyoming
THOMAS R. CARPER, Delaware           CHUCK HAGEL, Nebraska
ROBERT MENENDEZ, New Jersey          JIM BUNNING, Kentucky
DANIEL K. AKAKA, Hawaii              MIKE CRAPO, Idaho
SHERROD BROWN, Ohio                  JOHN E. SUNUNU, New Hampshire
ROBERT P. CASEY, Pennsylvania        ELIZABETH DOLE, North Carolina
JON TESTER, Montana                  MEL MARTINEZ, Florida

                      Shawn Maher, Staff Director
        William D. Duhnke, Republican Staff Director and Counsel
               Roger M. Hollingsworth, Professional Staff
          Julie Y. Chon, International Economic Policy Adviser
                       Aaron D. Klein, Economist
          Peggy R. Kuhn, Republican Senior Financial Economist
     Mark A. Calabria, Republican Senior Professional Staff Member
   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
                         George Whittle, Editor

                                 ------                                

              Security and International Trade and Finance

                      EVAN BAYH, Indiana, Chairman
                 MEL MARTINEZ, Florida, Ranking Member
SHERROD BROWN, Ohio                  MICHAEL B. ENZI, Wyoming
TIM JOHNSON, South Dakota            ELIZABETH DOLE, North Carolina
ROBERT P. CASEY, Pennsylvania        ROBERT F. BENNETT, Utah
CHRISTOPHER J. DODD, Connecticut

                       Jayme Roth, Staff Director
            Jennifer C. Gallagher, Republican Staff Director











                           C O N T E N T S

                              ----------                              

                        WEDNESDAY, MAY 23, 2007

                                                                   Page

Opening statement of Chairman Bayh...............................     1

Opening statements, comments, or prepared statements of:
    Chairman Dodd
        Prepared statement.......................................    33
    Senator Bunning..............................................     4
    Senator Casey................................................    18
    Senator Brown
        Prepared statement.......................................    34

                               WITNESSES

Morris Goldstein, Senior Fellow, Peterson Institute for 
  International 
  Economics......................................................     7
    Prepared statement of C. Fred Bergsten, Director, Peterson 
      Institute for International Economics......................    36
David A. Hartquist, Counsel, China Currency Coalition............     9
    Prepared statement...........................................    48
Robert S. Nichols, President and Chief Operating Officer, 
  Financial Services Forum.......................................    11
    Prepared statement...........................................    77
Patrick A. Mulloy, Adjunct Professor, George Mason School of Law.    13
    Prepared statement...........................................    84
John W. Nolan, Vice President and General Manager, Steel 
  Dynamics, Inc..................................................    15
    Prepared statement...........................................   102


U.S. ECONOMIC RELATIONS WITH CHINA: STRATEGIES AND OPTIONS ON EXCHANGE 
                        RATES AND MARKET ACCESS

                              ----------                              


                        WEDNESDAY, MAY 23, 2007

                               U.S. Senate,
  Subcommittee on Security and International Trade 
                                       and Finance,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The subcommittee met at 2:41 p.m., in room SD-538, Dirksen 
Senate Office Building, Senator Evan Bayh, (Chairman of the 
Subcommittee) presiding.

            OPENING STATEMENT OF CHAIRMAN EVAN BAYH

    Chairman Bayh. I am pleased to call this meeting of the 
Subcommittee to order. I would like to welcome all of our 
guests, including our panelists here today. I appreciate your 
indulgence. The Senate, as you probably are aware, is debating 
an important immigration measure, and as the Senate is 
sometimes wont to do, we have votes that are not scheduled. So 
we just had one at--the clock has stopped. We had one at 2:25, 
which ran over a little bit, so I appreciate your waiting for 
us, and I apologize for the delay. It is the nature of the 
beast, as we might say.
    The order of proceedings today, I am going to begin with an 
opening statement, turn to my colleagues in order of 
appearance--Jim, I think that means you are on deck, is that 
right?
    Senator Bunning. Thank you.
    Chairman Bayh. You are on deck, to use an expression you 
are familiar with--and then our other colleagues who will be 
here. I want to thank Senator Martinez for his participation 
putting today's hearing together. We have had very good 
bipartisan collaboration over the years, and certainly in terms 
of the conduct of the affairs of this Subcommittee.
    I would also like to thank the Committee Chairman, Senator 
Dodd, who has helped to make this hearing possible. It was at 
his recommendation that the subject matter was expanded to 
include not only currency valuations but also market access to 
financial services industries and others. I think that was a 
very helpful suggestion. It is an important issue and one is 
that it is timely that we focus on. The Senator could not be 
with us today, but he does intend to submit a full statement 
for the record, and I appreciate his sharing his thoughts with 
us in that regard.
    After the opening statements are completed, we will go to 
witness testimonies. I have had a chance to read some of the 
prepared statements. If possible--and we are going to have some 
flexibility--if we can keep it to 5 to 7 minutes, something 
like that, that would be ideal. We can submit any extra for the 
record, and then we will go to questions and answers, and we 
will try and have 5-minute rounds of questions and answers and, 
if necessary, a second round for questions and answers. So 
thank you for your patience. I will make a few comments, then, 
Jim, turn to you, and any colleagues who arrive, and then, 
gentlemen, we look forward to hearing from you today.
    This is a timely hearing. The Strategic Economic Dialogue, 
the most recent of meeting of that just concluded earlier 
today. Secretary of the Treasury Paulson called me last week to 
discuss some of his agenda with me, to talk a little bit about 
the subject of our hearing today, and I would like to say that 
I appreciate his efforts. He is a good man. I have known him 
for a long time. In some ways, he is dealing with some legacy 
problems, and I would characterize it as a legacy of neglect 
with regard to some of these issues. His actions and his 
activities are well intended. We are doing somewhat better than 
in the past, but the question before us today is whether we are 
making enough progress and whether that progress is being made 
in a timely manner. And my answer to both of those questions 
would be, ``Obviously not.''
    Steps by China so far have been largely cosmetic and 
symbolic and of marginal substantive import. And the pace of 
change is glacial, and I use that term in the pre-global 
warming context. It has been so slow, in fact, that nothing of 
consequence has been accomplished in any meaningful timeframe. 
I am reminded of something that John Maynard Keynes once said, 
which was, ``In the long run, we are all dead.'' And at this 
pace, we will be before the imbalances that have been allowed 
to build in the global trading system, particularly the 
bilateral trading relationship between our Nation and China, 
are rectified.
    It is becoming increasingly obvious that some form of 
benchmarks for specific actions and specific consequences for 
failing to meet those benchmarks will be necessary if progress 
is to be made. For years now, literally years, China has said 
many of the right things, and we appreciate that. But they have 
not followed through and done the right things. How long will 
we accept rhetoric as a substitute for action?
    Ultimately, it is a matter of credibility, both ours and 
theirs. When we repeatedly acquiesce to behavior that is 
harmful to the United States, why should China take us 
seriously? The answer is that they really do not. When they 
repeatedly do not fulfill promises to change their behavior, 
why should we believe them? And the answer is that increasingly 
we should not.
    The current state of affairs is most unfortunate. I wish we 
did not have this friction in our relationship. No one enjoys 
tension between two great nations like the United States and 
China. I want good relationships with China. It is probably the 
most important bilateral relationship that we will have over 
the next 50 years. It is a powerful nation with a rich history 
and culture and bright prospects for the future.
    But as much as I want good relations with China, I know 
that this cannot be achieved by ignoring the interests and the 
well-being of the United States. We all want China integrated 
into the global economic and security structure, but for 
amicable relations to exist, they must be mutually beneficial 
and sustainable. Growing questions about whether either of 
these is so exist.
    China is concerned about its domestic stability, and this 
is a real and legitimate concern. With the number of excess 
workers in agriculture who will be moving into the cities and 
the number of excess workers in state-owned enterprises, the 
risk of dislocation is real, and they have a right to focus on 
that. But in promoting rapid growth and stability at home, 
China cannot expect to export lower growth and instability to 
the United States in ways that are artificial. No nation state 
will voluntarily accept such a course, nor should we.
    For example, China policy benefits U.S. consumers but 
handicaps U.S. producers. That is not a decision for them to 
make. It is a decision for the United States of America to 
make.
    Another example. They cannot expect unfettered access to 
U.S. markets while denying open access to their own, 
particularly in the financial services sector and for turning a 
blind eye to rampant intellectual property theft, which was a 
previous subject for a hearing by this Subcommittee.
    Currency manipulation, which is an artificial distortion of 
trade, has had very harmful impacts upon our balance of trade. 
Some experts, including one member of the panel today, estimate 
that the Chinese currency is undervalued by as much as 40 
percent, and it is getting worse. I think, Dr. Goldstein in 
previous testimony about 3\1/2\ years ago, you indicated at 
that time the undervaluation was in the area of 15 to 25 
percent. Your most recent statement of a couple of months ago 
was 40 percent, and most experts would agree that the 
overvaluation is increasing rather than static or decreasing.
    The proposed expansion of the trading band is a marginal 
action at best--and really meaningless, in fact, given the fact 
that the current band has never been fully implemented. This 
results in lost sales and jobs to Americans due to reasons 
other than natural competitive market forces or comparative 
advantage. It has been estimated that the domestic 
manufacturing sector alone loses $31 billion of sales per year 
and that we lose $35 billion in exports to China every year 
because of their artificial manipulation of the currency.
    Other credible research suggests that the manipulation 
costs the U.S. economy approximately $500 billion per year and 
that this could translate into 5.3 million jobs. Regardless of 
the precise nature of these statistics, it is pretty clear that 
it is having a material impact upon our economy, and this is 
something that should concern all Americans.
    Market access limits exacerbate this imbalance. Not only 
does China artificially promote exports, it artificially 
restraints access to its domestic market. This is contrary to 
its obligations under the WTO. And China continues to 
discriminate against U.S. firms, particularly in the financial 
services sector.
    The global economy will not function very well if, when 
other countries, including China, have a competitive advantage, 
we buy from them, but when we have a competitive or a 
comparative advantage, they shut us out. But that is the 
current situation that we confront.
    With rights must come responsibilities. I voted for China's 
accession to the WTO because I believed it was better to have 
China subject to the rule of law and the discipline of market 
forces. Too often, unfortunately, they have chosen to flout the 
law and to manipulate market forces to achieve artificial 
economic advantages. This is not what anyone had in mind.
    The current situation poses great and growing risks to the 
United States. Economically, the situation is unsustainable. 
The current account imbalance--I think it is about 6.6 percent 
as a percentage of our GDP last year--continues to grow and 
most people believe will ultimately correct. The adjustment can 
either be gradual or abrupt. The longer we let this situation 
continue, the greater the chances of a severe correction, with 
substantially higher interest rates and correspondingly lower 
growth for the United States economy.
    There are also national security implications for this 
continuing situation. Interdependency is one thing and a 
positive aspect of globalization. But excessive dependency is 
another matter, and we are on the cusp of becoming excessively 
dependent upon China. This raises the possibility, however 
remote, of coercion.
    For example, look at Russia's recent behavior with regard 
to European nations that are excessively dependent upon Russia 
for energy exports. We are approaching a point where China 
could possibly threaten the United States with adverse economic 
consequences if we do not accede to its wishes. No great 
nation, particularly the United States, can allow itself to be 
placed in such a position.
    We have also, unfortunately, seen the limited utility of 
dialog. Endless conversations are not enough if they do not 
result in meaningful action. China sees the status quo as in 
its interests and will not change its behavior unless the cost/
benefic calculus changes. Put another way, if all we do is 
complain about the situation, why should they take us seriously 
or change their behavior?
    Action in some meaningful timeframe is needed--undertaken 
cooperatively with China if we can, unilaterally if we must.
    That is the subject of today's hearing, and, Senator 
Bunning, I will now turn to you and would very much appreciate 
your thoughts.

                STATEMENT OF SENATOR JIM BUNNING

    Senator Bunning. Thank you, Chairman Bayh.
    I want to thank Senator Bayh for inviting me to participate 
in today's hearing. I am glad the Banking Committee and this 
Subcommittee are taking the time to discuss what is self-
evident to even the most casual observer: China's manipulation 
of its currency.
    Congress has long recognized that a nation can subsidize 
its export industries and establish trade barriers simply by 
undervaluing its currency. In fact, that is why Article XV of 
the General Agreement on Tariffs and Trade and Article IV of 
the IMF Charter clearly prohibit currency manipulation, and 
China has signed both of these agreements. Yet some say that 
because the IMF and the Treasury Department failed to recognize 
a plain fact, that there is no currency problem.
    Chairman Bayh knows how concerned I am that the 
Administration and the IMF have refused to use the tools 
available to address China's currency manipulation. In fact, my 
colleagues on this Committee, including the Chairman, Senator 
Casey, and Senator Brown, have joined with me and Senator 
Stabenow to introduce a bill, the Fair Currency Act of 2007, 
which would identify exchange rate misalignment as a prohibited 
export subsidy under the U.S. trade law, thereby allowing 
injured companies the right to seek trade law remedies.
    American workers and businesses that compete with China are 
impatient for change. Congress is impatient. Yet, we have been 
told for multiple reasons that the United States does not need 
to act against China now.
    Time and time again we have been told that change will take 
time. It is argued that China needs to make numerous changes--
particularly to OK banking and financial systems--before they 
can allow the value of the yuan to float more freely on the 
international market.
    Or, we are told China is already making changes, cosmetic 
at best.
    Yet, China is doing even more today to manipulate its 
currency. It has dramatically increased its monthly average 
exchange rate buying to $45 billion per month. The chart I have 
shows where the yuan would be, if it were not for China's 
action. In other words, the yuan is here, and all the way up to 
where it should be would be a 40-percent appreciated value. And 
despite China's professed policy of allowing the yuan to float, 
it is not. China's extraordinary level of intervention is not 
only a barrier to trade, it is a growing danger to the global 
economy and one that Congress is obliged to address.
    I have a number of questions for our witnesses, and I look 
forward to their responses.
    Thank you.
    Chairman Bayh. Thank you very much, Senator Bunning. And it 
has been a pleasure to work with you on the Fair Currency Act. 
I am grateful for your interest in these issues, and it is 
great to have good neighborly relations between our two States.
    I will now turn to our panelists. Again, thank you for your 
patience, and I will go from this end of the table to that end 
of the table.
    Dr. Goldstein, thank you for joining us. Dr. Morris 
Goldstein is the Dennis Weatherstone Senior Fellow at the 
Peterson Institute for International Economics. Prior to 
joining the Institute in 1994, Dr. Goldstein spent 25 years at 
the International Monetary Fund, the last 8 as Deputy Director 
of Research. He consults widely with central banks, Ministries 
of Finance, and private financial institutions. He earned his 
Ph.D. in economics from New York University. Dr. Goldstein is 
kind enough to stand in today for his colleague, Dr. Fred 
Bergsten, who unfortunately is under the weather today. Please 
give him our best.
    By the way, you were not at NYU when John Brademas was 
President by any chance, were you?
    Mr. Goldstein. I was.
    Chairman Bayh. Very good. Some good Indiana influence on 
that fine institution.
    Our next panelist, Mr. David Hartquist, ``Skip''--I think 
you go by ``Skip''--is counsel to the China Currency Coalition 
and Chairman of the International Trade and Customs Practice at 
the law firm of Kelley, Drye & Warren. Mr. Hartquist's 
experience has involved industries such as specialty steel, 
copper and brass, tissue paper, oil and gas, electronics, 
chemicals, tableware, and apparel--all of this in connection 
with international trade litigation and negotiations. He has 
advised the U.S. Government on trade negotiations with China, 
the European Community, Japan, Korea, Taiwan, and other 
nations, as well as the Doha Round of the WTO negotiations. 
Before joining his present law firm in 1976, Mr. Hartquist 
worked for President Ford as General Counsel of the White House 
Counsel's Office on international economic policy. He earned 
his law degree from what we like to refer to as the ``Indiana 
University of the East,'' otherwise known as Harvard in some 
quarters.
    [Laughter.]
    That is the advantage of being Chairman, Jim. You can take 
some liberties.
    Our next panelist, the Honorable Robert S. Nichols. Thank 
you for joining us. Mr. Nichols is President of the Financial 
Services Forum, an organization of CEOs of the largest 
financial institutions in the United States. Before joining the 
Forum, Mr. Nichols was Assistant Secretary of the Treasury for 
Public Affairs. He is a recipient of the Alexander Hamilton 
Award, the Treasury Department's highest honor. Before joining 
the Treasury, Mr. Nichols served as communications director for 
the Electronic Industries Alliance. Previously, he was 
communications director to former Senator Slade Gorton and 
press secretary to former Congresswoman Jennifer Dunn. A native 
of Seattle, Washington, Nichols is a graduate of the George 
Washington University. Welcome, Mr. Nichols.
    Next we have the Honorable Patrick A. Mulloy. Thank you, 
Mr. Mulloy. Pat Mulloy served on the bipartisan U.S.-China 
Economic and Security Review Commission from April 2001 to 
December 2006 and was Acting Chairman from January of 2002 
through May 2002. The Commission conducted hearings and reports 
to Congress on national security implications of our economic 
relations with the People's Republic of China. Its work 
examines trade and investment issues, political relations, 
technology transfers, and China's WTO compliance. Prior to 
assuming that role, Mr. Mulloy was Assistant Secretary for 
Market Access and Compliance in the Department of Commerce's 
International Trade Administration from 1998 to 2001. He also 
served 15 years on the staff of the Senate Banking Committee--
welcome home, Mr. Mulloy--including as chief international 
counsel and general counsel. Mr. Mulloy is currently the 
Washington representative for the Alfred P. Sloan Foundation, 
which funds studies and programs regarding the forces impacting 
America's industries and the standard of living of our citizens 
in an increasingly competitive global economy. He is also an 
adjunct professor of international trade at both Catholic 
University and George Mason University. A native of 
Pennsylvania, he holds a J.D. from George Washington University 
Law School and a master's from Notre Dame.
    Mr. John Nolan. Thank you for joining us, Mr. Nolan. John 
Nolan is Vice President and General Manager of the Structural 
and Rail Division of Steel Dynamics in Columbia City, Indiana. 
Perhaps you detect a theme here today. During 1998 and 1999, 
John led Steel Dynamics' e-business strategies as well as the 
company's initiatives in East Asia. It was during his tenure in 
East Asia that John became acutely aware of the challenges 
presented to U.S. manufacturers by the mercantile policies and 
related currency practices of some of our trading partners. 
Since then, he has lobbied the administration and Congress for 
trade policies that support U.S. manufacturers and comply with 
existing U.S. trade law. He recently served on the U.S. 
Government's Industry Trade Advisory Committee on Steel. Mr. 
Nolan earned his degree in metallurgical engineering from 
Lafayette College in 1973.
    Thank you all. Dr. Goldstein, we will begin with you.

    STATEMENT OF MORRIS GOLDSTEIN, SENIOR FELLOW, PETERSON 
             INSTITUTE FOR INTERNATIONAL ECONOMICS

    Mr. Goldstein. Mr. Chairman, I appreciate the opportunity 
to testify before this Committee on the important issue of U.S. 
economic relations with China.
    As you will have noticed, I am not Fred Bergsten. Fred has 
shaved off his moustache and beard. I have not. Fred still 
plays full-court basketball at least once a week. I do not. 
Fred is the Director of the Peterson Institute. I am not. But 
on the issue of China's inappropriate exchange rate policies 
and what to do about it, Fred and I have quite similar views. 
In my remarks, I want to highlight five points that are 
developed more fully both in Fred's written testimony and in my 
own recent congressional testimony and writings on China's 
exchange rate policies.
    First, over the past 5 years, things have gotten much 
worse, not better, on China's external imbalance and its 
exchange rate policies. China's global current account surplus 
has grown without interruption over the past 5 years, 
mushrooming from about 1 percent of its GDP in 2001 to more 
than 9 percent of GDP last year. China now has the largest 
global current account surplus in the world in absolute dollar 
terms, and in the first quarter of 2007, China's global trade 
balance surplus ran about double the pace for the first quarter 
of 2006.
    In short, the Chinese Government has been allowing China's 
global external imbalance to expand out of control. China's 
real effective exchange rate, widely regarded as a much better 
measure of China's overall competitive position than the 
nominal exchange rate between the dollar and the RMB, is 
actually weaker now than it was in either 2001 or at the dollar 
peak in February 2002.
    Some would have you believe that because the RMB-dollar 
rate has appreciated by about 7.5 percent since June of 2005 we 
must be making real progress on the exchange rate front. The 
sad truth is that the RMB is now grossly undervalued, on the 
order of 30 percent or more against an average of China's 
trading partners and 40 percent or more against the dollar. The 
appreciation of the RMB that has taken place to date against 
the dollar is completely inadequate to make a real dent in this 
huge surplus. The recently announced increase in the daily 
fluctuation band between the RMB and the dollar is a very minor 
change that will in no way alter this broader conclusion. Here 
I could not agree more with the Chairman.
    When it launched its much heralded currency reform in July 
2005, the Chinese authorities said they intended to increase 
the role of market forces in the determination of the RMB. No 
such thing has happened. The Chinese authorities have continued 
to intervene in the foreign exchange market in massive amounts 
to keep the RMB from rising, and the amount of monthly 
intervention jumped yet further to about $45 billion a month in 
the first quarter of this year.
    Second point, the international community is now operating 
without an enforced international code of conduct on exchange 
rate policies. Although China is a member of the IMF, Chinese 
authorities continue to assert that they do not accept the 
concept of currency manipulation. Simultaneously, the Fund's 
Managing Director has maintained repeatedly that he rejects a 
role for the Fund as global umpire of exchange rate policies. 
Meanwhile, the U.S. Treasury Department has ruled repeatedly in 
its reports to Congress that it cannot find China guilty of 
manipulation because it cannot prove intent to manipulate. The 
practical upshot of all of this is that we now have a free-for-
all on exchange rates.
    Point No. 3, this lack of progress on improving China's 
exchange rate policies is bad news for China, the United 
States, and the international monetary and trading system. 
China's seriously undervalued and manipulated exchange rate 
makes it much harder for China to move to a more balanced and 
consumption-driven growth path and to implement a more 
independent monetary policy. From the U.S. perspective, the 
failure of the RMB to appreciate significantly has limited the 
helpful contribution that exchange rate changes in Asia could 
make to bringing about an improvement in the U.S. global 
current account deficit and to reducing the risk of a dollar 
crash and a hard landing for the U.S. economy.
    As Fred puts it in his written testimony, China's currency 
policy has taken much of Asia out of the adjustment process, 
and China's currency manipulation could lead to retaliatory 
trade responses in the United States and perhaps in Europe as 
well, much to the disadvantage of all parties.
    Fourth point, several popular arguments that maintain it is 
neither feasible nor desirable for China to take faster and 
bolder action in reducing the undervaluation of the RMB are not 
persuasive. A significant appreciation of the RMB will not be 
disastrous for China's growth, employment, or social stability. 
China's economy grew by over 11 percent in the first quarter of 
this year. A 10-percent appreciation of the RMB would probably 
reduce that growth to 10 percent, hardly a disaster.
    Point No. 5, a new U.S. stance toward China's currency 
policy is clearly needed. The U.S. Treasury should be pressing 
China to deliver right away a meaningful downpayment of a 10- 
to 15-percent appreciation of the RMB from its current level. 
Because China has waited so long to take the decisive action, 
the undervaluation of the RMB can no longer be eliminated in 
one go. A sizable up-front adjustment is needed if China is to 
escape from being so far behind the curve. A modest upward rate 
of crawl of the RMB relative to the dollar, say at 5 percent a 
year, is not going to get the job done.
    Failure by China to drastically reduce its large-scale, 
one-way intervention in the exchange market should result in a 
finding of currency manipulation in the Treasury's next report 
to the Congress. The exchange rate should be placed and should 
be maintained at the top of the agenda for future meetings of 
the SED until greater progress is made. The United States 
should also be promoting an international effort to obtain an 
Asian Plaza agreement that would work on the needed 
appreciation of all major Asian currencies that are currently 
out of line. The U.S. should marshall support from industrial 
and large emerging economies for making the IMF the global 
umpire for exchange rate policies, and it should resist any 
watering down of the IMF's exchange rate surveillance 
guidelines.
    Finally, the U.S. administration should quietly notify the 
Chinese that it will be unable to oppose responsible 
congressional initiatives in the event that China continues its 
failure to observe its international currency obligations. To 
ensure that the U.S. approach is evenhanded, the U.S. should 
indicate it is prepared to offer a new, longer-term plan for 
greater and more durable fiscal policy consolidation in the 
U.S.
    Thank you, and I look forward to answering your questions.
    Chairman Bayh. Thank you, Dr. Goldstein.
    Senator Casey has very graciously agreed to await his 
comments for the end of the panel, so, Mr. Hartquist, we look 
forward to hearing from you.

   STATEMENT OF DAVID A. HARTQUIST, COUNSEL, CHINA CURRENCY 
                           COALITION

    Mr. Hartquist. Thank you, Mr. Chairman. I am David 
Hartquist of the law firm Kelley, Drye, Collier, Shannon, 
representing the China Currency Coalition, which is a group of 
basically manufacturing companies, trade associations, and the 
AFL-CIO that joined together to work on this issue about 3 
years ago now.
    I note, by the way, that in the press statements that came 
out of the SED discussions today, both Secretary Paulson's 
statement and the fact sheet that was issued by the Treasury 
Department describing the results of the negotiations, the word 
``currency'' is not used one time.
    In discussing the problem of undervalued currencies----
    Chairman Bayh. Perhaps, Mr. Hartquist, that is because 
there was not much to report.
    Mr. Hartquist. I expect that is the case, Mr. Chairman.
    In discussing the problem of undervalued currencies, it is 
helpful to recall the perspective of those who were involved 
during and immediately after World War II in the creation of 
the institutions they designed for the post-war international 
monetary and trading systems. Weighing very much on their minds 
were the ordeal of the Great Depression of the 1930's, the 
damage done to international trade by competitive currency 
depreciation and exchange controls, and the need for orderly 
exchange arrangements to restore and facilitate international 
trade.
    The words of Harry Dexter White, who was a primary 
architect of the IMF, along with John Maynard Keynes, whom you 
mentioned, Mr. Chairman, are particularly thoughtful, and I 
quote: ``The difference between stability and rigidity in 
exchange rates is the difference between strength and 
brittleness. It is the difference between an orderly 
adjustment, if conditions warrant it, and eventual breakdown 
and painful adjustment.''
    And, again, in terms of lowering barriers to international 
trade, Harry Dexter White noted the following: It ``. . . 
cannot be done until there is assurance of orderly exchange 
rates and freedom in exchange transactions for trade purposes. 
A depreciation in exchange rates is an alternative method of 
increasing tariff rates; and exchange restriction is an 
alternative method of applying import quotas.''
    These sentiments were heartfelt convictions born of 
terrible experience, so what might we take from them today in a 
time when the yuan and the yen and a number of other currencies 
are undervalued and monetary and trade imbalances triggered by 
such misalignment are becoming more pronounced at a rapid rate?
    In the China Currency Coalition's judgment, the measures 
taken to address this situation will have the greatest chance 
of being effective if based upon a recognition of the hybrid 
nature of this situation. As White understood, balanced and 
mutually beneficial flows of international trade depend upon 
assurance of orderly exchange rates and freedom in exchange 
transactions for trade purposes. Article IV of the IMF 
Agreement and Article XV of the GATT reflect this attitude.
    Consistent with their historical roots, therefore, it is to 
be hoped that the IMF and the WTO would work in tandem in these 
circumstances, especially as the IMF can rely, as Dr. Goldstein 
indicated, only upon moral suasion to encourage revaluation of 
the yuan and other undervalued currencies.
    Currency manipulation in the IMF's terms, and exchange rate 
misalignment as a countervailable, prohibited export subsidy 
from the WTO's vantage point, are two sides of the same coin. 
In each case, there is an undervaluation of a foreign currency 
as a result of protracted, large-scale intervention by or at 
the direction of a governmental authority in the exchange 
market. Manipulation occurs if the foreign government's intent 
by such undervaluation is to prevent an effective balance-of-
payments adjustment or to gain an unfair competitive advantage 
over other countries. But there is no requirement of intent 
under the WTO's Agreement on Subsidies and Countervailing 
Measures.
    Treatment in U.S. domestic law of exchange rate 
misalignment as a countervailable, prohibited export subsidy is 
a reasonable interpretation and implementation of the SCM 
Agreement. During the Uruguay Round that led to the formation 
of the WTO, the definition of a countervailable, prohibited 
export subsidy was carefully amended and articulates three 
prerequisites that must be satisfied: a government financial 
contribution, a benefit, and the subsidy must be specific--in 
this case, contingent upon export performance. We believe all 
these conditions are met.
    The CCC filed a Section 301 case in 2004 urging the U.S. 
Government to take the China currency issue to the WTO. Members 
of Congress have filed similar 301 cases three times since 
then, most recently last week. The Bush administration turned 
down the first three cases. Ours was turned down only 4 hours 
after we filed a 250-page petition. We will see what they do 
with the current congressional case filed by 42 Members of the 
House--22 Democrats and 20 Republicans.
    I agree that China's recent announcement of widening the 
daily trading band to half a percent is grossly insufficient. 
Since China's announcement in July 2005, nearly 2 years ago, 
that the yuan would be traded within a daily band of 0.3 
percent, the Chinese Government has never for one single day 
permitted the yuan to increase by the allowed percentage. That 
dismal track record does not bode well for the future.
    China's blatant actions also distort other currencies, 
especially those of China's Asian neighbors. As former Treasury 
Secretary John Snow told the Senate Finance Committee 2 years 
ago, ``And, interestingly, China itself accounts for 43 percent 
of the non-petroleum trade deficit between our two 
countries''--43 percent. Congressional action we believe is 
needed and warranted. We strongly support S. 796, the Fair 
Currency Act, sponsored by several Members of the Banking 
Committee, including Senators Bunning and Bayh, Senator Casey 
and Senator Brown.
    Thank you.
    Chairman Bayh. Thank you, Mr. Hartquist.
    Mr. Nichols.

 STATEMENT OF ROBERT S. NICHOLS, PRESIDENT AND CHIEF OPERATING 
               OFFICER, FINANCIAL SERVICES FORUM

    Mr. Nichols. Mr. Chairman, thank you.
    Chairman Bayh and Ranking----
    Chairman Bayh. By the way, at least for our first two 
panels, you have been much more observant of the 5- to 7-minute 
timeframe than most Members of Congress are, so I salute you 
for that.
    Mr. Nichols.
    Mr. Nichols. Thank you, Mr. Chairman, Ranking Member 
Martinez, Senator Bunning, Senator Casey, thank you for the 
opportunity to participate in this important hearing on 
America's economic relationship with China and strategies 
regarding exchange rates and expanded market access. While not 
in attendance today, I do want to thank Chairman Dodd and 
Ranking Member Shelby for their leadership in this area as 
well.
    I am here as the President and COO of the Financial 
Services Forum, the chairing organization of the ENGAGE CHINA 
Coalition, which is a partnership among eight financial 
services trade associations united in our support of continued 
economic engagement with China, reform of China's financial 
sector, and expanded market access for U.S. providers of 
financial services. I would like, if I may, to focus my brief 
opening comments on how increased market access for U.S. 
financial services firms and China's capital markets will 
benefit American workers, America, and our manufacturers.
    A more effective and efficient financial sector in China is 
a prerequisite to successfully addressing the issues that have 
complicated the U.S.-China economic relationship, chief among 
them further currency reform and meaningfully reducing the 
trade imbalance.
    Regarding the currency, as Chinese authorities have 
repeatedly argued--reasoning generally acknowledged by most 
foreign analysts--an immediate shift to a fully market-
determined yuan is very difficult given the underdeveloped 
state of their capital markets. More specifically, China's 
banks, securities firms, and other businesses lack the 
expertise to develop and trade derivatives and other structured 
instruments used to hedge the risk associated with greater 
currency volatility. Sophisticated derivative products and 
hedging techniques provided by foreign financial services firms 
would clearly diminish such concerns. We would like to do that.
    Turning to the trade deficit, reorienting the financial 
habits of China's population to achieve a better balance 
between savings and consumption--while progressively bringing 
more than 1 billion Chinese into the global economy--is in our 
view the most powerful remedy to the U.S.-China trade 
imbalance. Chinese households historically save from a third to 
as much as half of their income compared to the single-digit 
saving rates here in the United States and Europe. This 
pronounced propensity to save is related to a couple of things: 
the declining role of the state and the fact that most Chinese 
depend on their families and private savings to pay for 
retirement, health care, and the economic consequences of 
accidents or disasters. Activating the Chinese consumer 
requires the availability of financial products and services 
that we here in this room take for grants--personal loans, 
credit cards, mortgages, 401(k)s, pensions, and life, property, 
health insurance products, et cetera, that will eliminate the 
need for such precautionary savings and thus facilitate 
consumption.
    Let me give you an example of how reducing this 
precautionary savings would profoundly help U.S. manufacturers, 
workers, and exporters.
    Last year, the United States exported to Japan goods and 
services worth approximately $60 billion--the same amount, 
roughly, we exported to China. China's population of 1.3 
billion, of course, 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 U.S. would export more than $600 
billion worth of goods and services to China, 11 times what we 
exported to China last year, an amount equivalent to 5 percent 
of our GDP, and more than twice what we imported from China 
last year.
    A fifth of the world's population is currently not 
participating in the global marketplace and, therefore, not 
buying American goods and services. The integration of more 
than a billion people into the global economy will not only be 
the economic story of the 21st century, it will be one of the 
most significant events in the history of the world economy, 
and we must make sure that this profoundly important event 
takes place on terms that work for America.
    Mr. Chairman, the fastest way for China to develop the 
modern financial system it needs to achieve more sustainable 
economic growth, allow for a more flexible currency, and 
increase consumer consumption is to import it--that is, by 
opening its financial sector to greater participation by 
foreign financial services firms. If you care about the 
currency issue, as we all do, and you care about the trade 
deficit, as we all do, you care about expanded access for 
financial services in China.
    By providing the financial products and services that 
China's citizens and businesses need to save, invest, insure 
against risk, raise standards of living, and consume at higher 
levels, foreign financial institutions--including U.S. 
providers--would help create what every manufacturer and 
service provider here in the United States wants, and that is, 
an unleashed Asian tiger hungry for U.S. products.
    Thank you very much for your time.
    Chairman Bayh. Mr. Nichols, thank you very, very much.
    Mr. Mulloy, it is always good to have an alumnus of the 
Banking Committee and of Notre Dame with us. We look forward to 
hearing from you.

STATEMENT OF PATRICK A. MULLOY, ADJUNCT PROFESSOR, GEORGE MASON 
                         SCHOOL OF LAW

    Mr. Mulloy. Thank you, Mr. Chairman.
    Chairman Bayh, Senator Bunning, and Senator Casey--being 
from Pennsylvania, I am delighted to see you, Senator--I want 
to thank you for giving me this opportunity to appear before 
the Committee.
    I am honored, the fact that I am an alumnus of this 
Committee. I served in a bipartisan manner on this Committee 
for 15 years. During the formulation of the 1988 Omnibus Trade 
Act, this Committee developed the exchange rate provisions of 
that omnibus bill. I as general counsel was charged by Chairman 
Proxmire to be very involved in that whole process, and I was 
asked to come up here and give you a little background on why 
Congress did that, and then how the Treasury initially used 
that authority given to it by the Congress.
    I should note that the views I am giving today are my own 
and not of my present employers.
    The important thing to remember, under Article I, Section 8 
of the Constitution it is the Congress, not the executive 
branch, which is in charge of foreign commerce and currency 
valuation. This is your authority, which you have delegated 
some of it to the executive branch in laws that were passed in 
the past. If they do not carry it out in a manner that you feel 
you want it carried out, take it back and do some other things 
with that authority.
    Now, in 1987 the leadership of the Congress was very 
concerned about the fact that the United States was running 
these then large trade deficits, and it charged each Committee 
to develop portions of what would be an omnibus trade bill. 
This Committee, under the Standing Rules of the Senate, has 
jurisdiction over exchange rates, so this Committee developed 
the exchange rate provisions.
    We reported that bill to the Senate on May 19, 1987--just 
about 20 years--and the Committee report said, ``The cumulative 
trade deficits of over $500 billion, built up by the United 
States since 1982''--that was about $100 billion a year; right 
now we are running them about $800 billion a year. Then the 
Congress was concerned about this situation.
    Each Committee then led its portions of an omnibus bill on 
the floor. We went to conference with the House. In that 
conference report, which is now law, the Congress found that 
policy initiatives of some of our major trading nations that 
manipulate the value of their currencies in relation to the 
United States dollar ``continue to create serious competitive 
problems for United States industries.'' Now, that was found 20 
years ago. That was a finding of the Congress.
    Congress then told the Treasury in that law that you should 
go and analyze the currency practices of these other nations, 
and if they are manipulating their currencies, the law says 
you, the Treasury, shall undertake negotiations to get them 
regularly and promptly to end the practice.
    Now, the conferees said in their report, ``The success of 
the legislation hinges on the process of reporting and 
consultation by the Secretary of the Treasury with Congress.'' 
In other words, Congress was saying if Treasury does not carry 
this out the way they are supposed to, we are going to have a 
problem.
    Now, then President Bush, this law was passed in--it went 
into effect I think August 1988. President Bush I was the first 
administration to have this really on the books, and they made 
good use of it. There was an Under Secretary of the Treasury 
named David Mulford, who is now our Ambassador to India. He 
exercised this authority. He identified Taiwan, Korea, and 
China as currency manipulators. He had no problem saying that, 
``The law does not permit me to do that. I have to go into 
intent.'' He used it. We got them to end the practices, and we 
got satisfaction.
    Now, the important thing to remember, in those days we 
still had Section 301 on the books. We still have it on the 
books. Section 301 is the provision of law that permits the 
United States to identify unfair trade practices and impose 
tariffs or something on the other country to make them stop the 
practice.
    When we joined the WTO, we essentially gave away 301 
because now, even though it is on the books, we can only use 
that if we first win a WTO case.
    Now, what has gone on here? Since 1994 the Treasury has not 
named one country a currency manipulator, when the facts are so 
clear that these other countries, including China, are engaged 
in massive currency intervention in markets to keep their 
currencies underpriced.
    Now, China, I am told--oftentimes with the Chinese they 
say, well, we have a sovereign right. Well, they would have a 
sovereign right if they had not joined the IMF and the WTO. 
When you join these organizations--and the Chinese every day 
get enormous benefits. Right now if China was not in the WTO, 
we would not have to give them MFN. When we give them MFN, the 
average tariff on their goods coming into the United States is 
about 3 percent. If they did not get MFN, their average tariff 
would be over 40 percent. So they get an enormous benefit day 
after day after day. Meanwhile, they are acting completely 
contrary to Article XV of the GATT and Article IV of the IMF. 
They are blowing off these legal obligations that they have in 
order--and we are sitting here year after year letting it 
happen to us.
    Now, is this just some reason that China has--this is part 
of China's economic strategy. I have been on that China 
Commission for almost 6 years. I have really gotten into this. 
I understand what is going on here.
    Once China got into the WTO and locked the U.S. market open 
and took away 301, they carried on this manipulation. What does 
it do? It gives American companies an incentive to move 
operations out of the United States and put them in China and 
ship back into this market. Sixty percent of China's exports 
are from foreign-invested companies.
    They also provide subsidies and all other kinds of 
attractions to bring that investment into China, because they 
know that foreign investment and foreign technology transfer is 
the way to build their economic strength. China had a very bad 
200 years. Their economy fell apart. Their policies fell apart. 
They are back in a major way. They tried a collectivist 
approach. It did not work. In 1978, they moved toward this 
foreign strategy of getting the foreign companies and get the 
foreign investors to come in.
    Now, our companies go along. Why? They are focused on 
shareholder value. That is what they are supposed to be doing. 
But the Chinese permit them to make bigger shareholder value by 
moving production to China and shipping it back here. So there 
is a divergence that has come between the interests of the 
multinational corporations and the larger American entity.
    Now, the reason this is such a serious problem for this 
country is that we are letting our economic base upon which is 
really our defense industrial base, we are letting it 
deteriorate, and not only manufacturing is going to China, but 
if you look, you will see now R&D and high-technology things 
are going to China as well.
    So this currency manipulation is an enormous problem. This 
Committee has the jurisdiction over it. If the present law is 
not working and Treasury is not doing it properly, rethink 
that. You yourself could make this finding that China is a 
currency manipulator, and you could order the Treasury to take 
this case to the WTO.
    I thank you very much for this opportunity and will be 
happy to field any questions.
    Chairman Bayh. Thank you, Mr. Mulloy. I appreciate your 
perspective on this. You bring a rich sense of history to the 
subject.
    Mr. Nolan, last but by no means least.

STATEMENT OF JOHN W. NOLAN, VICE PRESIDENT AND GENERAL MANAGER, 
                      STEEL DYNAMICS, INC.

    Mr. Nolan. Thank you very much, Mr. Chairman. I have to 
tell you that Mr. Mulloy is a tough act to follow this 
afternoon. I want to compliment you, Pat. Great job.
    Mr. Chairman, Senator Bunning, Senator Casey, I have to say 
I am delighted to be here this afternoon to represent the great 
State of Indiana. I will tell you a little bit about my 
company. Steel Dynamics began its journey in 1994 as a 
``greenfield'' flat-rolled steel producer in Butler, Indiana. 
Today, we are the fifth largest carbon steel producer in the 
United States, and we are an American company, with American 
values and interests. We have 8 production facilities in 
Indiana employing nearly 2,000 Hoosiers. We have bought or 
built 12 more facilities in the United States that, when 
combined with our Indiana operations, produce over 5 million 
tons of carbon steel products annually. And we are home to more 
than 3,500 American families.
    The Chinese Government has actively intervened in the 
currency market, as you have heard already this afternoon, to 
gain export advantage for its manufacturers since 1994. The 
brilliant Chairman of the Federal Reserve, Ben Bernanke, also 
understands this economic reality because he has recognized and 
emphasized this significant point to which most economists 
agree today--that manipulation of the value of the Chinese yuan 
by the Chinese Government clearly constitutes an export subsidy 
for Chinese manufacturers.
    Now, given that the Bush administration has failed during 
the past 6 years to directly confront this unfair trade 
practice via the WTO, I would like to focus my testimony today 
on the administration's additional failures to enforce trade 
laws passed by Congress--trade laws intended specifically to 
address surging imports from China that materially injure U.S. 
manufacturers.
    Now, in 2001 Congress passed the China Permanent Normal 
Trade Relations Act. The centerpiece of this act was the 
inclusion of a China-specific safeguard that was only allowed 
in U.S. law for a period of no more than 12 years. To 
everyone's grave disappointment, the President of the United 
States has all but nullified this congressionally mandated 
statutory provision.
    Since 2002, there have been four affirmative decisions by 
the International Trade Commission in Section 421 cases. Since 
the President denied relief in 2002 to U.S. producers of steel 
wire hangers, wire hanger imports from China surged by 800 
percent, from 300 million hangers to 2.4 billion hangers a 
year. Thirteen of the fifteen U.S. plants producing these 
products have already shut down. In a March 5, 2007, article, 
Fortune Magazine reports that the last two steel wire hanger 
plants--one in Wisconsin and one in Alabama--will be shutting 
down soon. The Chinese will have gone from 15 percent of the 
U.S. market to 90 percent of the U.S. market with the rest 
supplied by other imports. About 2,500 workers lost their jobs 
in this industry, and the U.S. steel wire rod industry has 
permanently lost several hundred thousand tons of annual 
consumption due to the loss of this important downstream 
market.
    Now, in a 2004 case on ductile waterworks fittings, the 
President again denied relief. In the 3 years since that case 
concluded, imports from China have more than tripled their 
market share, from 20 percent to approximately two-thirds of 
the U.S. market. Major foundries have been shut down in 
Chattanooga, Tennessee, and Aniston, Alabama. Partial foundry 
shutdowns occurred in Birmingham, Alabama. Another major 
productionsite, Tyler, Texas, will shutter its operation 
dwindle as its parent company ramps up a new foundry--guess 
where? China. In the very near future, our entire municipal 
waterworks infrastructure carrying water from every U.S. local 
water authority to every U.S. home or business will be entirely 
dependent upon imports from China.
    Now, the last Section 421 case--and I emphasize that it 
will be the last ever 421 case unless Congress changes the 
law--was near and dear to Steel Dynamics. That case involved 
circular welded non-alloy steel pipe. The petitioners were many 
of the steel industry's largest customers. At the time the case 
was brought, imports from China had increased from 10,000 tons 
in 2002 to 290,000 tons in 2004. After the President said no to 
relief in late 2005, these imports soared to 680,000 tons in 
2006 and are on pace for nearly a million tons in 2007. Now, 
for every ton of pipe from China that replaces a ton of pipe 
produced in the United States, it also takes a ton of steel 
sales away from SDI and from other U.S. sheet mills.
    Now, as a company trying to create and maintain good jobs 
in the State of Indiana, I am also overwhelmed by the loss of 
manufacturing jobs in Indiana caused by increased imports from 
China. Most of these job losses are in the steel-using sectors 
with the hardest hit being the automotive parts industry. 
According to the 2007 Indiana Manufacturers Directory, in just 
the last 12 months Indiana lost 2.4 percent of our 
manufacturing jobs, 17,000 jobs. Now, remarkably, over 11,000 
of those jobs were in the auto parts industry alone. Our State 
lost 12 percent of its auto parts jobs in 1 year.
    Now, I believe that Indiana is representative of the United 
States job losses in the auto parts industry. More broadly, the 
Chicago Fed reported that there have been nearly 200,000 job 
losses in the auto parts industry in just the last 4 years. 
These job losses were directly attributed to the dramatic 
increase in auto parts imports from China, from US$1 billion in 
2001 to over US$7 billion in 2006.
    The Economic Policy Institute has also reported, Mr. 
Chairman, that Indiana was the hardest hit State in the Midwest 
in terms of job losses by reason of surging imports from China.
    Now, the Commerce Department has refused to even 
investigate whether currency manipulation is an export subsidy. 
Mr. Chairman, Senator Bunning, Senator Casey, this is beyond 
the pale. Application of the countervailing duty law to China 
and mandating that the Department of Commerce defines currency 
manipulation as a countervailable subsidy will not result in 
massive trade disruptions with China. It will merely allow U.S. 
industries to fight for and obtain the elusive ``level playing 
field'' we have for so long sought.
    Now, a lot of U.S. manufacturers are dying slowly, 
painfully, unfairly. Help them live to fight another day and 
not just because it is the right thing to do. Do it for our 
children, our grandchildren, their grandchildren, and for the 
opportunities that U.S. manufacturers represent to each of 
their futures. I ask this Committee to pursue every possible 
avenue to combat the damage of Chinese currency manipulation, 
and I urge the Finance Committee to fast track to the Senate 
floor provisions within Senator Rockefeller's trade bill S. 
364, that would remove Presidential discretion from Section 421 
enforcement and require the Department of Commerce to apply the 
countervailing duty law to Chinese currency manipulation.
    With that, Mr. Chairman, thank you very much for this 
opportunity to appear today.
    Chairman Bayh. Thank you very much, Mr. Nolan. We are 
grateful for your experience in the private sector and the 
practical perspective that you bring to this important debate.
    Senator Casey, would you like to make any comments now?
    Senator Casey. Sure, if Senator Bunning already has.
    Senator Bunning. I have.

              STATEMENT OF SENATOR ROBERT P. CASEY

    Senator Casey. OK. Thank you.
    Chairman Bayh, thank you and I thank Senator Bunning as 
well for convening this hearing, as well as for both of your 
leadership on this issue, and so many others over many years. I 
want to thank the witnesses for appearing, and we want to get 
right to questions. I just have a couple of comments.
    First of all, we have heard all the data--and there is more 
to talk about--about the currency manipulation and the impact 
it has had. I just want to make a few points about 
Pennsylvania.
    Similar to the stories that have been related already, for 
a lot of people in our State, as is true, Mr. Nolan, in some of 
the testimony you provided about Indiana and some other States, 
this is not just some esoteric currency or financial data 
point. This is real life. Holes in the ground, literally, where 
not just job loss and people losing opportunity in a way to 
make a living, but sometimes adding insult to injury, so to 
speak, is the physical infrastructure of a plant that is 
literally lifted off the ground and taken away to make it even 
worse.
    So we have got much to do, and I know that we are all 
looking forward to Secretary Paulson's report and the specific 
words in that report. Mr. Hartquist, I appreciate you pointing 
that out that there is a word missing, or two. But I think we 
are all getting pretty weary that what we might see in this 
report, frankly, or what we will not see is a lot of action or 
a lot of results that we can act upon, just more talk and more 
discussion and more pleas for more patience.
    So I want to take the time now to listen to the questions 
by Senator Bayh and Senator Bunning, and I will have a few of 
my own.
    Thank you.
    Chairman Bayh. Thank you, Senator Casey.
    Mr. Goldstein, I would like to begin with you. Is it your 
opinion that efforts to manipulate the value of a currency 
constitute an effective subsidy? Chairman of the Federal 
Reserve Bernanke in written remarks I think last December 
indicated that he felt so. What is your opinion?
    Mr. Goldstein. I think it is an export subsidy and an 
import tax, so it is both those things. More generally, I think 
it is just hard to maintain open trade and investment if you 
have such problems on the currency end. We have got the WTO as 
one pillar to look at trade policy. We are supposed to have the 
IMF on the other end.
    But the problem is the sheriff at the IMF says he does not 
want to do this. He just does not want to be an umpire for 
this. And in the meantime, the Treasury, as mentioned earlier, 
is not issuing any rulings of manipulation, even when the 
evidence is obvious. So then, you know, what do you do?
    I do not consider it protectionist to take a response if 
another country is not abiding by its obligations. I just do 
not buy it. I think you need to have both ends, and if we do 
not get some more fairness on the currency end, we are not 
going to be able to maintain the openness that we all want on 
trade and investment. They are related. And I would like to see 
an investment in the infrastructure on the currency side that 
would match what we have on the trade policy side. And I wish 
Secretary Paulson would put the same emphasis on that as he has 
been doing recently on financial sector access.
    Chairman Bayh. Thank you. I noted with some interest a 
commentary piece, I think it was yesterday's Wall Street 
Journal, by a former member of the Council of Economic Advisers 
who offered the opinion that even if China were to allow its 
currency to float freely and be determined by market forces, 
this would not really have any impact upon the current account 
imbalance because of low wage rates and that sort of thing in 
China.
    Most other economic observers do not agree with that, and 
it does ignore part of what you mentioned, which is the 
effective barrier that the current currency peg presents to 
exports from our country into China.
    But I would appreciate your thoughts, Dr. Goldstein, about 
that commentary and whether you think that is correct or not.
    Mr. Goldstein. I do not think it is correct. I think if 
China were to implement significant revaluation of the RMB, and 
particularly if that were followed by revaluations of other 
Asian currencies, I think it would have a significant impact in 
reducing the U.S. current account deficit, the global current 
account deficit.
    For example, if we were to get a 25-percent appreciation of 
all Asian currencies--and as a group they account for 40 
percent in the dollar index--that would be equivalent to a 10-
percent weighted average depreciation of the dollar. And that 
is worth about somewhere between, let's say, $130 and $180 
billion improvement in the U.S. global current account deficit. 
That does not take us all the way to where we want to get to, 
but it would be an important contribution. So, no, I do not 
agree with Mr. Slaughter's conclusion.
    Chairman Bayh. I have probably time for one more question 
here, but, gentlemen, do not think I am ignoring you. There is 
going to be another round, and I have got some questions for 
each of you. But, Dr. Goldstein, if I could just conclude with 
one more question to you, you ended your testimony by 
recommending that we attempt to persuade the Chinese to 
undertake a relatively immediate 10- to 15-percent revaluation 
of their currency. Is my memory correct in that regard? I think 
that is what you testified.
    What would you suggest we do if they do not? Persuasion has 
not worked too well to date, and that is one of the questions I 
have raised at this hearing. I am all for dialog, but dialog 
without action does not really remedy the problem that exists. 
And so if the dialog does not lead to the sort of cooperative 
outcome that you outlined, what do you recommend that we do?
    Mr. Goldstein. Well, I agree, dialog alone is not going to 
do the job. I would recommend first that we put much more 
pressure on the IMF to start doing its job. I would not approve 
their budget, I would not approve any initiatives that go 
forward until they start doing what they were established to 
do--namely, to be the umpire on exchange rate policies. So I 
would exhaust what we can do there.
    But if we are not able to get anywhere on that front and 
the Treasury also continues to hide behind the intent to 
manipulate rationale and says no foul, no currency manipulation 
by China, after we have done that, then I think some 
congressional measures, including trade policy, if it is WTO 
compliant, we ought to have to consider that.
    I regret to have to say to do that, but at some point we 
need to get something moving here, and it clearly is not 
moving.
    Chairman Bayh. My time has expired, Dr. Goldstein, and 
Senator Bunning, I am going to turn to you next. But you have 
mentioned the IMF a couple of times, and they are supposed to 
be the referee here in this sort of thing. It is a part of 
their role. Countries are not allowed to try and manipulate 
trade flows through the artificial valuation of their currency. 
Do you believe that they have an effective instrument if they 
had the will and desire to actually referee this? What tangibly 
could they do in your opinion that would influence China's 
behavior other than just to say to them, look, you should not 
be doing what your doing? In other words, if we just replaced 
dialog with us with dialog with the IMF, what is it actually 
going to accomplish?
    Mr. Goldstein. Well, I would not underestimate it. A ruling 
by the IMF, which is the international body responsible for 
that, I think would carry a lot of weight. As it is now, it 
emerges as a difference of opinion with China. We think they 
should go fast; they think they should go slow. Well, if it is 
a difference of opinion, they would prefer to take their own 
opinion. But if it is a decision by the body responsible for 
that that says, no, it is not just ill-advised, what you are 
doing is illegal, that I think provides a much firmer basis for 
any action that the United States would take subsequently, and 
I think it will increase pressure on them. We need to get them 
named as not carrying out their IMF obligations. I do not think 
it would just be nothing. I think it would have an effect.
    Chairman Bayh. The last part of your point there was a good 
one, I think. You perhaps place more faith and moral suasion 
than do I, but if by first taking that step it lends greater 
international legitimacy to further steps that might be in 
order, it would be an undertaking well worthwhile.
    Senator Bunning.
    Senator Bunning. Thank you very much.
    Having been here when Mr. Mulloy and the Senate Committee 
acted, and I happened to be in the House of Representatives at 
the time, my patience has run out. I am tired of listening to 
Treasury tell the Members of this Committee and the Congress of 
the United States that China is not a currency manipulator. 
When they do not act, it is the responsibility of the Congress 
to act. And I think you mentioned that in your testimony, Mr. 
Mulloy.
    I believe persuasion is part of the overall picture. We had 
Secretary Paulson before us, and I told him that he cannot 
negotiate with the Chinese because they do not understand that 
the Congress of the United States writes the laws. Whether they 
be trade, whether they be currency, or whatever we are dealing 
with now, TPA--all these things are interwound in our 
relationship with China.
    So my question, first to Mr. Hartquist. Some have said that 
the approach of the Fair Currency Act, the one that we are 
talking about, labeling China's foreign exchange policy as an 
export subsidy, is inconsistent with our WTO obligations. Can 
you explain why this is not the case?
    Mr. Hartquist. I would be happy to, Senator. We have done a 
lot of research on this, and, by the way, I heard a comment 
recently that a senior member of the administration in the 
Office of the United States Trade Representative indicated that 
no trade lawyer in Washington thought that your legislation was 
WTO compliant. I have not retired yet, and I know there are a 
number of my colleagues who also share my views about this.
    We think it is clear. It is unprecedented, of course, 
because a case like this has never been brought in the WTO to 
test the issue, but we believe that under Article XV of the 
GATT, the frustration----
    Senator Bunning. Article IV in IMF.
    Mr. Hartquist. And Article IV in the IMF, that the 
manipulation constitutes a violation of those agreements that, 
as has been pointed out, China subscribes to. And we also 
believe--and Fred Bergsten of the Institute where Dr. Goldstein 
resides gave the same testimony a couple of weeks ago before 
the tripartite hearing in the House of the Energy Committee, 
Ways and Means Committee, and Financial Services Committee.
    We think this practice does constitute a subsidy. Fred 
testified that he wrote that agreement when he was at the 
Treasury Department about 30 years ago. So he knows what is a 
subsidy, and it is certainly his opinion that this does 
constitute a subsidy.
    So I think when you put those two elements together, this 
is an issue that, as has been pointed out again and again, is 
not just an IMF issue, as Treasury wants to treat it. It is a 
trade issue that is drastically affecting our relationships 
between the United States and China. And we believe the legal 
authority is there to enforce these agreements.
    Senator Bunning. Do you believe the Administration 
understands the consequences of not naming China as a currency 
manipulator with the Banking Committee and the Finance 
Committee in dealing with trade? Because we are about to do 
some things and they are about to get some problems with their 
TPA that they are not expecting. We have talked and talked and 
talked with the Trade Representative, with the Secretary of the 
Treasury, with everybody else in the Administration, and they 
do not get it. And they understand the power that the Congress 
has in trade, in TPA.
    But unless the Chinese understand it, we are not going to 
make any progress. As you heard, there is not one word in the 
Secretary of the Treasury's statement mentioning currency. 
Well, if that is the case, we are not having a real dialog with 
the Chinese on this major problem that we are dealing with.
    Mr. Hartquist. Senator, I think certain elements of the 
administration do understand this, but the turf has been ceded 
entirely to the Treasury Department. We have made the argument 
to USTR, look, this is a trade issue, you are responsible for 
trade; it is going to come down on your heads if nothing is 
done about this problem because of the impact on our economy 
and jobs.
    But they cede authority over currency matters entirely to 
the Treasury Department, and, therefore, the administration has 
made the decision that that is where it is going to end.
    Senator Bunning. But it will not end there. I just want you 
to know that because there are certain of us that sit on the 
Banking Committee and on Finance, and we are up to ears with 
the noncompliance. First of all, they passed all the WTO 
implementation laws, China did, and now they are not complying 
with them, whether it be on banking, whether it be on--whatever 
it is. All you have to do is walk down the street of Beijing, 
and you will know that intellectual property laws are not being 
enforced anywhere in the country. Just get to Beijing and walk 
down the street, and you will find anything you want to find; 
goods that are not complying with our intellectual property 
laws.
    I have gone over my time, Mr. Chairman. I am sorry. But I 
feel so deeply about this, and being a free trader, I want to 
be a fair trader, but I do not want to get, you know, the short 
end of the stick in doing it. And that is what the United 
States is getting right now because of China's manipulation of 
their currency.
    Chairman Bayh. Thank you very much, Senator Bunning. I 
appreciate your passion for this issue.
    Senator Casey.
    Senator Casey. Thank you, Senator Bayh, and thank you for 
calling this hearing, again. And Senator Bunning once again 
demonstrates the passion that I think is consistent with and is 
rooted in the frustration that a lot of Americans feel when 
they almost feel powerless to be able to address this kind of 
issue.
    I wanted to highlight the legislation that all three of us 
have supported, led by Senators Bunning and Bayh, and I am 
proud to cosponsor it. But I just wanted to highlight a couple 
of the headlines, so to speak, to refresh recollections.
    Part of what the legislation does is provide that exchange 
rate misalignment by any foreign nation is a countervailable 
export subsidy. It also clarifies the definition of 
``manipulation.'' It expands the power of the International 
Trade Commission to impose countervailing duties on products 
from a country that has been provided a countervailable 
subsidy.
    So that is a piece of legislation which represents part of, 
and maybe a significant part of, an action plan. And I wanted 
to probe a little deeper--and I hope we can do more on the 
second round--on some of the testimony here today.
    First of all, I will start with Mr. Mulloy, only because 
you are from Pennsylvania. Otherwise, you would be in at the 
end of the alphabet, right? And I have to say you went to Kings 
College and you went to the same law school my father and my 
brother went to, so I will give you the easiest question.
    I was struck by what you said in terms of the history of 
the Committee and your role in that as counsel, and I am just 
wondering, in light of what you have heard already, in light of 
what you have observed and seen in the news, and in light of 
the brief, albeit headline summary I gave you of Senate bill 
796, what else should the U.S. Senate and, in particular, this 
Committee do? Some of it you addressed, but even by way of 
reiteration, if you would just tell us how you think we should 
grab hold of this if there is continuing reluctance by Treasury 
and the administration.
    Mr. Mulloy. Senator, thank you for asking me, Senator. I 
maintain very close ties to my roots in Pennsylvania. In fact, 
I am going up there Memorial Day weekend. I have seen in 
Pennsylvania what happens when an economy begins to fall apart, 
and it is very damaging to families and communities, tax base, 
and everything else.
    My worry is this can be precursor to this happening to the 
United States if we do not begin to have some different 
approaches to the way we do trade.
    In my testimony, I have said this exchange rate is not just 
a silver bullet. This alone will not solve some of our trade 
problems. We need a more comprehensive, integrated approach to 
this globalization, and I put some comments in my testimony on 
it.
    But one thing you have to understand--and this fits with 
Senator Bunning's question. You know, the National Association 
of Manufacturers, 90 percent of their companies may be small, 
and they were supporting the Bunning-Stabenow approach to this. 
When it got up to the final vote on that within the NAM, the 
big multinationals headed it off, saying it was somehow WTO 
illegal, even though they had two other law firms that said it 
was WTO legal.
    So you have a group of companies in this country--and they 
are not being evil, but they are working to get shareholder 
profits, and they do it by maintaining the system the way it is 
going now.
    I think it is a very short-term look on their part, but a 
lot of these corporate guys are in it for the short term. I 
think you have got a real problem on this divergence.
    Now, on the currency issue, I am very much in favor of the 
Stabenow-Bunning bill to make this countervailable. But I think 
we should also be bringing a WTO case against China.
    Now, why is the IMF very important in this? Under Article 
XV of the WTO, when you file that case, Senator, what will 
happen is under that rule they will immediately turn to the IMF 
for its advice on currency issues. So getting the IMF to take a 
position on this is very important.
    Now, I have an article which I would like to put in the 
record of this hearing. This is an article from September 28, 
2005, ``IMF Chief Opposes United States on China.'' This 
article says that the IMF----
    Chairman Bayh. Without objection, Mr. Mulloy, we will 
include\1\ that with your testimony.
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    \1\ The article referred to can be found on page 100 of this 
hearing.
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    Mr. Mulloy. Thank you, Mr. Chairman.
    The IMF is urging China to allow its currency to move 
upward. The IMF understands what is going on here. But listen 
to what they said. The head of the IMF says to Treasury, 
``Treasury itself has refrained from tagging China for 
manipulation in its own semiannual report on foreign exchange 
policy.''
    The IMF is hiding behind the fact that Treasury has not 
done its job. If Treasury will do its job, it makes the--and it 
is reality. They are underpricing their currency. Massive 
interventions in currency markets to do it. Increasing leverage 
over U.S. debt. They have got $1.2 trillion of foreign reserves 
now, many of them invested in U.S. Government bonds. This is an 
enormously building problem. So you have got to bring--do 
Bunning-Stabenow, but also bring the case into the IMF.
    Then, third, begin to think about how we bring the 
divergence between the multinational corporations and the 
American national interest back into line. And I am working 
with a group called the Horizon Project, and we made a report 
to the Congress laying some of those issues out in that report 
that we did in February, Senator.
    Senator Casey. Thank you. I know I am out of time, but we 
will come back.
    Chairman Bayh. I would like to follow up on Senator Casey's 
good question and your excellent answer, Mr. Mulloy. As you 
describe it, you recommend bringing a WTO case, but they will 
immediately turn to the IMF.
    Mr. Mulloy. Right.
    Chairman Bayh. Which is hiding behind the Secretary of 
Treasury, which, in your testimony, leads me to ask: You 
mentioned Mr. Mulford and the previous interpretation of the 
law that the first Bush administration had, that he had. Why is 
this administration taking so different an approach where, as 
you say, they have not even identified one currency manipulator 
in spite of the overwhelming evidence?
    Mr. Mulloy. Well, this requires me to maybe say some things 
that I--I will give you my opinion.
    Chairman Bayh. That is why you are here, Mr. Mulloy.
    Mr. Mulloy. The guys in the Treasury are very close to the 
Wall Street crowd. The Wall Street crowd is making a lot of 
money running the system the way it is being run. And you will 
notice that Paulson pushed very hard to get more access for 
financial firms into China.
    I was at a meeting a couple weeks ago where Paulson was 
talking about that, and one of the people in the audience from 
China, former head of--I was in Shanghai a couple years ago, 
and he was running--he was No. 2 in the Shanghai Stock 
Exchange. And he said, ``If we did that, provided more access 
to your financial firms, would that take some of the heat off 
some of these other issues, including the exchange rate?''
    So I think there is a split going on here in our society--
--
    Chairman Bayh. They do not seem to have provided that 
access, even if the answer was yes.
    Mr. Mulloy. Yes. There is a split going on between the 
interest of some of the folks on Wall Street and some of the 
multinational corporations who make a lot of money with this 
system going on. I hate to say this, but many people who leave 
the Treasury go work for these financial firms. So I think 
there is an inordinate influence, and that is why it is so 
important for the Congress to conduct the kind of oversight 
that Chairman Dodd and Chairman Shelby and others have been 
doing. You have got to put a lot of pressure on those guys.
    Now, again, under the Constitution, if Treasury does not do 
it, it is your authority under the Constitution to deal with 
foreign commerce. And if you do not like what they are doing 
and they will not do it, give it to somebody else or do it 
yourself. Make that judgment. You can do it under the 
Constitution.
    Chairman Bayh. Thank you, Mr. Mulloy. You have provided 
some key insights.
    Mr. Hartquist, I would like to now turn to you, and based 
upon what Mr. Mulloy was saying and the advice that was 
rendered to a couple of the multinationals, apparently you are 
not the only lawyer in Washington who takes a similar view of 
the steps that Senator Bunning, Senator Casey, and I have 
proposed are WTO compliant.
    As I understand, there is a three-part test, financial 
contribution benefit, but that the key element that seems to be 
the sticking point here is whether it is specific, company 
specific. So I would like to ask you about that. What in your 
opinion leads you to believe it is WTO compliant because the 
test of specificity is met?
    Mr. Hartquist. Mr. Chairman, our answer to that is really a 
very simple one. It is because the benefit is contingent upon 
export performance. Essentially what happens is when the 
Chinese companies export to the United States, they get paid in 
dollars. If the currency were properly valued, they would get 
about five--the exchange rate would be about one dollar for 
five yuan. But under the current system, it is more like one 
dollar for eight yuan. So they qualify for it by exporting 
their goods. That is a very specific act that they must 
accomplish. And then they pocket an extra three yuan, about a 
40-percent differential, because of the undervalued currency.
    Chairman Bayh. Why the disconnect, in your opinion, or any 
of the other panelists, between the IMF's approach to this 
where they have concluded that this has a harmful effect upon 
global trade flows and that kind of thing, and yet the sort of 
this academic three-part test where, you know, Ben Bernanke 
says, sure, it is--I think the words he used--``effective 
subsidies.'' Dr. Goldstein says the practice effect is a 
subsidy. The IMF says that is bad and you have got, you know, 
this three-part test that seems academic in the extreme and 
divorced from the reality of the marketplace. Anybody hazard a 
guess as to why they have taken this interpretation?
    Mr. Hartquist. I think, Mr. Chairman, that there are 
several things going on here. One is there is real fear that 
the Chinese banking system may simply collapse if this issue is 
not handled properly. The estimates are that there are about 
$800 billion in bad loans in the Chinese system, and a lot of 
that money has gone to setting up industries that are competing 
with us every day. We are supposed to compete with them one on 
one----
    Chairman Bayh. Well, I hear that, and I appreciate that. 
But that is a different issue. I mean, we have got to get on 
the right path and then make sure it is sustainable from their 
standpoint as well. Nobody wants their banking system to 
collapse, but that is kind of a different issue, which I hope 
they have not derived this test just to obscure that. But 
please continue.
    Mr. Hartquist. Well, I was going to make two other brief 
points, if I may. I think beyond that, the Chinese are almost 
frozen in time themselves. They are very concerned about their 
economy collapsing if they handle this wrong. They are 
concerned about the banking system. They are concerned about 
having to create tens of millions of jobs for their citizens 
every year. And they are concerned about retaining political 
power. Very concerned about that. The development of a middle 
class, a more independent class in China, is in many ways a 
threat to the regime in China. And I think that the U.S. 
Government is looking at these issues, too, and is saying if we 
get this wrong, there could be catastrophic consequences. But 
that is no excuse for not taking the actions that we can take 
under the law to get China to really get in gear here and start 
to make these changes.
    Chairman Bayh. My time has expired here at the beginning of 
the second round, Mr. Hartquist, but I referenced some of that 
in my opening statement about the desire of the Chinese for 
stability in their country and, therefore, the need to maintain 
very high rates of growth. So I agree with what you said.
    Dr. Goldstein, you were nodding your head, and I am going 
to get to Senator Bunning. Is there something you want to add 
here?
    Mr. Goldstein. Well, I do want to make a comment, if I 
could have 2 minutes. Some of the language in a number of the 
currency bills I think is of a lot of practical import, and 
that is, the distinction between manipulation and misalignment. 
Some people simply think that misalignment is a politer word 
for manipulation, but it is not.
    Manipulation means the government is taking a specific 
prohibited policy action to keep the exchange rate away from 
where it ought to be. Usually that is large-scale, protracted 
one-way intervention.
    Misalignment just means the exchange rate is away from 
where it ought to be for whatever reason. It could be because 
of a Government policy action, or it could be because the 
market has got it wrong.
    Now, what happens if you do this? If you do manipulation, 
there are three advantages. One advantage is it tells you who 
is at fault. If you are engaging in large-scale one-way 
intervention, you are at fault. So China is at fault. The U.S. 
is not doing that; we are not at fault.
    The remedy is also clear. Stop doing the prohibited action. 
Stop intervening, and you get a relative limited list of 
offenders--in this case, probably China, Malaysia, Taiwan. You 
probably will not get Japan under that.
    The disadvantage is you miss some cases where the exchange 
rate is out of line, but the country is not obviously doing 
something. But if you do misalignment, then you have got a real 
problem. It is misaligned, but why? The yen is misaligned 
because Japanese interest rates are too low or the U.S. 
interest rates are too high? You do not know who is at fault. 
You also do not know what the remedy is because it can be due 
to many things, and you get a very different list. In 
particular, the same people who are going to tell you the RMB 
is seriously misaligned are also going to tell you the dollar 
is misaligned, the dollar is overvalued.
    So if the purpose of the legislation is to put the U.S. in 
the dock--which I did not think it was--misalignment will do 
that for you. Manipulation is different. If you do not like the 
word, call it something else. Call it destabilizing 
intervention. But you need to be careful about this because 
otherwise you get some unintended consequences and you get a 
recipe for inaction rather than, I think, what you want.
    Chairman Bayh. Thank you, Dr. Goldstein.
    Senator Bunning.
    Senator Bunning. Thank you.
    Mr. Mulloy, I would like to follow up on some things. China 
recently announced plans to invest $3 billion in the Blackstone 
Group--the same company that recently attempted to buy Chrysler 
Corporation. Do you believe China has begun using its $1.2 
trillion in foreign exchange reserves to buy United States 
companies using the Blackstone Group as a platform?
    Mr. Mulloy. Thank you, Senator, for that. I was very 
fortunate to have been invited before this Committee to testify 
on CFIUS legislation about a year and a half ago. And, again, I 
was very involved when we wrote that legislation. That was part 
of the 1988 trade bill, again, Senator.
    Senator Bunning. We are trying to do it again, as you know.
    Mr. Mulloy. And my concern then was when you are running 
massive trade deficits like the United States is, you are 
sending dollars out of the country. The other country, if they 
are not buying your goods, has those dollars.
    Now, so far China has been investing those dollars in U.S. 
Treasuries, Fannie and Freddie. But in that testimony at that 
time, I said there will be a time when the Chinese are going to 
start buying major assets in the United States economy. And 
that is why it is very important for this Committee to have a 
good CFIUS process in place to understand the national security 
significance of what is going to happen. The cake is already 
baked. They have the money. The purchases are going to be 
coming.
    Now, I have read speculation--and I have not analyzed it 
myself--that one way--and remember when they tried to buy 
Unical.
    Senator Bunning. Oh, yes, I sure do.
    Mr. Mulloy. You know, that company, that was not a private 
sector Chinese company. That is a government-directed company, 
and that is the important thing to understand. Many of these 
Chinese companies, they are not private sector people. They are 
organized and controlled by the party and the Chinese 
Government.
    So I have read speculation--and I do not know, and this 
Committee might want to do a hearing on it--to understand that 
they are going to use some other way because Congress reacted 
against the purchase of Unical. They may try these other back-
door ways of getting major assets in the United States economy, 
which will be important, what we call ``national security 
jewels'' for the United States, which will end up being owned 
by the government of another country.
    So I think it is very important that you have a good CFIUS 
process in place and do the kind of intelligence that needs to 
be done in looking at those kinds of purchases.
    Senator Bunning. Then you do believe, as most of the panel 
here, that the manipulation of the currency and the misuse or 
ill-fated use of their assets in bonds and/or government 
dollars, our dollars, could be used to undermine our own 
economy?
    Mr. Mulloy. Well, let me say this: First, I went to China 
for the first time in 1981. I like the Chinese people. They are 
a wonderful people. I am not out to demonize China. And I 
always tell my Chinese friend, this imbalance in this economic 
relationship, if you let it go on, you are going to poison the 
political relationship. And we do not want to poison the 
political relationship with China because we have so much to 
work with them on--global warming, ocean pollution, energy, a 
lot of things.
    But here, by permitting this situation--I think I would 
call it ``metastasize.'' By permitting this to go on year after 
year, we are permitting the Chinese to gain enormous leverage 
over our economy and now have the assets to come in here and 
buy important parts of our economy.
    Now, what will that do? It will give them even more 
political influence on our political system, because if they 
own major assets in the United States, those assets and those 
people are going to become more favorable toward China.
    So this is very important that we begin to get this under 
control soon, and not let it just go on year after year.
    Senator Bunning. Well, then, do you believe that is one of 
the reasons Treasury and the current Administration is sitting 
there with their hands folded?
    Mr. Mulloy. I do not know why the Treasury and the 
administration--I personally think they have gotten themselves 
preoccupied with another area of the world, and they are not 
understanding the significance of the global trends which are 
presently in place and which I saw as a member of that China 
Commission for 6 years. And the last 2 years of it, we had 
Senator Fred Thompson on that Commission, and he signed on to 
that last report. These are big problems, and we are letting 
them build and get bigger and bigger and more difficult to 
unwind. And that is why I am speaking so forcefully that these 
are important matters. And it does not mean you demonize the 
Chinese if you say to them no----
    Senator Bunning. None of us are trying to demonize the 
Chinese. We are trying to get at a problem that we will 
probably overcome us eventually if we do not overcome it. So I 
have no fight with the Chinese, except that we did take six 
members of the Trade Subcommittee to China to talk trade with 
the Chinese, and they would not meet with us. I find that, you 
know, astounding that the Trade Minister would not meet with 
six members of the Finance Committee. In other words, they do 
not understand the give and take that goes on in the United 
States. They dictate to their Congress what they want done. The 
administration cannot dictate to our Congress what they want 
done.
    Mr. Mulloy. Let me just give you one last thing on this. A 
year ago, just about June of a year ago, 2006, I was in China 
with a group from the China Commission, and we had a meeting. 
The Consul General in Shanghai had a dinner for us, and he had 
a number of the American corporations doing business in China 
at the dinner. And there were two things that struck me about 
that dinner: one, how many of these corporations say these 
historical things, these historical flows are going to happen, 
in other words, the power and the economic wealth moving to 
Asia is going to happen; but at the same time, how terrified 
they were of the Chinese Government. They do not want to be 
bucking the Chinese Government because there is no real rule of 
law in China. They are dependent upon favors for non-arbitrary 
treatment from the Chinese Government. So they can end up--and 
there is a good book called ``The China Fantasy'' by Jim Mann, 
who had the article in the Outlook section of the Washington 
Post this weekend, ``The China Fantasy,'' where he says the 
Chinese in time can make American companies cheerleaders for 
their policies.
    Senator Bunning. Thank you, Mr. Chairman.
    Chairman Bayh. Thank you, Senator Bunning.
    Senator Casey, are you needing to leave? OK. Thank you for 
your attendance.
    Gentlemen, just a couple more questions, and I appreciate 
your patience. Mr. Nichols, any effort to quantify if the 
Chinese really did open up--and I thought your testimony was 
excellent about how, you know, that would actually benefit 
Chinese consumers and help to promote U.S. exports and that 
kind of thing. But with regard to financial services in 
particular, are there any--have you made any estimations about 
how much business you think could be done there and how many 
jobs that might create here domestically? You know, they 
obviously have a comparative advantage in some aspects of the 
economy. Here is one where we have a comparative advantage. If 
they really did open up, what would our advantage be?
    Mr. Nichols. Well, it would be significant, and I will 
answer that in just a couple of ways. Actually, I was asked 
here to talk a little bit today about market access. I want to 
complement a point he made and build on it a little bit. It is 
true that we are pushing for increased market access. That is 
absolutely the case. But we are trying to explain why that is 
good for America. So our coalition is aggressively pushing 
Treasury to focus on market access because of the impact we 
think it will have on currency, as well as the trade deficit.
    There are some estimates that I have seen that suggest 
there is $2 trillion in the pockets of Chinese families, 
essentially mattress money, that if increased access to 
financial services can help spring that and bring that here to 
America to our exporters and to our service providers--I do not 
know exactly how many jobs that would translate into or to the 
sort of GDP growth, but----
    Chairman Bayh. We would not get the all the business, 
right? There are other competitors----
    Mr. Nichols. Absolutely not. There would be some growth 
within China, certainly, as their economy transforms, as well 
as in the euro zone, but certainly here as well.
    Chairman Bayh. Is part of their reluctance, do you think, 
related to the point Mr. Hartquist raised about the fragility 
of their financial system and perhaps some of their own 
domestic financial companies and players that are afraid if 
they just opened up, they would be forced out of business, that 
kind of thing?
    Mr. Nichols. I suspect there is something to that. I would 
like to add to a broader point, that, you know, the U.S. 
financial services industry is not pleased with the pace of 
reform, and I would like to align myself with those who say 
there is greater risk in them moving more slowly than more 
quickly.
    In terms of the pace of reform in China, it is not at a 
pace that we think is----
    Chairman Bayh. And I concur with that. And, look, I am not 
insensitive for the need for there to be stability in China 
from a variety of perspectives. But this process of 
globalization and in our bilateral relationship we have 
certainly been willing to take on some domestic dislocations 
here.
    Mr. Nichols. Right.
    Chairman Bayh. That needs to be, you know, a two-way street 
so that the laws of comparative advantage and natural 
competitive factors can allocate resources, labor, and so 
forth.
    Mr. Nichols. Right. In fact, Mr. Chairman, the Financial 
Services Forum--I am speaking outside of the ENGAGE CHINA 
Coalition, but with regard to my day job, we are taking a look 
at that. And, in fact, we have a study that we are working on 
right now that will help come up with a series of public and 
private sector responses to those who are not sharing, to 
individuals and families and communities that are not sharing 
in or feeling the full benefits of globalization. We have hired 
three economists--a Republican, a Democrat, and an Independent, 
including Matt, whom one of you mentioned Matt's op-ed 
yesterday in the Wall Street Journal. He is one of the three 
that we have employed. We think in terms of this broader trade 
debate----
    Chairman Bayh. I am glad you have employed some others.
    Mr. Nichols. You know, one of each. But I----
    Chairman Bayh. Can I nominate Dr. Goldstein?
     [Laughter.]
    Mr. Nichols. But the point, though, is that there are 
dislocations, and those are not--entire communities, regions, 
families, individuals who are feeling in the full benefits and 
sharing in them. And it is important that both the public and 
private sector tackle that policy issue and help those people.
    Chairman Bayh. It may be a bit soon, but do you have any 
reaction to the communique that came out at the end of the 
economic dialog? We have touched base with a few of your 
members, and at least from what we heard, I think the word 
``underwhelmed'' perhaps could apply.
    Mr. Nichols. Anticipating that, Mr. Chairman, we just met 
right before your hearing today, and we see the results today 
at this moment as there has been some progress, but there is 
much, much more to do in many areas, specifically regarding 
market access. So there is some progress, and we think we want 
to see more milestones. We appreciate the long-term structure 
of the Strategic Economic Dialogue, and we do think engagement 
with the Chinese is the right answer.
    That said, some progress today. Much more to do.
    Chairman Bayh. Said very diplomatically, Mr. Nichols. Thank 
you.
    Mr. Nolan, perhaps can you share with us your perspective? 
As I understand it, in your particular industry the capacity to 
produce steel in China is expanding significantly. Is that 
accurate?
    Mr. Nolan. Mr. Chairman, it is extraordinary, is the word I 
like to use.
    Chairman Bayh. And the concern is that even with the rapid 
rates of growth in China, the expansion of their steel 
production capacity is outstripping their projected domestic 
demand. Is that a fair characterization?
    Mr. Nolan. That is absolutely the case. They are the most 
underpriced market on the globe today, and it is a consequence 
of oversupply.
    Chairman Bayh. And so if that is true and they continue to 
add capacity in excess of domestic requirements and that 
production then is put on the global market, the 40-percent 
currency distortion, if that is an appropriate word, what would 
that do to other global competitors and companies such as your 
own?
    Mr. Nolan. Well, I think the word that comes to mind is 
``tsunami.'' It would, I believe, put the world steel-producing 
community in a position where the potential to return any 
opportunities to shareholders would diminish to the point of 
becoming nonexistent.
    Chairman Bayh. And just one last question, and then I will 
have 30 seconds of comments. And, again, I appreciate your 
testimony and your patience today. This has been very, very 
interesting. Getting back to the op-ed yesterday, which seemed 
to say that there were other competitive forces that would more 
than overcompensate for the currency issue, do you find in your 
markets, you know, is labor alone, is that a 40-percent--and 
you have got transportation costs, you have other costs, a lot 
of businesses out there where the competitive--we are within 40 
percent, that is what I am trying to say, for a lot of 
companies. And if the currency thing were removed, there would 
be a lot of U.S. producers here that would be competitive, 
where otherwise that is not the case because of the currency 
issue? Is that a fair observation or no?
    Mr. Nolan. Senator, I have been waiting for you to ask that 
question. It was asked in a slightly different fashion just 
last week, and the question was: As an exporter, can I get to 
China? And I would tell you, at eight yuan to the dollar, as 
they used to say in Maine, I can't get ``they-ah'' from ``hey-
ah.'' We would struggle at six. But we would be there every day 
at four.
    You know, I can do the financial math for you if you would 
like, but I think you can probably figure it out, you know, or 
staff can figure out for yourself. Clearly, there is enough 
standing capacity to support considerable demand in China. They 
do not have to build it themselves. All they need to do is to 
give us an opportunity to get there.
    Chairman Bayh. Thank you, Mr. Nolan.
    Well, I will conclude by associating myself with some 
comments that Mr. Mulloy made, and I think the rest of you 
would concur with, and that is, that China is a great nation in 
many respects, and they have a bright future. They have got 
hard-working, intelligent people. They have a rich culture. And 
it pains me to see these tensions in our relationship. We very 
much want a cooperative relationship with China. There are so 
many things that we can be working on together, and yet this is 
a source of disruption within what should be a more cooperative 
relationship. And we can no longer allow it to fester because 
there are adverse consequences to our Nation that, as a great 
country, we cannot sit idly by and allow it to occur. And so 
that is why a course of action on a sustainable timeframe, that 
is what really is required here, and this endless dialog 
leading nowhere is only going to lead to worsening relations, 
and that is not in China's interest, in the U.S. interest, or 
the world's interest. And that is why we have conducted these 
hearings today, and, gentlemen, that is why I am very grateful 
for your presence and for your thoughts.
    Thank you all for attending. The hearing is adjourned.
    [Whereupon, at 4:28 p.m., the hearing was adjourned.]
    [Prepared statements supplied for the record follow:]
           PREPARED STATEMENT OF SENATOR CHRISTOPHER J. DODD

    I would like to thank Senator Bayh, Chairman of the Subcommittee on 
Security and International Trade and Finance, for holding this 
important and timely hearing on U.S. economic relations with China.
    One of the very first actions that I undertook as Chairman-elect of 
the Banking Committee in December 2006 was to write a letter with then-
Chairman Shelby to the Treasury Secretary on the occasion of the first 
Strategic Economic Dialogue (``SED''). In January 2007, I chaired a 
hearing with Secretary Paulson on exchange rates and the SED. At that 
hearing, Treasury Secretary Paulson testified that the SED is the 
``best chance to get some progress [on the currency issue].'' The 
second session of the SED concluded in Washington this morning and I am 
eager to learn more about any progress made on both the currency and 
market access issues that the hearing today will address.
    The issues of exchange rates and market access represent two 
significant hurdles in the U.S.-China economic relationship. China is a 
source of tremendous opportunity for the United States, but also a 
source of new challenges that must be overcome in order to reach the 
full potential of our economic relationship. Foremost among these 
challenges is the need to level the playing field for American firms 
doing business in China and for American workers and companies 
producing goods for sale at home and abroad. Currently, the trade of 
goods and services is tilted to advantage Chinese firms because of 
ongoing Chinese government intervention to keep the yuan undervalued 
and China's discriminatory treatment of American and other non-Chinese 
financial services firms.
    The most recent Commerce Department data shows that the bilateral 
trade deficit increased from $47 billion in the first quarter of 2006 
to $57 billion in the first quarter of this year, accounting for over 
thirty percent of the overall U.S. trade deficit. These numbers have 
very real consequences in terms of our nation's manufacturing base and 
the communities in which manufacturing firms are based. Nearly 22 
percent of manufacturing jobs have been lost in my home state of 
Connecticut over the last ten years. Over the past six years alone, our 
nation has experienced the loss of three million manufacturing jobs.
    To be sure, China's undervalued currency is not the sole, or even 
predominant, cause of this loss of American manufacturing jobs. But 
just as surely, China's devaluation of its currency is, in my view, a 
major contributor to the loss of U.S. manufacturing jobs and our 
bilateral trade deficit. Federal Reserve Chairman Ben Bernanke said as 
much last December when he referred to ``the effective subsidy that an 
undervalued currency provides for Chinese firms that focus on 
exporting.''
    While China benefits from this export subsidy, they also enjoy open 
access to investment in America's markets. Over the weekend, the 
Chinese government announced its purchase of a 10 percent stake in the 
U.S. private equity firm, Blackstone. Far from being protectionist, 
this transaction demonstrates the openness of the American public and 
the American markets to foreign investment. Unfortunately, U.S. 
financial services firms are not afforded the same open treatment in 
China's markets. For too long, U.S. financial services firms have been 
denied the open access that our country provides for Chinese firms in 
the United States.
    I welcome today's announcement from the SED on financial sector 
reform which will resume the previous practice of licensing foreign 
securities companies, raise the quota for Qualified Institutional 
Investors (``QFIIs''), permit foreign banks to offer domestic currency 
credit cards, and improve the application and licensing process for 
insurance companies.
    However, significant discriminatory policies remain that protect 
China's financial sector from foreign competition. For example, today's 
announcement does not address China's restrictions on foreign bank 
branches' ability to offer full domestic currency services to Chinese 
individuals, including restrictions on domestic currency loans and 
deposits. China also restricts the operating structures under which 
foreign firms do business, limiting activities to branch offices 
instead of subsidiaries, and limiting the geographic reach of foreign 
firms. Because of these ongoing restrictions, only one American bank is 
fully incorporated in China. China also limits the foreign equity stake 
in state-owned banks to 25 percent, imposes unequal capital 
requirements on foreign banks, and maintains an onerous application and 
approval process for a range of financial services operations.
    These policies hinder the ability of U.S. firms to compete in China 
and to expand their market presence among a consumer population in need 
of financial services, products, and expertise. I urge the 
Administration to continue to use all tools available to eliminate 
unfair trade advantages resulting from China's discriminatory policies. 
My hope is that American firms in China will soon experience the type 
of fair treatment and open access that the United States provides to 
the Chinese. As Steve Bartlett, president of the Financial Services 
Roundtable recently stated, ``if the Chinese government is allowed to 
invest in Blackstone, the Chinese people should be allowed to invest in 
Merrill Lynch or Raymond James.''
    Simply put, American workers and businesses are being forced to 
compete on tilted terrain, and our government must take action to level 
the playing field. Last week, Senator Shelby, who as Chairman of this 
Committee conducted vigilant oversight and numerous hearings on 
exchange rates, and I wrote a letter to Treasury Secretary Paulson 
urging him to take the necessary steps that will bring an end to the 
unfair currency practices and market access barriers that are 
contributing to the trade deficit and damaging the competitive position 
of American workers and businesses.
    Adequately addressing these unfair trade practices may require 
steps beyond diplomacy and the Strategic Economic Dialogue, as 
Secretary Paulson's colleagues in the Department of Commerce and the 
Office of the United States Trade Representative have recently 
demonstrated. I believe that one such step should include citing China 
for currency manipulation in the upcoming International Economic and 
Exchange Rate Policy Report, which was due to this Committee on April 
15th. This report is the only mechanism currently in place for the 
United States to publicly monitor and remedy unfair trade advantages 
resulting from currency manipulation.
    Under a law passed by this Committee nearly two decades ago, the 
Treasury Department has a statutory obligation to use this reporting 
mechanism. The American public relies on the Treasury to ensure that 
countries who manipulate their currencies ``regularly and promptly 
adjust the rate of exchange . . . to eliminate the unfair trade 
advantage.'' Given Treasury's current approach on currency 
manipulation, I look forward to learning from today's witnesses and 
others about additional strategies and options the United States should 
consider to better address the unfair trade advantage resulting from 
China's currency and discriminatory market access policies.
                                 ______
                                 

              PREPARED STATEMENT OF SENATOR SHERROD BROWN

    Good afternoon. Thank you, Senator Bayh, for holding this important 
hearing on U.S. economic relations with China. And thanks to those of 
you here to testify.
    Our economic relationship with China is one of critical importance 
to the working men and women of Ohio, where we have lost 180,000 
manufacturing jobs since 2001--including more than 50,000 jobs to China 
in the last decade alone. In a state where the economy is largely 
driven by manufacturing, the dramatic influx of Chinese manufactured 
products and the loss of jobs in Ohio are surely related.
    We need to think carefully about where these trends are leading us. 
Manufacturing is not only important to our economy, its essential to 
our national security. What is happening in Ohio and in other 
manufacturing states has dramatic implications for our nation as a 
whole. I think most economists would agree that China's exchange rate 
manipulation has been a major contributor to our trade imbalance. 
China's RMB is undervalued by roughly 40 percent, due to the 
government's strong efforts to keep it artificially low. Partly as a 
result, imports from China have increased by 20 percent in the first 
quarter of this year and may hit yet another record high.
    In the past few weeks, in preparation for the Strategic Economic 
Dialogue, the Chinese have decided to widen the daily trading band on 
the RMB from .03 percent to .05 percent. Gestures like this are 
certainly not substitutes for real concrete measures.
    I'd like to take a minute today to discuss a few important issues 
with regard to the economic relationship between China and my home 
state of Ohio. Ohio's largest exports are in manufactured goods such as 
machinery, vehicles, and steel. For Ohio's workers and businesses to 
remain competitive in the global economy, we must ensure that other 
countries play by the rules. Our manufacturers cannot and should not 
have to battle Chinese currency manipulation and they cannot and should 
not lose out to unfair competition from firms in China that are propped 
up by heavy government support.
    Approximately 30% of the Ohio's manufacturing activity is related 
to motor vehicle production. When you consider the indirect jobs 
related to the industry, it is the largest industry in Ohio's economic 
base. Nearly 10% of all Ohio workers--over 652,000--depend on the motor 
vehicle industry for their livelihood. This is also an industry that 
the Chinese government has explicitly targeted to promote.
    The Chinese government is actively trying to increase exports of 
auto parts, many of which are fake or faulty. The auto parts industry 
loses $12 billion annually, including $3 billion in the U.S. alone to 
counterfeit auto parts--and China is responsible for about 75 percent 
of those fake products.
    Moreover, the Chinese do not provide for equal treatment of U.S. 
auto parts in the Chinese market as they committed to do when they 
joined the WTO. Instead, they impose a 25 percent charge on imported 
auto parts. This is in clear violation of the basic commitment that all 
countries agree to when they join the WTO.
    We often hear proponents of China talking about the complex 
challenges the country faces in moving towards a ``responsible 
stakeholder.'' If it is unable or unwilling to simply apply national 
treatment to imports, I have reservations about our overall trade 
relationship.
    Although the WTO cases recently filed against China's illegal 
industrial subsidies, as well as the IPR and auto parts cases, are 
steps in the right direction, manufacturing is too critical to Ohio's 
families and future to wait for the often several years it takes for 
the WTO to make it final determination. I look forward to hearing about 
the ways we can address these issues in the more immediate term. Thank 
you.

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